Towering infernos of cash
WORK-FROM-HOME REALITY WIPES ALMOST $50BN FROM VALUE OF CBD OFFICE SPACE
Almost $50bn could be wiped from the value of commercial office properties across Australia’s major cities as a surge in the number of work-from-home staff forces employers to reassess how they operate their businesses and dampens demand for a corporate footprint in central business districts.
Property analysts predict the value of the nation’s office tower sector — currently estimated at $318bn — could fall by as much as 15 per cent over the next year because of the shift away from highly centralised CBD operations to stay-at-home work.
The value of Sydney’s office space — at $165bn — makes up the majority of the national total.
A fall in Sydney values of 10-15 per cent, as predicted by Macquarie Equities, would amount to losses of up to $25bn for the city’s office property owners.
The Melbourne office market is valued next highest by JLL at $86bn, followed by Brisbane ($32bn), Perth ($16bn), Canberra ($12bn) and Adelaide ($7bn).
Citi property analysts Suraj Nebhani and Adrian Dark predicted the value of buildings in larger CBDs could fall by more than 15 per cent but said the slide was unlikely to reach the 20-30 per cent slumps of previous bad cycles.
Although Australia appears to be faring better than many nations in combating COVID-19, its city office vacancies are set to balloon over the next two years, with rents likely to be slashed as a result.
Colliers International has said the cost of renting could plunge by 13.5 per cent in Sydney’s CBD by next March, with Melbourne rents to be off by 7.1 per cent and Brisbane edging down 0.7 per cent, but it said office vacancies would not hit their peaks until at least two years down the track.
Mr Nebhani and Mr Dark said the Sydney and Melbourne office markets had entered the coronavirus period in a strong position, with rents at near historic highs and very low vacancy levels, but this was set to change.
While annual rises “embedded” in most rents offered some shortterm financial protection for landlords, the Citi analysts said investors were worried about losses from rent waivers or deferrals negotiated so far with tenants affected by the economic impact of COVID-19.
Many large city offices in Sydney, Melbourne and Brisbane hope to reopen next week, with about 25 per cent of staff ending isolation at home and returning to their desks.
Up to half of the nation’s CBD office workforce could be back by mid to late June — but only if there are no significant virus outbreaks that would require the reimposition of tough government restrictions and stall the staged start-up.
Commercial advisory firm Heritage Property Partners said COVID-19 was the catalyst for tenants to shift to remote working. As a result, the city office market had “hit an infection point that may alter demand and pricing factors for years to come”.
Heritage said while some employees were “longing to return to the office”, businesses had realised the ease and efficiency of cutting out daily commutes and operating remotely.
As cost reductions became a key concern, remote working offered the opportunity to reduce the office “footprint” — and even “big players” were learning to live without going into the office.
However, Mr Nebhani and Mr Dark said many companies had reservations about the “work from home” model.
“We don’t see a meaningful portion of the workforce moving to work from home as a permanent arrangement,” the Citi analysts said.
“We believe that productivity could be hampered and that
collaboration in workplaces is hard to replace virtually. Many employees’ households are also not set up for working from home on a long-term basis.”
Michael Tooma, managing partner of law firm Clyde & Co, said working remotely had been a “seamless” arrangement for his staff but most were “busting” to return to the office, and he believed nothing beat face-toface meetings, collaboration and the informal “social tempo” of the office.
City planning firm Urbis believes COVID-19 is a test of the resilience of Australia’s cities, including commercial office space, and they could “look different” afterwards.
Companies still face a big challenge resuming operations because of disruption caused by the requirement they continue to follow social-distancing rules.
Workers face a potentially chaotic daily battle commuting to and from city jobs on public transport, with delays and long queues at bus stops and train stations because of severe passenger limits.
Managers will discourage staff from leaving the office during working hours for lunch or coffee, and yet office kitchenettes will be closed as part of infection-risk measures.
