Investa Inside Office Market Outlook - April 2021
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Investa Inside Office Market Outlook —— April 2021
1 │ Investa Inside Office Market Outlook April 2021
Overview
Key messages
A solid rebound in business conditions Reflecting weak growth in business
and business confidence in recent operating costs, including office rent
months bodes well for the outlook for relief, white collar business profits
white-collar employment and cyclical increased sharply through 2020,
—— demand for office space across
Australia’s major capital city markets.
creating an office rental affordability
boost. We think this will strengthen the
Australia’s economic recovery and white-collar We explain how an acceleration in capacity for businesses to ‘upgrade’
structural office work trends are their office.
employment growth are expected to support office
expected to soften future net Broader financial market activity and
market net absorption over the coming year. absorption by ~5-10% in comparison investor sentiment indicates positive
However, office vacancy rates in Australia’s major to pre-COVID net absorption underlying capital demand and liquidity
assumptions. for Australian office assets. We expect
CBD markets will remain elevated as the office a return to more open capital market
COVID-19 has not significantly
development pipeline will continue to provide a steady impacted office construction activity activity will maintain downward
pressure on Australian prime office cap
stream of new office completions across Australia’s across Australia’s capital city markets.
rates.
Despite some easing in office
major CBD markets in 2021 and 2022. development approvals, the current
supply pipeline will a produce a
The disruption of COVID-19 has accelerated a number steady stream of new office
of existing trends to the way office work is conducted. completions across Australia’s major
CBD markets in the coming years.
These include the availability of workplace flexibility
and the office workplace playing a greater role in
driving collaboration and team-based office work.
These trends, and other shifts in tenant preferences
from COVID-19, are expected to strengthen a ‘flight
to quality’ in tenant leasing activity and drive
outperformance in Australia’s higher quality office
buildings.
2 │ Investa Inside Office Market Outlook April 2021
Economic Outlook
—— —— ——
Sound base for economic recovery Conditions to support office demand Market & industry variation
Australia’s economic conditions were severely impacted As the Australian economy, and its major capital cities, State-based policy responses have driven varied operating
by COVID-19 through 2020. However, despite being have increasingly implemented COVID-normal business conditions across Australia’s office markets, with
hampered by restrictions on business and social activity, operations, both business conditions and business Melbourne’s recovery and office occupancy in particular
the Australian economy expanded by a solid 6.6% confidence have rebounded strongly. A solid recovery in lagging Australia’s other markets due to the extended
through the second half of 2020. This growth effectively leading business indicators bodes well for the outlook for COVID-19 lockdown from July to September 2020. More
accounted for the COVID-related decline in GDP through white-collar employment and cyclical demand for office recently, measures and government policy designed to
the first half of 2020, with GDP running at 99% of pre- space across Australia’s major capital city markets. support a ‘return to the CBD’ have driven convergence in
COVID levels by the end of 2020. Australian CBD market office occupancy rates.
However, Australia’s growth potential, and the pace of
In recent months, a positive read on business activity economic recovery, is being held back by the headwind In addition, the range of Australia’s office-occupying
indicators reflects an Australian economy that is of restricted international cross-border movement. A businesses are also experiencing varied operating
recovering soundly in 2021. In particular, the Australian successful rollout of the COVID-19 vaccination program is conditions. Across Australia’s white-collar industries,
business sector has been comparatively resilient through expected to moderate the strength of this headwind over specialist business services and public administration have
COVID-19 and is well placed as it faces a further wind the coming 12-24 months. together added more than 80,000 jobs in the year to
back of the highly effective furlough measures and February 2021. In contrast, business administration
We expect a cautious reopening to international travel
continues to ‘open up’ towards a post COVID-normal services (ie. office administration and employment
and migration will provide a measured return to pre-
setting. services) have cut around 50,000 jobs in the past year.
COVID rates of net overseas migration, and a gradual
support to Australia’s future economic growth.
