Office Demand Up but Office Workers still Down?

Office Demand Up but Office Workers still Down?

Commercial real estate has been an industry defined by major evolutionary tide shifts. Decades ago, individualized, spacious offices were the norm, with many offices allotting as much as 25 square metres per employee. Companies were comfortable entering long-term leases and building out large headquarters as their business hubs. More recently, (Pre-Covid) a trend was emerging among companies, who were seeing the business benefits of flexible working, like increased productivity and improved brand reputation. This trend has been accelerated by enforced remote working during the pandemic.

Post-Covid increased the number of businesses that integrated both flexible working and agile working by embracing flexible hours, processes and workspaces.

According to a report by Australian financial review (AFR), Melbourne CBD towers were 12 per cent occupied in December, but 88 per cent leased; in Sydney, CBD towers were 23 per cent occupied but 91 per cent leased.

Property Council chief executive Ken Morrison told Australian review that the demand for office space increased in the December half, despite lockdowns. In the past year, commercial tenant adviser Kernel Property helped 60 businesses relocate or renegotiate office leases and “not one cut its space requirement”, Kernel director Steve Urwin told AFR.

In some cases, the reason was a good old-fashioned surge in business and the need for more bums on seats. Capital markets in particular have had a bumper for 18 months. In other cases, however, valid points were made as to why office space is still in demand. They include:

1. Increase in tech-related headcount:

JLL’s head of office leasing, Tim O’Connor, tells Australian Review that among the pent-up demand, and the increased willingness to commit to new leases, the need for business to increase its “tech-related headcount” stands out.

2. Employment growth:

Andrew Ballanty, The global property group’s head of research in Australia says employment growth has always been a lead indicator for rising office sector demand. He also said that our positive net absorption figures show that several organisations are increasing their footprint to accommodate headcount growth.

3. Uncertainty on how working from home will affect their profits once the pandemic passes:

Matthew Kahn, provost professor of economics at the University of Southern California and the author of the soon-to-be-published Going Remote:  says such a decision to delay has an “option value”. Corporate space users don’t know how the pandemic will play out. Many don’t know how their profits are being affected by work-from-home. And they certainly don’t know how WFH will affect their profits once the pandemic passes.

4. Formal government restrictions, and little pressure to cut accommodation costs:

With the shortage of skilled labour, formal government restrictions, and little pressure to cut accommodation costs, it makes sense to both allow staff to work remotely and to retain the office.

5. Ensuring the health and safety of employees:

Top of the corporate list for 2022 is not the expansion or reduction of space. Instead, the main focus will be “ensuring the health and safety of employees and providing a compelling workplace experience to attract and retain talent”. For office owners, those key points – health and safety, a compelling workplace and more flexible lease terms – add up to increased costs; though to be fair, Australia’s leading office landlords have been working on those issues for some time.

6. To retain and nurture top talent:

Mr Micheal Holloway, general manager of property investment at Kiwi Property, one of New Zealand’s largest real estate firms says in a report to WPS that “When you’re trying to attract, retain and nurture top talent.“Rather than doing a job interview on a videoconference, you want to go into their space and see how they value other members of staff.”

7. To provide learning opportunities for younger employees:

This will apply differently across demographics – with a tension between younger employees’ need for training and senior employees’ greater motivation to work from home.

8. Resilience:

A greater amount of home working will persist: for the sake of resilience as much as anything else. Jim Coleman, head of economics at WSP in London says “The next time a coronavirus comes along, we know we need to move quickly to this model, which means that it has to be in play – at least in part – most of the time.

In Going Remote, Kahn argues that the workers themselves will sort out the future. Some will gain from WFH, others will prefer face-to-face interaction. “If I am right, then firms will want their commercial leases, but they may need less commercial real estate,” he says.

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