With the coronavirus (COVID_19) situation changing by the moment – not to mention self-isolation and working from home becoming the new norm – office markets are under the spotlight. At the start of 2020 forecasts were particularly upbeat. Low vacancy rates and a projection for more than one million square metres of office space to come online saw analysts across declaring good prospects ahead.
A few months later and COVID-19’s rapid escalation has clouded the blue-sky forecasts. Yet while the seriousness of current events is undeniable, office property market stakeholders need to ride through the storm according to experts. Acknowledging that the severity of the pandemic’s impact on office markets clearly depends on its duration, AMP chief economist Shane Oliver said immediate impact on the sector will be minimal. “I don’t think it will change office property buyer’s interests,” Mr Oliver said. “If half a work force has to work from home due to the virus that should be temporary as will any lasting impact on space and therefore rents.
“The base case is there will be short term disruption – with no impact on vacancy rates and rents long term. It seems quite certain to me that social distancing policies among other safety measures will be effective.”
The greater danger is if the pandemic causes significant, long-lasting economic downturn, the kind that sees workers laid off and businesses close, which will result in a sharp drop in demand for office space amid widespread disruption. “This is obviously why the government has jumped in with its social stimulus package so it can head of any impact of these scenarios,” Mr Oliver said.
A secondary risk, Mr Oliver said, is that even when COVID-19 is finally controlled, a greater proportion of businesses will continue to the work-from-home model forced on them by the crisis. “On the other hand, if business sees that working from home has led to a decline in productivity the office sector will simply go back to the way it was before. But this is actually quite a big issue – what’s happening now is a big experiment – and we could see more of it.”
BIS Shrapnel chief economist Frank Gelber is similarly measured. “Given the limited expected duration of the shock the direct effect on net absorption of office space will be short-term,” Mr Gelber wrote in The Australian this week.
“If we look beyond the COVID-19 shock into the medium term, there’s no need to panic about office markets. Any negative impact of COVID-19 will be short-lived, say one or two years. There may be a short-term setback to the upswing, with a weakening of leasing markets and effective rents, and possibly a minor setback to prices. But the downside risk to prices is low and they’ll rebound as the economy and office net absorption recover post the COVID-19 shock. We still haven’t built enough office space to oversupply the markets, so we’re still a long way from the top.”
Given the assessment, stakeholders can breathe a sigh of relief for the time being. Mr Gelber also noted in The Australian that given the tightness of leasing markets in Sydney and Melbourne, he did not expect owners to engage in panic leasing incentives. “It’s much more sensible to wait it out,” Mr Gelber advised. “Brisbane, Adelaide and Perth — where vacancy rates are much higher — are more likely to be susceptible to panic leasing incentives, but I wouldn’t advise it. Again, better to wait it out.”
Aiding the situation are the strong markers that led to those positive 2020 office market forecasts in the first place. While Melbourne and Sydney CBDs continue to show lowest vacancy rates - 3.2 per cent (the lowest in Australia) and 3.9 per cent respectively – other capital city markets are now on the upswing. The 2020 nationwide office market report by The Property Council of Australia found tenant demand increased in five of the eight CBD markets surveyed over the latter half of 2019.
Largest gains were recorded in Perth, Canberra, Brisbane, Hobart and Darwin – all of which recorded demand more than double their historical average. Hobart came in with the third-lowest CBD vacancy rate at 4.1 per cent. Negative demand was reported in Adelaide, Melbourne and Sydney.
“Our office markets are a great economic barometer of our cities and these numbers show good demand for quality office space in most centres around the country,” said Ken Morrison, Chief Executive of the Property Council of Australia.
Melbourne’s office market is on track to move fastest this year, the Victorian capital’s CBD scheduled to absorb 57 per cent of all space coming online in CBD markets.
The city is also home to the best performing office region thanks to East Melbourne’s 2.4 per cent vacancy rate. Next best performer is the fast-growing western Sydney hub of Parramatta, with 3.2 per cent vacancy, followed by the city’s lower north shore suburb Chatswood 3.7 per cent. Parramatta’s ascendancy was being aided by major relocations from the Sydney CBD, plus the large pipeline of premium office space expected to come onto the market over the next few year. This includes 150,000 sqm in 2020 alone, unlocking even more significant opportunities in the Parramatta CBD, the Property Council of Australia found.