Is the office dead?
When an American newspaper incorrectly printed his obituary in 1897, Mark Twain’s iconic response was “The reports of my death are greatly exaggerated”. If offices could talk, they would be making similar statements right now.
The impact of the pandemic on commercial property has been significant, but it’s not all bad. What we are facing is a change of direction in the workplace landscape and a “future normal” that has arrived earlier than anticipated. Trends like remote working, technology, markets leaning towards tenants and an increasing pipeline of supply were already being detected prior to 2020. COVID19 has simply accelerated them and the slow cycle of bricks and mortar property has been caught out. Some areas of commercial property have been hit harder than others, and will likely experience short to medium term discomfort as our industry scrambles to understand and adapt to a market weighted towards tenants.
Real estate has traditionally been an instrument by which we measure our economic health so it’s interesting to see what is happening in the current market. Early data is showing a downward pressure on net rentals and increasing incentives as vacancy rates rise. An influx of sublease space is now competing with direct leases and forcing landlords to make competitive offers. The pipeline of supply typically runs through a 3-5 year cycle and the sudden decrease in demand means that we will face an over supply through the next couple of years, and therefore the market will further soften before improving. Our economy was showing signs of staggering in early 2020 prior to the pandemic and while it's being stimulated now, we have yet to solve the underlying problem, which is the virus itself. A vaccine breakthrough is elusive, outright suppression is proving difficult and the logistics and timeline to roll out a vaccine will be measured in years rather than months. Furthermore, as economic assistance is withdrawn, zombie and precariously balanced companies will be revealed in the next 6 months as stimulus measures are withdrawn, leading to further unemployment. And office demand links directly to unemployment rates.
On the positive, our economy is well positioned to recover. Productive and symbiotic relationships between tenants and landlords is now understood and valued. Landlords are listening, and becoming flexible on lease terms. This will create opportunities for tenants, with length of leases likely to decrease, giving flexibility and buying time for companies that need to re-consider how they use their space. Co-location spaces are becoming legitimised, and likely to boom in 2021, particularly in the non-CBD locations.
At BRM, we were busy advising clients through the initial impact of COVID, helping with short term leasing strategies and navigating rental relief. Now, as tenants look at the mid-long term we’re telling them that this is an exciting time! Most businesses cannot return to the way things were and while this has immediate implications for their space, their options are greater than ever before.
Some tenants are considering the “hub and spoke” approach, providing office accommodation closer to the homes of their workers; others are looking at a combination of remote working and using the office as a collaborative/social/meeting space. The majority are rationalising their footprint and eyeing off reduced leasing costs. Those tenants committed to the CBD are leaning towards A and premium buildings in a flight to quality. There is also increased preference for existing, quality fitouts, so tenants can reduce setup costs and funnel their incentive towards rent free periods. What we’re seeing is far from a complete abandonment of the office – more of a re-shaping. However certain parts of the office market like the CBD and B Grade buildings are under extreme pressure. The market is fragmenting, and like businesses during COVID, there are also property winners and losers emerging.
Excess lower quality stock will likely see buildings re-purposed, while some landlords will use this time to upgrade their assets so they can return to market and compete. Landlords will need to provide speculative or tailored fitouts, work with co-location companies within their buildings, offer flexible terms and undertake upgrades to make their facilities more attractive than those across the road. Safety, touch-free navigation of the common areas and enticing tenants back to CBD buildings is a current hurdle.
Even if a vaccine is rolled out in 2021, behavioural changes brought on by the pandemic are likely to remain which means the CBD itself will need to pivot, just like its occupiers needed to throughout this year. There is still too much value in the workplace environment for the office to simply disappear. For the rest of the year remote work will remain prevalent, as we slowly transition back to our offices. Most of our clients have already started to re-think their work space. They are assessing what’s working about the physical space and what needs to be re-purposed. While office spaces are still needed, the way we think about density, space, access, location and even safety has changed.
COVID19 is a catalyst. The office is rapidly evolving, and it is an interesting time to be helping our clients navigate these changes.
