Coronavirus will impact the way our industry functions, and how people work, into the future. Some of the changes will represent an acceleration of trends already underway, whereas other impacts will mean a sharp turn from the previously established course.
Human-connectivity will underpin on-going demand for office space, and nobody believes our CBDs are going to remain ghost towns forever. However, the impact is clearly going to be far greater than just a few more hand sanitiser dispensers in building lobbies and offices.
This blog post specifically focuses on the impact of COVID-19 on landlords of commercial office buildings in Australia. I will follow with up with two more pieces: one forecasting the impact on CRE firms and another on occupiers of office space in general.
Here are three predictions of the impact on landlords of major office buildings in Australia in a post COVID-19 world.
It seems inevitable that vacancy rates are going to increase substantially. There was already a lot of new office stock recently completed or under construction in our largest capital city markets. A fall in demand, as a result of a decentralisation trend, a greater propensity to work from home and lower-than-previously-expected economic growth, will result in higher vacancy rates than were previously forecast.
More vacancy means that some owners who had been increasingly relying on inhouse leasing resources will need to rethink their strategy. For portfolios with huge amounts of backfill space, the notion of inhouse leasing teams having the market coverage necessary to lease huge chunks of space – in a market where there is much more competing stock for lease – becomes unrealistic.
I expect that some owners will move back to an outsourcing model, as leasing agents’ expertise becomes more important in the process – or they will at least shift the balance towards outsourcing by adopting a hybrid approach.
If certain landlords stick with the inhouse leasing model, they will probably need to more aggressively incentivise tenant representatives (which many, who carefully guard their independence, will resist), and provide higher fees to other agents, to generate incoming opportunities.
Alternatively, they could recruit more high-powered in-house leasing teams, but the cost of this exercise may be ineffective at a time when demand is expected to be lower – it would be cheaper to just pay agencies the commission.
In a higher vacancy market, the prudent approach will be the traditional agency model.
Prior to COVID-19, there was a trend towards placemaking, experiences and events in Australian office buildings.
The events industry was booming. People wanted more immersive and interactive experiences, and landlords were responding by putting on all sorts of events as they curated a community for their buildings. Some events and common areas were enticing for outsiders to enter the building.
How quickly things have changed. The focus on placemaking and the creation of more event space at the expense of leasable area should be reviewed. Expansive coworking-style spaces in lobbies will probably be cut back or completely removed to discourage congregation.
There will likely be less pop-ups and fewer landlord-sponsored events.
Some of the costs of maintaining common areas can be shifted to the tenant via outgoings (e.g. common area cleaning charges will increase as more preventative disinfectant becomes the norm), and tenants may still appreciate the provision of common area amenity.
However, the allocation of so much space to the general public and event uses, in an age where people are more germ-conscious, no longer make senses – at least for the foreseeable future. Indeed, before there is a vaccine, the need for contact tracing makes it likely that such events and gatherings will be discouraged or disallowed.
Landlords will also review building policies and start to restrict tenants’ ability to have in-house events, while more proactively limiting the number of guests within leased areas at any one time (or even imposing a capacity limit over a period of time).
This means that Eventbrite or Meetup-style events within flexible space providers, tenant break out areas and building common areas, which were growing quickly before COVID-19, will likely be banned or severely restricted. Placemaking will be sidelined in favour of curating safe spaces.
NABERS, the National Australian Built Environment Rating System, rates the environmental performance of Australian buildings and tenancies. While landlords have been focused on improving their performance in this area over the past decade, I expect that more will seek to compete on technological connectivity moving forward.
Wired Certification is a CRE rating system for landlords to understand, improve and promote their buildings' digital infrastructure.
As companies become more comfortable with, and reliant on, virtual meetings as a way to communicate internally and externally, the review of a building’s Wired Score (or a competing measure) will become part of the decision-making process for tenants when deciding on space. This will, therefore, influence the capital expenditure priorities of asset managers.
According to the Wired Score website, there are currently only 2,000 Wired Certified buildings globally. If Wired Score becomes the industry standard by which a building’s digital infrastructure is measured, I expect there will be a trend for buildings to become certified and, as buildings seek to differentiate themselves in a challenging leasing environment, more investment in the measures that result in a Gold or Platinum grade.
Therefore, the recent arms race between buildings on sustainable design features and end-of-trip facilities will likely evolve into a competition for digital infrastructure supremacy.
And then…
No doubt there will be many other impacts and implications for landlords from COVID-19, but these are three I wanted to share to get the conversation started.
The points raised are designed to stimulate further discussion and debate, as we all seek to navigate our way through this unprecedented period of uncertainty.
