Office life is looking brighter by the month. For the first time, Jones Lang LaSalle’s regular analysis of office markets across all Australian capital city CBDs has found that incentives for tenants to remain are equally as attractive as any offered to relocate.
Leasing agents and landlords are placing more emphasis on not only attracting but retaining tenants. Tenants are being feted with more tempting amenity and customer experience strategies that cater to the needs of employees and foster loyalty. In Sydney for instance, JLL’s Tenant Perspectives report released this month found the loyalty rate rose 8% in the 12 months to June 2021, increasing from 26.5% to 34.5%. Rents dropped across the board by up to 13%.
At the same time, while surveys consistently find the majority of workers expressing a desire to return to the office at least some of the time, companies are still seeing employees generally reluctant to commute. This means employers “are going to need to earn the right to a commute,” says Ben Tindale, managing director of accounts at JLL Work Dynamics.
“What we are seeing is a lot of enthusiasm initially to come back to the office and then after a week or two that drops off.”
Despite vaccination rates climbing increasingly higher, the latest Australian worker survey by JLL also found 55% of workers remained concerned about contracting covid in the workplace. One business client in the survey reported that although half their employees indicated they wanted to return to their physical offices, only 10% did so once they could.
So what does this mean for leasing and landlords?
Since the office market started recovering over the course of the year, lessees have been more attracted to better quality spaces with high levels of amenity. Basically, the more appealing a workplace, the better the chances of employees turning up more regularly.
The flight to quality is apparent in Sydney, borne out by vacancy rates for newer buildings (those less than 10 years old) sitting at 7.2% compared to 14% for buildings older than 10 years.
JLL’s head of tenant representation in Sydney Luke Dutton describes the city’s CBD as a “much friendlier office leasing market today than it was 18 months ago”.
“However general uncertainty around the workplace and future working models is understandably adding complexity to decision making,” Mr Dutton says. Pinpointing exactly what lessees are looking for remains a tricky exercise: “We’re seeing a broad range of views from businesses on what their respective working models may be for the immediate future and longer term,” Mr Dutton says.
“The spectrum spans from ‘all hands-on deck in the office’ to 100% remote and everything in between with hybrid models being explored.”
Finance and insurance services are the two industries most active in Sydney’s CBD leasing space, the JLL report found.
Recent activity includes investment firm Moelis Australia Asset Management leasing 3800 sqm in Carrington St’s Brookfield Place, a relocation from 1800 sqm in Governor Philip Tower, and the Bank of Queensland leasing 7300 sqm at 255 George St after deciding to consolidate from premises at 2 Chifley Square (5900 sqm) and at 126 Phillip Street (1400 sqm).
Professional, scientific and technical services are also areas to watch with significant levels of companies in these industries in expansion mode. Tyro Payment Solutions for example has leased 6300 sqm at 55 Market St after growing out of its 3800 sqm in 155 Clarence St. Government departments continue to decentralise headquarters away from Sydney’s CBD into suburban office market hubs, JLL observes.
Professional services will be the source of most leasing business in Melbourne’s CBD over the coming decade according to Deloitte Access Economics. Currently expanding their footprints are law firms Gilbert + Tobin and Dentons as well as the global software and services firm Citadel Health. Technology companies continue to seek out tenancies as the industry grows, JLL attributing their prevalence to “overseas companies viewing Melbourne as a preferred location for their Australian operations”.
Industries currently growing in Melbourne are government, healthcare, professional services and technology, the JLL report found. The pandemic has triggered higher volumes of healthcare companies than usual to seek larger premises, with Ryman Healthcare at 6 Riverside Quay and Converge International at 180 Lonsdale St among those growing in size.
JLL head of tenant representation in Melbourne, Ed Hill, says multiple factors are affecting the market and types of space companies require. While the majority of new developments have leased well, they have done so at the expense of other Prime Grade assets. Melbourne’s Prime Grade asset vacancy rate stands at 16.1% with the highest being recorded by Docklands (18.5%) followed by the Western Core (17.1%) and Eastern Core (15.3%).
With so much quality stock and fitted out space on the market as well as leasing flexibility, a wait and see approach is no longer viable Mr Hill says. “Strike while the iron’s hot,” he advises. “It’s critical for occupiers to start assessing how they want to work moving forward and ultimately what their size requirement may be.”