Gab Aghion
When an American newspaper incorrectly printed his obituary in 1897, Mark Twain’s iconic response was “The reports of my death are greatly exaggerated”. If offices could talk, they would be making similar statements right now.
The impact of the pandemic on commercial property has been significant, but it’s not all bad. What we are facing is a change of direction in the workplace landscape and a “future normal” that has arrived earlier than anticipated. Trends like remote working, technology, markets leaning towards tenants and an increasing pipeline of supply were already being detected prior to 2020. COVID19 has simply accelerated them and the slow cycle of bricks and mortar property has been caught out. Some areas of commercial property have been hit harder than others, and will likely experience short to medium term discomfort as our industry scrambles to understand and adapt to a market weighted towards tenants.
Real estate has traditionally been an instrument by which we measure our economic health so it’s interesting to see what is happening in the current market. Early data is showing a downward pressure on net rentals and increasing incentives as vacancy rates rise. An influx of sublease space is now competing with direct leases and forcing landlords to make competitive offers. The pipeline of supply typically runs through a 3-5 year cycle and the sudden decrease in demand means that we will face an over supply through the next couple of years, and therefore the market will further soften before improving. Our economy was showing signs of staggering in early 2020 prior to the pandemic and while it's being stimulated now, we have yet to solve the underlying problem, which is the virus itself. A vaccine breakthrough is elusive, outright suppression is proving difficult and the logistics and timeline to roll out a vaccine will be measured in years rather than months. Furthermore, as economic assistance is withdrawn, zombie and precariously balanced companies will be revealed in the next 6 months as stimulus measures are withdrawn, leading to further unemployment. And office demand links directly to unemployment rates.
On the positive, our economy is well positioned to recover. Productive and symbiotic relationships between tenants and landlords is now understood and valued. Landlords are listening, and becoming flexible on lease terms. This will create opportunities for tenants, with length of leases likely to decrease, giving flexibility and buying time for companies that need to re-consider how they use their space. Co-location spaces are becoming legitimised, and likely to boom in 2021, particularly in the non-CBD locations.
At BRM, we were busy advising clients through the initial impact of COVID, helping with short term leasing strategies and navigating rental relief. Now, as tenants look at the mid-long term we’re telling them that this is an exciting time! Most businesses cannot return to the way things were and while this has immediate implications for their space, their options are greater than ever before.
Some tenants are considering the “hub and spoke” approach, providing office accommodation closer to the homes of their workers; others are looking at a combination of remote working and using the office as a collaborative/social/meeting space. The majority are rationalising their footprint and eyeing off reduced leasing costs. Those tenants committed to the CBD are leaning towards A and premium buildings in a flight to quality. There is also increased preference for existing, quality fitouts, so tenants can reduce setup costs and funnel their incentive towards rent free periods. What we’re seeing is far from a complete abandonment of the office – more of a re-shaping. However certain parts of the office market like the CBD and B Grade buildings are under extreme pressure. The market is fragmenting, and like businesses during COVID, there are also property winners and losers emerging.
Excess lower quality stock will likely see buildings re-purposed, while some landlords will use this time to upgrade their assets so they can return to market and compete. Landlords will need to provide speculative or tailored fitouts, work with co-location companies within their buildings, offer flexible terms and undertake upgrades to make their facilities more attractive than those across the road. Safety, touch-free navigation of the common areas and enticing tenants back to CBD buildings is a current hurdle.
Even if a vaccine is rolled out in 2021, behavioural changes brought on by the pandemic are likely to remain which means the CBD itself will need to pivot, just like its occupiers needed to throughout this year. There is still too much value in the workplace environment for the office to simply disappear. For the rest of the year remote work will remain prevalent, as we slowly transition back to our offices. Most of our clients have already started to re-think their work space. They are assessing what’s working about the physical space and what needs to be re-purposed. While office spaces are still needed, the way we think about density, space, access, location and even safety has changed.
COVID19 is a catalyst. The office is rapidly evolving, and it is an interesting time to be helping our clients navigate these changes.
Gab Aghion