International firms across the Asia-Pacific region are indicating they are keen to reduce their office footprint, The Urban Developer reports
Office demand and revenue will continue to fall as more employees embrace working from home arrangements this year.
According to the S&P Global Ratings’ industry top trends 2022, many employees want to continue working from home and this, along with any future lockdowns or pandemic measures, will increase office vacancies.
The prediction is that office landlords will become more flexible if competing with sub-leasing tenants to offer incentives and different lease terms.
However, some of the adverse effects from high vacancies and low rentals will take time to materialise due to long lease profiles, and landlords may not be able to address balance sheets issues quickly.
In Australia, data from the Property Council’s 2022 office market report shows that office vacancy increased slightly from 11.9 per cent to 12.1 per cent over the six months to January 2022.
Three of the four non-CBD markets with negative demand for office space were in NSW—North Sydney, Chatswood and Crow’s Nest-St Leonards.
A third of the office supply that will become available in 2022 will be in Sydney.
While all capital cities recorded positive demand in January 2022, only Brisbane and Sydney were not above historical averages.
Investors have already been buying up middle market office space with 137 assets sold in 2021 for a total of $4.78 billion, taking advantage of low interest rates and the lack of competition from offshore capital.
How individual cities and their economies will adapt and react to the pandemic and post-pandemic working life will also determine how office demand and revenue shift.
Brisbane and Melbourne recorded office vacancy increases of 15.4 per cent and 11.9 per cent in January 2022 compared to July 2021, according to the Property Council.
Supply also outstripped demand in both cities.
Weaker rents and cash flows will also affect asset values for both office and retail landlords.
Retail sales were also hurt by lockdowns in Melbourne and Sydney in the latter part of 2021 and an increase in working from home meant a decrease in foot traffic.
Consumer confidence and business expectations were also stated as important.
Retail landlords will need to focus on creating consistent consumer demand and increasing visitation levels in early 2022.
There is some improvement in retail cash rent collection and occupancy generating better key credit metrics but the fast increasing demand for online commerce and delivery will mean retail landlords will have to rethink their strategies, lease structure and tenant mix.
“Longer term, consumer preference for online shopping and the prevalence of remote working will remain a key rating focus for retail and office landlords,” S&P Global Rankings’ report stated.
“However, industries supporting the transition to online shopping are thriving. Industrial landlords are riding the wave of demand for logistics services to support growing online consumption.”
An oversupply of good-quality space will determine how much rental income there will be for industrial landlords but in some of Australia’s cities such as Sydney, finding that space is hard.
JLL’s head of supply chain and logistics Bruce Myers told The Urban Developer that one of the major challenges was availability of land, particularly in Sydney, and that over the next three to five years, multi-storey warehousing may become the solution to meet the increasing demand for storage space.
Industrial landlords could help solve this concern of urban-based locations for dark stores and fulfillment centres.