Cast your mind back to the latter part of 2020: lockdowns were decreasing across Australia and, in the commercial sphere, there was a growing confidence that tenants would start returning to their workspaces.
Asset managers and owners who had been holding off from spending were looking to start exhausting that capital, says Neil Shepherd, Nutbrook’s MD. “As a result, a lot of these managers were pushing through the compliance work up to 30 June 2021.”
Fast forward to today and this picture has been modified. While a return to the office is still very much a reality, there is widespread reluctance for it to be on a full-time basis, and adjustments are being made to reflect this.
“We can see this flexible approach is becoming the new norm,” says Shepherd. “With this, many asset owners are continuing to operate with a lean model of compliance in 2021/22”.
“We will only sweat assets as far as we can until we have to replace them. It’s very much reactive capital works as opposed to proactive.”
This ‘new norm’ of employees working remotely for at least part of the week is having various flow-on impacts on tenancies. Staggered office use means organisations may require a different footprint.
For some companies, this will lead to downsizing. “The reality is that when their lease is up, they’re going to give away a percentage of their office floors,” says Shepherd. “They will hold their leases for the remainder of the term but, if they can exit them, they will.”
Conversely, some businesses will look at increasing their floorspace to ensure they are able to offer COVID-safe environments with plenty of room for physical distancing.
For landlords of organisations looking to downsize, the challenge will be in trying to get people to recommit to the existing lease by area. What was a landlords’ market has now become a tenants’ market, as vacancy rates are driven higher.
Tenants will need added incentives to either stay or take up new space, which will put a lot of pressure on rentals for the asset owners. This pressure will filter through to the availability of funds for capital works.
Shepherd foresees fundamental changes in the property landscape. “The fringe will turn to residential organically; it will be converted to build to rent and the CBD will probably hold but not grow anymore.”
In the short term, asset owners would be advised to prepare for an uncertain road ahead and plan for next year’s budget accordingly.
“I think you’re looking at least five years to get your buildings back to where they should be,” says Shepherd. “It’s a game of Tetris, with smaller companies downsizing and looking for a smaller space, giving landlords the enormous challenge of backfilling the spaces.
“The premium will hold because there’s still a lot of activity in that part of the market, but overall people will need to be a lot smarter in their financial decisions.”