The future of offices in post-COVID Melbourne

With the prospect of COVID-19 restrictions easing in Victoria, there are two key questions when it comes to where and how we work up for debate.

What changes would workplaces need to ensure safe return of workers? And what is the future of existing office properties?

While the answer to the first question is based on advice from public health experts and governments – the answer to the second is elusive.

There are many uncertainties on the path to our post-COVID-19 workplaces.

There’s speculation around the timing of vaccine and the possibility of another wave of infection in the interim if the virus is not eliminated and easing of restrictions is not managed in strict clinical way.

But what is occupying policy discussions currently is how to get the economy and the employment back on track. Part of this question is to what extent work would return to offices and what risks landlords of office buildings face in current economic climate.

So far, the employment trends are positive; the growth in employment in the FIRE (finance, insurance and real estate services) sector in Victoria in August 2020 grew by 10 per cent compared to this time last year.

According to the Australian Bureau of Statistics, the full-time employment figure in this sector grew by 20 per cent – a positive – while part-time employment declined by 25 per cent, but from a relatively small base.

The FIRE sectors are traditionally the drivers of prime office buildings in Melbourne’s central business district (CBD).

But two sectors that have shrunk are the administrative and support services (by more than a quarter), and public administration by one-tenth in August this year, compared to the same period previous year – though for different reasons.

There’s a trend towards the casualisation of administrative and support work, while in public administration the casual work was reduced due to lockdown. Moreover, full-time work declined more than part-time in the case of administrative services, which is a further a cause of concern.

Administrative services occupy secondary office space (which are usually lower quality and located in less attractive locations) and a decline in this full-time workforce does not bode well for the landlords of these buildings.

Public administration will be the first to return after lockdown is eased and the likely demand for space could revert to pre-COVID levels to a large extent, particularly with the push from governments for public servants to lead the return.

But let’s investigate that a bit more.

A third of Melbourne’s CBD is occupied by tenants like the state government, Telstra, NAB, ANZ, Australia Post, Superfunds, Police, NBN and legal offices – which are blue-chip occupiers of prime office space.

These properties have seen value growth, low vacancy and this will continue with the new supply of prime space already pre-committed.

There is, however, a quarter of space in the CBD that’s occupied by providers of education services, small and medium enterprises (SMEs) and co-working space providers – which will face increased vacancy.

The secondary office space is at risk of lower occupier demand and high vacancy.

There’s no doubt that rents will be under pressure and incentives for tenants will increase across all types of office space, more for secondary than prime office buildings.

Though the government’s Budget, tabled two weeks ago, is a pro-business budget, a lot will depend on agility of SMEs and education sectors.

Migration will play a key role in education sector recovery, which at present is uncertain.

While the Australian Securities Exchange’s stock indices are showing confidence in the economy with increase in value, we must remember that the index reflects health of companies that are doing well.

Those who are not part of the index are the ones to look at in order to understand the impact of the shock on the corporate sector.

The banks are healthy, and the interest rates are at historic low. The yield curve for Australian government bonds is normal reflecting confidence in the future of the economy.

It’s possible that a large part of the economy will bounce back in coming months and the demand for office space will be sustained, but this all will depend on how SMEs are repaired.

For investment in office properties, the average yield for prime office space is at a historic low, around 4.8 per cent. There’s also a trend towards shoring up of portfolios by domestic institutions. Office funds are well capitalised and have low debt.

Better management of the pandemic and the economy, relative to the rest of the world, is viewed positively by globally-focused investors.

All of this is in favour of a prime office asset.

Secondary office stock would need to be retrofitted or repurposed, but this offers opportunities, as potential for yield compression exists in the near future.

The early signs from other Australian states is that work will slowly but surely return to offices, although this must be managed carefully. Its success depends on factors including the containment of the virus through a vaccine, but that’s still the biggest COVID-19 uncertainty.

Office layouts, common areas, access, timing and travel to work needs to be well planned. Technology and innovation that provide social distancing solutions and healthy building strategies also hold the key in terms of the demand for Melbourne’s office spaces in the future.

Professor Piyush Tiwari is leading a webinar discussion on this subject on Thursday 22 October starting at 12pm as part of Melbourne School of Design’s MSD at Home series.

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