With employers encouraging more of their staff to avoid the commuter crush by driving to work, analysts predict increased traffic congestion and parking difficulties.
Adrian Taylor, chief executive of property asset manager Charter Hall, said a smooth re-entry to city office spaces would require many employers to adopt a “splitteams” strategy, with staggered start times for staff where it was possible while others continued working from home.
Mr Taylor said some companies might increase the decentralised “hub and spoke” model in which certain numbers of employees would remain at CBD headquarters while others worked closer to home at suburban branch offices.
The biggest difficulty for employers trialling remote working would be for new staff forming work relationships and coming to grips with company culture, he said.
Mr Taylor, whose firm manages a $20bn portfolio accounting for 1.5 million square metres of office space, said he expected office floors would be cleared of much furniture to ensure social distancing at desks. More stringent office cleaning, at higher cost, would be introduced to help reduce the risk of infection.
Over the past 25 years, Mr Taylor said, office density ratios had more than halved to cope with increased numbers of staff working closely in open-plan environments from 20-25sq m to 10-12sq m per employee.
“To observe social distancing, that could have a long-term impact of going back up to 1516sq m per person,” he said.
“I would expect to have reduced demand overall (for office space) in the short to medium term on the expectation of any economic downturn. But with this difference — the measures needed to ensure distancing may mean city offices need more space. It’s a contradiction.”
Australia’s CBD office space covers 17.89 million square metres, says market adviser JLL. With vacant space reported at 1.46 million square metres before the crisis began, JLL expects it to rise to 1.88 million by the end of this year, a jump of almost 30 per cent.
Urbis director Nisha Rawal said new buildings in CBDs had been aiming for space ratios of 8-10sq m per worker — but this ratio was likely to increase over the long term to cope with social distancing.
Ms Rawal said COVID-19 presented an opportunity to bring work to where employees lived: either by creating satellite offices in suburbs or allowing more people to work from home.
Urbis says entrenching remote working could boost productivity in the service sector by 5 per cent a year, adding $100bn to GDP. Ms Rawal said the projected productivity increase was based on workingfrom-home trends, and taking into account the elimination of stress workers experienced commuting long distances, currently estimated to cost the economy $12bn a year.
Dexus, the nation’s largest listed city office landlord, expected an accelerated return of tenants to its city commercial premises but only providing 1.5m distancing was guaranteed.
The company’s executive general manager, Kevin George, said preparations were under way for increased sanitisation on building floors and lobbies.
Mr George urged employers to embrace more flexible working hours to “avoid crushes at peak work times” in office lobbies.
Landlord Investa said it had expected more Sydney and Brisbane tenants back in the office last week but many were constrained by the lack of public transport options. Investa has set up “feasible and practical” guidelines, which even include how to enter offices across the $12bn of towers its manages.
Investa group executive Sally Franklin said the company was encouraging the use of revolving or automatic doors.
“We’re also suggesting tenants call lifts or touch surfaces with objects other than their hands.”
Prohibitive restrictions on the numbers of people permitted in office lifts at any one time were scrapped earlier this week when commercial landlords and employers successfully argued to Safework Australia that such rules would create havoc in workplaces.
While there is no longer an edict that each person in a lift has 4sq m to themselves, Safework’s revised regulations demand that people “still ensure, as far as they reasonably can, that they maintain safe physical distance in lifts and lift waiting areas”.
Investa runs an office empire with $12bn worth of towers and says almost 60 per cent of companies intend to adopt a staggered re-entry of their workforces. Half will use their office space differently but most won’t change their fit-outs.
“They’re really practising social distancing and using their current fit outs,” Ms Franklin said.
‘We’re suggesting tenants call lifts or touch surfaces with objects other than their hands’
SALLY FRANKLIN INVESTA GROUP EXECUTIVE
Cities in flux … Sydney’s central business district, which could lose up to $25bn in value as some companies shift to a work-from-home model,