Chart 1: Australian Business Insolvencies Chart 2: Business Conditions & Office Employment Chart 3: Office Occupancy, Australian CBD Markets
Sources: ASIC & Investa Research Sources: ABS, NAB & Investa Research Sources: Property Council of Australia & Investa Research
3 │ Investa Inside Office Market Outlook April 2021
Office Leasing Market Outlook: Demand
——
Chart 4: White-Collar Employment & CBD Office Net Absorption
Office-based employment and net Two common workplace trends that were
prevalent before COVID-19, and are being
absorption prioritised as businesses take the disruption
of COVID to reassess their operations and
While Australian labour market business policies, are flexible working
conditions, and the outlook for the (including ‘working from home’) and the role
white-collar business economy is of the office workplace. More specifically,
increased workplace flexibility and remote
positive, the lagged flow-through to work is expected to soften underlying
Australian CBD office net absorption demand for office space, while a shift
foreshadows some continued towards greater utilisation of the office
challenges to underlying leasing workplace for collaboration, team-based
demand for another 6 to 12 months. work, meetings and innovation is expected
to increase office demand through upward
However, allowing for this lag, demand for pressure on workspace ratios (ie. office
Australian CBD office space is strongly space required per employee).
correlated with economic conditions and white- Sources: ABS, JLL Research & Investa Research
collar employment. Historically, annual growth While there is still some uncertainty about
in private sector (ie. excluding government) the likely scale impact of these factors on
white-collar employment greater than 2% has future demand for office space and net
been sufficient to drive positive net absorption absorption (in fact a significant share of
across Australia’s major CBD office markets. businesses are still unsure how, or if their
workplace and operations will change), we
In addition to the impact of economic estimate that the net impact of these two
conditions and employment, the disruptive trends alone will create a moderate long-
influence of COVID-19 on the operation of the term reduction in future net absorption of
white-collar economy has fuelled debate about ~5-10% in comparison to pre-COVID net
the future role of the office market and the absorption assumptions (for more detail see
impact of new ways of working on future office page 7: New Ways of Working and Office
demand and net absorption. Demand).
4 │ Investa Inside Office Market Outlook April 2021
Office Leasing Market Outlook: Supply
——
Chart 5: Approved Office Development
Development activity supports Consequently, we anticipate Australia’s
major capital city markets will experience
office supply outlook variable conditions across precincts and
grades, with higher vacancy and weaker
Australia’s office supply outlook has not market conditions concentrated in the lower
been significantly impacted by grade and backfill assets. Partly offsetting
COVID-19. Office construction activity the solid office development outlook, we
expect a steady pipeline of office
and supply chains have been largely withdrawals in Sydney and Melbourne will
maintained and 12 major office constrain the availability of office stock, as
development projects were completed backfill assets are either repurposed or
across Australia’s CBD markets in 2020. refurbished and repositioned to compete
with the new supply.
While office development approvals eased in
2020, and expected completion dates of some
longer-term uncommitted office development
projects have been delayed, the near-term Sources: ABS & Investa Research
pipeline will continue to provide a steady
stream of new office completions across
Australia’s major CBD markets in 2021 and
2022.
A steady supply pipeline in the coming years
will somewhat counter a cyclical rebound in
demand and draw out the recovery in market
conditions compared to previous cyclical
recoveries. However, solid pre-commitment to
new office development projects (~60% for the
current under construction pipeline across
Australia’s CBD markets) reflects the strength
of demand for high quality office space.
5 │ Investa Inside Office Market Outlook April 2021
Office Leasing Market Outlook: Rent
——
Chart 6: Prime Office Rent Growth vs White-collar Business Profit Growth
Office rent relief & affordability 30 15
25 12
A range of COVID-19 furlough measures
12m/12m % change
20
y/y % change
and policies, including the national code of 9
15
conduct for commercial leases, dampened 10
6
office occupying business operating costs. 5
3
This drove an unexpected increase in 0 0
white-collar business profit growth and -5 -3
supported office rental affordability. 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021
White collar business profit: Australia (LHS) Face rent growth: Sydney CBD (RHS)
In response to government-regulated rent relief Face rent growth: Melbourne CBD (RHS)
policy and softer market conditions, rent growth Sources: ABS, JLL Research & Investa Research
across Australia’s major office markets effectively
stalled in 2020. In comparison, white-collar
business income remained somewhat resilient,
resulting in a surprisingly sharply increase in Chart 6.1: Sydney CBD Office Rental Affordability Chart 6.2: Melbourne CBD Office Rental Affordability
business profit growth.
