The shifting nature of flexible office spaces was supercharged thanks to COVID19, but just picking up elements of the office and dropping them near home isn’t straightforward.
Micah Schulz, a fund manager with Lendlease’s Australian Prime Property Fund Commercial said last year’s lockdowns saw lots of requests from tenants for short term extensions.
“That was just kicking the can down the road, hoping for clarity around what their space needs would be in the long term and short term,” he said at Investment Magazine’s Real Estate Investment Conference in late February.
Schulz said businesses were seeking to negotiate shorter two to five year terms, but there are still prominent large organisations participating in traditional style deals in the ten to fifteen year range.
“While we’re likely to see a decrease in lease terms in some cases, the long term trend is the need for more flexibility and how landlords package that flexibility across portfolios,” he said.
Incentives to keep tenants in place have increased in key markets, though Schulz pointed out there was significant supply delivered and an uptick in vacancies which also cause incentives.
“There wasn’t a dramatic increase in incentives in our portfolio but there are certain, more substantial deals where there are new developments,” Schulz said.
“There are packages to entice a tenant, but they’re generally the exception and not the rule.”
Evolutionary path
Lendlease saw a big increase in sublease space thanks to the virus, but Schulz said it wasn’t the only factor.
“Businesses are looking at the wider economic environment and which levers they can pull to manage costs,” he said.
“History tells us that sublease space rarely transacts when you look at the total portions of space made available.
In the short term, there is likely to be more sublease space on the market and while there will naturally be some sublease deals, the market could easily swing the other way.
The knee-jerk reaction to the pandemic’s affect on office space was instinctive but the long term picture is not as one dimensional.
“The short term reactions have frankly been short sighted,” Schulz said.
“This development isn’t really a huge divergence from the evolutionary path we were already going down, it’s just more front of mind now.”
That path reflects the flexibility required by tenants who are catering for staff needing a much larger work-life balance consideration. The flexibility of working from home, or remotely, was already in the pipeline and organisations were designing their office space to serve this.
“Tennents need to think about what drives success for the business and the wellbeing for the individual,” Schulz said.
Schulz described the ‘hub and spoke’ model, where a central hub would be supported by at-home or remote ‘spokes’ for employees.
“Intuitively it’s a great idea to pick up elements of the office and drop them near to where people live,” he said.
However the economics is under pressure as many of the economics of scale benefits from a CBD office are lost.
“You don’t get the agglomeration benefits and network effects and other positive elements that are present in the CBD,” he said.
Particularly in suburban areas, there isn’t always accessibility for people to infrastructure or the rich experiences and activations that are the attractive offering for workers.
“The main game is a really strong hub with flexibility integrated into it and then connected to the home so that it’s a seamless experience,” he said.
Schulz pointed to Sydney’s Barangaroo and the Melbourne Quarter as examples of highly attuned office spaces that focus on culture and amenities.
“These have very highly activated ground planes, high quality office products, strong links to transport, a rich and diverse amenity offering like childcare and gums and a broad variety of food and beverage,” Schulz said.
“It’s very clear we need places where people can come together to connect for business and personal reasons, and we still think the role of office spaces in the longer term is absolutely intact.”
An extension of the social consideration is that of the environment, and Schulz concedes there are likely to be some challenges with older quality, commoditised, or obsolete stock.
“It can be expensive to retrofit for sustainability for some assets,” he said. “But there are sophisticated opportunities to work ESG through the running of assets where there are plenty of long hanging fruit.”
