The uptake of CBD office space could fall by as much as 15 per cent in the coming year as a greater proportion of city workers spend more days each week working from home.
That estimate, from Investa’s head of research David Cannington, is based on the prospect of staff working from home between two and 2½ days a week, an increase of one to two days on pre-COVID-19 levels of working from home.
Taken into account in that estimate is the offset to softer demand from the likely increase in workspace ratios – anywhere between 10-20 per cent – as greater amounts of space are earmarked for collaborative work and meetings.
“In net terms, if you put those two factors together, it equates to around a 10-15 per cent reduction in annual net absorption,” Mr Cannington said.
Net absorption is an industry metric which measures the change in occupied office space over a period.
For Sydney and Melbourne, that reduction in occupied space could amount to as much as 9000sq m and 10,000sq m a year respectively.
Attempts to quantify the extent of structural change to the office market triggered through the pandemic disruption remain a guessing game. The state of the economy and the rate of unemployment had a much greater and more direct effect on office space take-up, Mr Cannington said.
As a rule of thumb, a 1 percentage point increase in the unemployment rate equates to around 30,000sq m to 40,000sq m contraction in net absorption for CBD.
“The economic impact and the labour market impact going forward is going to have more significance for net absorption than the impact of WFH or workspace ratios,” he said.
One of the country’s largest property fund managers, QIC, estimates about half of the country’s workforce will work from home two days a week following the pandemic. That in turn could result in a 5 per cent fall in net demand for office space.
But QIC fund manager for office George Katsanevas said that, while it was clear demand would be subdued in the short term, major corporates would move carefully on any changes to their footprint.
“They will be cautious not to overstep the mark, lest they contract to the extent that they then cause issues with their wider workforce,” he said.
“The last thing they want to do is contract to the extent that it impacts the productivity of their workforce and their engagement.”
The uncertain outlook for occupancy is a global trend as office markets around the world are restructured. . In the Asia Pacific region, 72 per cent of senior leaders would like to, or are encouraging, employees to work from the office, according to a CBRE report on the future of work released this month.
Around 66 per cent of survey respondents intend to allow remoteworking for no more than one or two days a week.
An uncertain outlook combined with the wider embrace of flexible working was making the forecasting of office accommodation needs much more complicated, the report noted.
Traditionally, corporate real estate demand could be plotted against business growth, which “directly correlates with changes to headcount”, it said.
That then allowed for a relatively straightforward “linear decision-making process” in the pre-pandemic world.
“The widespread adoption of remote working is transforming how companies calculate the number of office-based employees and related workspace demand.
“The pandemic has also prompted many employees to re-evaluate the time and cost of commuting to work and strengthened the appeal of living outside city centres,” the CBRE report said.
The uncertainty is already playing havoc in demand for office space, with the Sydney and Melbourne markets notching up what Macquarie analysts described as the “worst year on record” for demand, resulting in vacancy rising to 12 per cent and 13 per cent respectively.
Net effective rents have declined 16 per cent peak to trough in Sydney, while Melbourne’s have fallen 8 per cent, the analysts wrote in a client note this month.
“We continue to believe Sydney net effective rents will fall 20-30 per cent this cycle, with rents now approaching the bottom end of our range,” the report said.
“We expect softer demand in the near term to result in rising incentives and, potentially, face rent declines in Sydney.”
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