In contrast to the tight CBD office market
conditions in recent years, and corresponding solid
rental growth, current market conditions present a
unique rental affordability window. In addition,
elevated incentives further support the easing in
rental affordability on an effective basis.
We expect favourable rental affordability
conditions, combined with both elevated market
vacancy and a strong tenant preference for
centrally located, high quality and flexible office
space will support a ‘flight to quality’ trend and Sources: ABS, JLL Research & Investa Research Sources: ABS, JLL Research & Investa Research
drive future rental growth outperformance in
Australia’s CBD prime office markets through the
cyclical recovery.
6 │ Investa Inside Office Market Outlook April 2021
Office Capital Markets Chart 7.1: Foreign Capital Transactions & Australian Cap Rates
80 8.5
Share of total Australian CBD
70 8.0
(% of total value, trend)
—— 60 7.5
transactions
50 7.0
Pent up capital demand Consequently, we expect low policy 40 6.5
%
rates to maintain downward pressure
30 6.0
Office capital market activity has on interest rates and global liquidity to
support the depth of capital. 20 5.5
slowed sharply during COVID-19. 10 5.0
This provides a smaller base of Evidenced by the experience of 2020,
where capital values have effectively 0 4.5
transaction evidence to influence 1998 2001 2004 2007 2010 2013 2016 2019
held firm with modest easing in some
future capital market assets, Australian office markets are
Foreign buyer office transactions (LHS)
Australian office cap rate (RHS)
expectations. However, when expected to continue to provide stable
combined with broader financial and attractive returns. In particular,
Sources: Property Council-IPD, JLL Research & Investa Research
market activity and investor prime assets in Australia’s major CBD
markets are expected to attract strong
sentiment, this supports a
capital demand and outperform. Chart 7.2: Bond Rates & Australian CBD Prime Office Yields
positive underlying outlook for
capital demand and liquidity for However, a return to more open capital
market activity, and a resumption of
Australian office assets. firm downward pressure on Australian
Global central banks, including the prime office cap rates, is dependent on
Reserve Bank of Australia, have international business travel and cross-
committed to maintaining border movement of capital.
accommodative policy settings until Since the mid-2000’s foreign buyer
economic and financial market activity has been critical in driving
conditions return to normal. This office capital market transactions and
includes sustained economic growth office market capital growth. We
and underlying inflation, which the RBA expect the COVID-19 pause in
“does not expect to be met until 2024 international travel, and the ability to
at the earliest”1. conduct in-person due diligence, will
unwind with the application of the
COVID-19 vaccination program.
Source: JLL Research, RBA & Investa Research
1
Statement by Philip Lowe, Governor: Monetary Policy Decision, RBA, 6 April 2021.
