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Finance Market Update – 28 August 20

Updated: Aug 28


The office is dead, long live the office. In this update we talk about the changing nature of where and how we work and what impact that is having on commercial and residential property prices.


Offices in the future


The way and places we work are changing.


People are wanting to move away from the city to further away locations and this has dramatic consequences for both commercial and residential property prices.


Since the advent of COVID19 people have learnt very quickly how to use Zoom, work online, from home, and there is a big debate about what work will be like in the future.


Will it be done all remotely, will we all go back to the office or will we end up with something in between?


Where work and how work will be done in the future is unknowable at this time.


But there are emerging trends which we could reasonably expect to continue and get stronger in the short to medium term. One of the key trends is working from home or remotely.


As a sign of the times of people working from home and businesses cancelling and shutting their offices, vacancy rates in city centres are around 10% or more which is the highest in three decades.


Only last year there were concerns about a shortage of office space. Now there is more supply than demand.


Unsurprisingly a consequence of rising vacancy rates is declining rent prices for offices, particularly large office towers in city centres.


Vacancy rates are increasing as both a requirement of businesses to move people to work from home but also from demand from employees to work from home.


The ‘requirement’ not to be in the office for health reasons is different from ‘demand’ not to be in an office.


This is an important distinction.


Businesses that told their people to stay home compared to people who do not want to return to the office.


But there are many people who want to go back into the office.


Many people find that in the office they get a lot of their social interactions, collaboration learning time, focus time and serendipitous experiences that comes from being around so many people in one place and want to go back into the office, maybe not everyday five days a week, but they want to be back in there.


Interestingly there is also increasing demand for suburban or smaller business district offices (closer to home).


A lot of people want to go back to the way it was.


But there are also a lot of people who do not want it to go back to normal five days a week in the office with the commuting times and crowds. This is very understandable and recent studies are showing that staff can be just as or more efficient and effective working from home or remotely.


My prediction is that once the virus is under control, either through vaccination or elimination, offices will fill up again, but at substantially reduced occupancy rates. Something along the lines of people working two days then three days in the office then at home or visa versa.

The value of commercial property and particularly offices has a lot to do with the rental income they generate.


If there is less requirement and demand from people to be in the office then rents will need to (continue to) fall to meet the market and get people back into cubicles.


As rents for offices drop so does the value of the office itself.



Home (and work) is where the heart is


Conversely, even though we are at the start of a profoundly serious recession residential property prices are remaining stubbornly strong.


As you might recall I predicated in June that “Property prices will recover all lost ground in 2020 and be setup for a boom in 2021 that will reach or exceed previous record highs” and while I am less confident that prices will recover so strongly this year I am increasingly confident that prices will rebound next year.


A lot this has to do with demand.


Specifically, the changing nature of demand from people who no longer have the requirement or demand to go into the office.


You probably know people who have said something along the lines of “I am moving to the country or up the coast and getting a bigger house because I don’t need to be in the city anymore”. A lot of people are thinking this way.


Not always to make a drastic sea change but even just to upsize their property as they realise working from the dining table each day is not sustainable.


Right across the eastern seaboard of Australia people are googling houses in regional centres away from the Sydney metropolis, busy roads, expensive food and rent and congested trains and buses. Picturing rolling hills, sandy beaches, and open (more than enough for social distancing) space.


The sharp spike in interest in regional houses and properties is seeing prices start to recover in certain areas.


Hobart for example, a long desired sea change city from Sydneysiders and Melbournians who had enough of big city life, has seen property prices continue to go up most of this year, and listings almost plummet as people hold tightly onto their prized properties.


This means that in some cases residential property prices are, strangely enough, being positively impacted by the shifting demand of property buyers.


But the expectation the job market is going to support a fully remote workforce forever is misguided.


There will be and are leading companies such as Atlassian who will enable staff to work from home forever but even they know they need an office.


Atlassian is one of the biggest, smartest, and most successful Australian tech companies and they have recently announced they are building a $1 Billion dollar office next to Sydney central train station. It will be the worlds tallest hybrid timber building and likely incorporate every sustainable element possible.


They recognise something particularly important about the changing nature of work and the office.


Choice.


Companies will need to give employees the choice to go into the office or not.


That choice has two important elements, the first is having an office they can chose to go into, and the other is having them set up to work remotely whenever necessary.


Businesses will need to have amazing office spaces where people can meet, talk, work and interact.


The office will need to become a value proposition and have unique benefits and features that attracts new and existing staff.


Humans are social animals. There is so much power of being in person at an office, you learn the culture almost by osmosis and how to actually get the job done in many cases.


At the same time, businesses will need to recognise that staff might not want to come to the office, or cannot because they live so far away from a recent sea change, and support that as well.


So, while the rents and values of offices are being hammered right now it is likely the office is not yet dead.

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Skyward Financial Pty Ltd ACN 620 915 675 is Authorised Credit Representative 506871 of Australian Credit License 390261