The office isn’t dead. It’s hibernating.

The office isn’t dead. It’s hibernating.

Read time: 5 minutes, 39 seconds.

Chances are right now you’re sitting in your home office – especially if you’re in Sydney.

While that may be great for your new morning routine (no commuting), it’s not ideal if you’re looking to invest in commercial office space.

And in fact, commercial properties in the office space are under threat right now – so investors should move carefully.

Luckily, when one door closes, another door opens. The savvy investor, as I know you are, will take advantage of the rapidly changing environment we find ourselves in.

The year began positively

Earlier in 2021, office investment had a promising outlook. And in fact, most CBD office markets across Australia recorded a positive space uptake in Q2. Sydney CBD achieved a net absorption of 1,200 square metres and Melbourne achieved a significant 6,600 square metres.

Over in Melbourne, the prospects for commercial office space looked positive as the city came out of lockdown.

In Sydney, office sales saw billion-dollar transactions with overseas buyers becoming heavily invested in commercial properties.

The Macquarie Tower in Sydney’s Martin Place sold for $800 million. A Singaporean company purchased a one-third stake of a major commercial building in Sydney’s CBD (1 Bligh St) for $375 million.

Leasing activity in Sydney boosted from 1,000 square metres to 7,000 square metres in some locations (largely thanks to the financial services industry).

But Sydney’s lockdown is likely to delay rental decisions.

One of the key factors underlying a good commercial property investment is bringing in a tenant.

Sydney’s lockdown, and millions now working from home, will very likely lead tenants to delay any decisions to rent out CBD office space there, especially in the short-term.

We expect this particularly to be the case for tenants with larger teams looking to rent out spaces of greater than 1,000 square metres.

We’ve already noticed that the finalisation of the long-anticipated Brookfield Place (and its backfill) has already pushed the vacancy rate up to 13.2%.

The outlook for Sydney at the very least will depend on how long the lockdown lasts. It’s now just been extended until around the end of August, so we shouldn’t expect improved statistics anytime soon.

Tenant demand is likely to remain low.

Recall the dark days of last year, when Sydney CBD recorded a -94,500 sqm of net absorption over Q3.

Vacancy rates throughout the year doubled from 3.9% to 5.6%, before eventually skyrocketing to 10.2%.

The Property Council of Australia’s Office Market Report for the 6 period to January 2021 demonstrated that the country’s office market vacancy rate increased from 9.6% to 11.7% – the highest it’s been since January 1997.

The below statistics published in the Report break it down city by city:

The statistics have improved since January 2021 (as I alluded to above👆), with the lack of COVID bringing a sense of normality back into commercial office life. But things have now changed with these lockdowns rampant across some of our capital cities.

We don’t expect massively negative net absorption rates for Sydney in Q3 just yet. Although this will depend on how long the lockdown lasts.

Overall, for Australia, the statistics do look positive for 2022. Recent figures have shown a national positive net absorption of 16,000 square metres.

But we do expect softer rental growth as the year goes on.

The unexpected disruption the commercial office space experienced last year (which saw the city see rates we have not seen since the late 1990s) will not enjoy some miraculous recovery.

Is there any hope for retail?

Not only has the pandemic and lockdowns caused people to work from home more.

It has completely facilitated the rise of e-commerce and online retailing – everybody is shopping online.

These figures from the Reserve Bank of Australia show the significant decline in demand for retail tenancies throughout 2020 (and a corresponding increase in vacancy rates). 👉️

The Reserve Bank stated in their April 2021 Financial Stability Review that vacancy rates would be “likely to increase further, with some department stores and large retailers announcing plans to further reduce the size of their floor space over the next couple of years”.

From January to June 2021, CBD retailers in Sydney had struggled with vacancy rates of 8.3% (up from 3.7% from January to June 2019).

But in july 2021, this increased even more.

Retail is unfortunately fairing even worse than office spaces, with the vacancy rate rising to 12.9%.

Vicinity, which owns half of the Chadstone in Melbourne, had $1.8 billion of its portfolio completely wiped out in the first six months of 2020 (about 11.3%) and posted a $394.1 million loss in the first half of 2021. Chadstone dropped in value by 2.1%.

The Emporium in Melbourne (also owned by Vicinity) also fell by 3.1%.

The Queen Victoria Building in Sydney (yep, also owned by Vicinity) also dropped by 3.1%.

But, again, this should not fuel too much pessimism.

While vacancy rates were still higher than usual in the first half of 2021, transaction volumes exceeded $4.3 billion largely due to a surge in consumer demand for home-based products and convenience-based assets.

don’t let this bring you down – industrial property is booming.

We recommend investors watch for opportunities elsewhere in the commercial property market while offices are currently in hibernation.

And industrial property – i.e. warehouses – may very well present that opportunity. 

A recent Sydney Morning Herald article written by Carolyn Cummins stated that the country’s warehouses are “flexing an industrial muscle that is leaving office towers flat footed and big shopping centres in a cloud of dust”.

Real estate investment trusts (REITS) on the Australian stock exchange are on the rise – with the ASX 200 REIT sector already increasing by 5.9% in June 2021. Dexus was up by 5.5% that month and industrial behemoth Goodman was up 7.8% (its best in over 12 years).

The rise of e-commerce is no doubt contributing to this success, as online shopping is packing factories and keeping the business of warehousing & logistics incredibly busy.

But in any case, if you’re looking in Sydney and still keen on the office space, keep a sharp eye out how tenancy rates move for when lockdown finally comes to an end.

The bottom line

It’s now more important than ever to think of a long-term investment plan if you’re looking to stay in the sphere of commercial property investment.

It is still worth investing in commercial properties, but a robust strategy is critical right now.

The rise of industrial properties is where savvy commercial investors may find an opportunity to shine, so consider if this fits within your long-term property goals.

MLS Finance are always here to help you build such a strategy.

So get in touch.

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📞 Call: 02 9635 1888

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