7 │ Investa Inside Office Market Outlook April 2021
New Ways of Chart B1.1: Australian CBD Office Workspace Ratios
Forecast
Working & Office
105
Workspace ratio index
(March 1994=100)
100
95
Demand 90
85
80
—— 75
The disruption of COVID-19 has accelerated existing trends to 70
the way office work is conducted. Applying basic assumptions 1994 1998 2002 2006 2010 2014 2018 2022 2026
related to the shift towards increased flexible work and greater Work space ratio: Australian CBDs combined Work space ratio: trend
use of the office for collaboration-style work, we estimate the Sources: Property Council of Australia & Investa Research
net long-term impact on net absorption will create a modest
5-10% drag. Chart B1.2: Contributors to Sydney CBD Office Net Absorption
Flexible Work & Office Utilisation Office Net Absorption Contributors
100
Contribution to annual net absorption:
Workplace flexibility relates to offering a In addition to the net impact of accelerated
suitable range of workplace options, adoption of flexible work practices and a 80
including, but not limited to the office and shift in workplace utilisation trends, office
Sydney CBD ('000 sqm)
60
home-based work. Assuming the net impact net absorption is also impacted by tenant-
of greater workplace flexibility decreases specific factors, such as changes to 40
forecast absorption by 20% (equivalent to a location or building preferences. Assuming 20
net increase on average of 1 day per week a stronger post-COVID tenant preference
0
working from home) – this would decrease for centrally located offices, we expect that
potential annual absorption in Sydney CBD annual Sydney CBD office absorption from -20
by ~15-20,000sqm. this factor will increase by a modest -40
~2-3,000sqm.
On the other side of the ledger, we assume -60
workplace utilisation trends, and a greater However, the economic cycle and 20-year historical average Annual average: 2021-2023
emphasis on collaboration and team-based white-collar employment remains the most
Office employment growth Work space ratio
office work, will drive some moderate near- significant factor impacting Australian Flexible work (incl. work from home) Other (incl. tenant relocation)
term upward pressure on workspace ratios, capital city office absorption. Job creation Total net absorption
reversing the long-term downward trend, and business expansion is expected to
Sources: ABS, Property Council of Australia & Investa Research
and adding ~10-12,000sqm to Sydney CBD continue to account for approximately
annual absorption. In the longer-term, we 60-65% of Australian CBD gross
expect this will revert to more stable absorption.
declines in market workspace ratios.
8 │ Investa Inside Office Market Outlook April 2021
Further
Information
—— —— ——
Research team About Investa Research About Investa
Investa Research focuses on
Investa is a leading Australian real estate
understanding the drivers and analysing
company managing more than A$12
the movements and trends within the
billion of quality office real estate. As a
Australian commercial office market. The
specialist office manager of commercial
research function is fundamental in
office buildings Investa manages 21
guiding group investment strategy and
assets in the key Australian CBD markets
decision making, as well as providing a
on behalf of ICPF, Oxford Investa
competitive advantage through insightful
Property Partners (OIPP) and private
analyses and forecasting.
mandates.
David Cannington Jack van Aanholt The research team publishes regular
Its end-to-end real estate platform
Head of Research & Strategy Research Analyst updates on the performance of the major
incorporates funds, asset, property and
Australian office markets, as well as
P +612 8600 9209 P +612 8226 9921 facilities management, development,
E dcannington@investa.com.au E jvanaanholt@investa.com.au occasional papers and reports examining
sustainability, capital transactions and
a broader scope of topics that may be of
research.
interest to investors and other Investa
stakeholders. Investa strives to create Australia’s most
valued working places be the first choice
in Australian office, by delivering
consistent outperformance for its
investors and exceeding the expectations
of its tenants and staff, while remaining
The information contained in this Report is intended to provide general information only. While every effort is made to provide
accurate and complete information, Investa does not warrant or represent that the information in this Report is free from errors an industry leader in sustainable building
or omissions. management and responsible property
You should be aware that any forecasts or other forward looking statements contained in this Report may involve significant investment.
elements of subjective judgment and assumptions as to future events which may or may not be correct. There may be
differences between forecast, projected and actual results because events or actual circumstances frequently do not occur as
forecast or projected and that these differences may be material.
No person, including Investa or any related entity or any of its employees, accepts any responsibility for any loss or damage
however so occurring resulting from the use or reliance on the information contained in this Report.
This Report has been prepared by Investa without taking into account your objectives, financial situation or needs. You should
consider the appropriateness of its contents having regard to your own objectives, financial situation and needs before making
any investment decision. Past performance is not a reliable indicator of future performance and no guarantee of future returns
is implied or given. You should rely on your own judgment before making any investment decision.
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