There is little doubt that the pandemic experience will leave a long-lasting mark on us and how we go about our daily lives, but what will the impact on our offices be?
Reduced commute times, flexible work schedules and increased productivity has seen a better work-life balance for many, and as a result business are now exploring ways in which they can incorporate these benefits into their post-Covid workplace. The question therefore begs, does this herald the death of the office as we know it?
Even with the many work-from-home benefits, most enterprises see it being a supplement to, rather than a substitute for the office. Vibrant physical workplaces are key to corporate cultures and most successful companies value the power of in-person collaboration, and so do their employees. Furthermore, the long-term effects of increased remote working are not fully understood yet. Extended periods of isolation, challenges around onboarding of new employees; diminished mentoring and career development and poor work from home options for some are all possible drawbacks to this shift in our working week.
So, what are we likely to see in a post-covid workplace? Ultimately, the challenge will lie with employers to create dynamic, safe and connected spaces that will attract their employees from the dining room back into the board room. An improved focus on employee health and wellbeing; enhanced sanitation and hygiene protocols; increased social distancing measures and higher density ratios are all likely outcomes. Technology and digital transformation will also be accelerated, with many organisations implementing contactless technology, fever screening systems and improve air-quality mechanisms.
Ultimately, in-person contact is a basic human need and our workplaces play a significant part in achieving these connections. The office is good for business and is here to stay.
Leasing Market Outlook
Pedestrian filled streets; occupied office floors; bars, restaurants and cafes abuzz with patrons, South Australia is well and truly ahead of the curve on the return to work front.
Over the past few months, we have seen a steady increase in activity across the Adelaide CBD, however with our Victorian neighbours in a second-wave lockdown some downward market sentiment has crept into local office sector. Activity in the leasing market has been subdued during the second quarter of 2020, however we have recently seen a significant improvement in enquiry levels which points to a more positive outlook for second half of the year.
Another benefit for Adelaide is that we have not seen the early reaction by many large corporates to sub-lease significant portions of their CBD presence as they have in the Melbourne and Sydney markets. We expect that vacancy will rise over the second half of 2020 to around 15%, up from the current vacancy rate of 14.2%. A relatively minor impact under the circumstances.
Upcoming lease expiries have traditionally been the catalyst for movement amongst tenants, affording organisations an opportunity to reset and future proof their real estate needs. With an opaque outlook on the short to medium term market recovery, many businesses are seeking short term hold-over arrangements with their existing landlords while they wait for the dust to settle. This has resulted in increased competition amongst landlords as they seek to attract the limited number of active requirements into their vacant tenancies. Under these conditions’ owners should not expect Face Rental growth over the short to medium term and early deal evidence has already seen an upwards pressure on incentives in the region of 5%.
On the supply side, Adelaide will see a few new cranes in the sky before the year’s out. Most notably the recent announcement by the State Government that they will be relocating to 83 Pirie Street in the latter part of 2023, occupying 17,000sqm and underpinning the 30,000sqm development for CBUS. Kyren Group is nearing completion on its most recent development at 108 Wakefield Street, with 15,000sqm due to be complete later this year. The recent acquisition of the Southern Cross Arcade by Charter Hall and subsequent lodging of plans to redevelop the site into 40,000sqm of office has much of the market speculating that they have successfully secured Service Australia for their pending 29,000sqm market requirement. Neither the Federal Government nor Charter Hall have confirmed this at the time of writing.
Investment Market Update
Investment activity continued to build momentum in the second half of 2020 following the mid-year hiatus following the onset of COVID-19. Investors are on the move with several high-profile transactions have been concluded or in the process of being finalised.
• Rundle Place (retail portion) which is in due diligence for circa $210 with Sydney based investment manager Fortius.
• Melbourne based, Nikos Property group have acquired 50 Flinders Street, Adelaide for $175m from CBUS Property.
• Sydney based Intergen Property Group’s acquisition of 22 King William Street, Adelaide (NAB Building) for circa $47.2m on behalf of a Singaporean private investor.
• The NOVA Building at 75 Hindmarsh Square is rumoured to be in due diligence with Adelaide based property syndicate Harmony Property Group for c $40m.
These transactions reinforce that investment grade assets with healthy cash flow, from high quality tenants are in high demand. The interest from interstate and offshore groups is reflective of South Australia’s health and economic response to the outbreak, firming our state as a safe haven for residents and investor alike. Significant volatility in equities and lower returns in the fixed interest markets has investors leaning to the commercial property sector for higher yielding assets. With interest rates expected to remain at record lows for some time, we expect that this trend will continue for the foreseeable future.
While organisations are in different phases of dealing with the pandemic and the impacts vary by geography and sector, comparatively Adelaide is in great shape.
Volatility creates opportunity, and this will be a market that rewards the proactive property owner. As disrupted businesses navigate their return to the office, landlords should be exploring ways in which they can adapt their buildings to appeal to this post-Covid occupier.