Property Australia

Office life after lockdown

Karen Jamal Karen Jamal September 28, 2021

New data from Savills shows that vaccination rates are linked to commercial vacancy rates in New York and London – and this offers insights into the future of Australia’s office market.

 

  Three key takeaways:

  • Data shows New Yorkers are heading back to their offices, with use of public transport, walking and driving all good indicators, says Savills.
  • In London, vacancy rates are still high, but requirement levels are “healthy”, with just 16% of tenants hunting for less space than they currently occupy.
  • Paul Craig, Savills’ CEO in Australia and New Zealand says: “The combination of increased physical occupancy and the reduction of sub-lease space are both excellent indicators for the two largest cities in Australia and give us a roadmap for the ‘new normal’.”

 

Savills’ analysis of tenant vaccine requirements, leasing and mobility trends, investment activity and traffic flows in both New York and London point to positive future for Australia’s office markets.

290921 - Story 3 - Paul CraigFor example, data from the Metropolitan Transit Authority shows public transport usage in Manhattan is up 76.7% since the beginning of the year. Manhattan mobility trends, from Apple, are also rising, with a 125 per cent increase in walking and a 123 per cent increase in driving. “This has resulted in an increase in physical office occupancy,” says Savills’ CEO Paul Craig.

A significant number of organisations require their New York staff to be vaccinated, including tech titans Facebook, Google and Microsoft, and real estate and investment firms BlackRock, CBRE, Morgan Stanley and Cushman & Wakefield. The New York City Government, for instance, requires all city workers to be vaccinated or face weekly testing.

Savills’ research shows leasing activity in Manhattan was up 48.6 per cent year-on-year to June 2021. Relocations and new leases accounted for 74.6 per cent of activity, while renewals and expansions were responsible for 25.4 per cent.

In London, vacancy rates are now broadly in line with the levels reached during the global financial crisis. The volume of sublet space is 82 per cent higher than normal. But central London requirement levels remain “healthy”, with only 16 per cent for less space than companies currently occupy.

Savills expects most staff to return to their London office for the majority – but not all – of the time from January 2022. And strong demand for offices with high sustainability and wellness credentials will outweigh suitable supply.

Savills’ national head of office leasing, Graham Postma, says lockdown-affected Australian markets have shown similar trends to international cities throughout the pandemic.

During the height of the Manhattan lockdown, sublet supply peaked at 27.6 per cent of available space, Postma says. But as a percentage of total available space, sublease supply remained below the Dot Com-9/11 crisis, which reached 44.2 per cent, and the global financial crisis, where sublet space was at 30.3 per cent vacancy.

“As vaccine rates increased, from January 2021, Savills research shows 53.0 per cent of sublease removals were backfilled by tenants opting to reoccupy their space instead of subleasing it,” Postma adds.

“Additionally, subleasing activity increased to 23.9 per cent of leasing activity, up from 11.4 per cent in the first quarter, further compounding the declining sublet supply.”

Sublease space is up “four-fold” in Sydney, Postma notes, and “six-fold” in Melbourne since the COVID-19 crisis began. “This mirrors the New York experience. What we have subsequently seen in New York is that much of this sub-lease space has been withdrawn and reoccupied.”

Two primary drivers are behind this trend. The first is increased availability and attractive commercial terms. The second? Post-lockdown re-hiring requirements as companies look to attract and retain top talent, while also luring people back into the office.

Savills notes a “significant shift” in office usage. “The office is now being used differently,” says Savills’ national head of occupier services, Mark Smith. Collaboration spaces, designated video conferencing rooms, extra meeting rooms and lower density open plan are in demand.

“There is a real sense the office is a valuable business tool not just a place for staff to attend each day. While many companies are embracing a hybrid model… this has not translated into a consistent theme of reduced office footprints,” Smith concludes.

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