What’s New in the Office Space?
Countless questions are currently being posed about what the potential longer-term impacts of the pandemic on the office sector may be, and what challenges and opportunities may arise as a result.
Whilst uncertainty prevails, larger tenant commitments to new space in existing and new buildings are mostly on hold across the Melbourne CBD and metropolitan markets. This has allowed the market to take a pause, re-rate risk and assess what the key drivers for value will be as we transition into a post-pandemic environment – with many office owners starting to look towards the future and how they can ensure their buildings remain relevant and attractive to future tenant demand.
Office investors remain quite active and curious about opportunities both on and off market, with most applying a firmer lens towards tenant covenants and their ability to pay rent as time progresses. Many are keen to ensure that buildings are well placed to respond to the inevitable rise in unemployment by catering for a range of tenancy sizes and business types, and ensuring that the asset’s location remains relevant for certain tenant sub-sectors.
Despite a more prudent approach from buyers, there remains a notable amount of transactional activity in the sub $150 million space, with buyers showing appetite to take on leasing and tenant risk for the right product. Deals are being structured in more creative ways so as to protect the interests of both Vendors and Purchasers, which is requiring a more experienced and patient agency approach.
In talking with our Melbourne Middle Markets operatives, office leasing agents and various clients in the industry, some of the major talking points and questions are as follows:
- Will the now established phenomenon of “Working from Home” (WFH) change the demand patterns of tenants?
- Will overall space requirements from tenants reduce as a result?
- New office hygiene practices will likely see more square metres per occupant required which could offset the reduction of required space.
- Remote working combined with the decentralisation of the workforce could result in the revival of metropolitan commercial office hubs.
- Tenants will be seeking more flexible lease options with opportunities to expand and contract in line with their business fluctuations, so, what does this mean for valuations?
- What does the future hold for flexible working and co-working operators?
- What tenants and industries are likely to remain active/profitable over the short to medium term?
- How are landlords coping with the new guidelines for rental abatements and what is the best strategy for managing these discussions?
- Could hot-desking and shared workstations, and large gathering areas and boardrooms, become a thing of the past, due to contagion risk?
- Common amenities and upgraded hygiene practices within buildings are going to be front of mind for tenants more than ever before.
- Wellness ratings for buildings are anticipated to no longer be a fad, as occupant health becomes a tenant requirement.
- Sensor activated controls for lifts and doors to become the norm.
- Have the investment criteria for buyers changed since the onset of COVID?
- What does the return to work effort look like in the Asia Pacific Region?
- How does Australia sit in the hierarchy of investment destinations for overseas investor?
By talking to major players in the industry, both domestic and international, this interview series addresses many of the above points, while putting current market activity into context as we continue to navigate through these uncharted waters.