With Sydney shaping up to be one of the longest locked down cities in the world, (yes Melbourne still wins), we look at the impact on the Sydney Corporate Real Estate market, and more importantly, what we can expect office life to look like as restrictions ease.
2020 - Lockdown 1.0
When the lockdown struck in March of 2020, uncertainty spread amongst businesses and real estate took a hit. Following the lockdown from June to Christmas, the market rebounded strongly and the economy bounced back with multiple bailout packages for businesses and individuals.
At the beginning of 2021, there was very high demand for commercial real estate, fuelled by high incentives and higher than normal vacancy levels. Interestingly, the whole-floor market softened leading into June, with increased demand for part-floor/small suites. The market remained steady right through to May/June before lockdown 2.0. Face rents in the majority held firm, with incentives very much asset and Landlord specific.
2021 - Lockdown 2.0
Lockdown 2.0 has certainly slowed things down, although transactions are continuing and completing, with interest from tenants aplenty. We are now seeing great underlying pent-up demand with corporate Australia looking ahead into 2022 in a vaccinated ‘no lockdown, no shut border’ environment. We certainly expect to see an increase in demand from Q4 this year with a progressive return to work as we hit the "magical" 80% vaccination rate.
Returning to work
The second lockdown has reinforced the value of face-to-face interaction, and the importance of a place of work for collaboration and culture development. Employees absence from the workplace has reminded them of the benefits and the primary purpose an office serves. With restrictions likely to ease in stages, it will similarly be a staged easing back into the market.
The Workplace Hybrid model is here to stay in a variety of ways over the next few years. Flexible work arrangements, likely1-2 days per week, will continue to suit those with a longer commute, back-office staff and/or senior staff. Some business functions will also suit ongoing remote work better than others, with sales teams most likely to return quickly. A few weeks ago we also highlighted that many employees are requesting flexible 'work from anywhere' policies as a cornerstone for their hiring negotiations. Beyond talent retention, a hybrid model may undoubtedly prove more beneficial to mental health and wellbeing as employees find a cadence that works best for their individual situations, and potentially having positive sustainability impacts as travel is reduced.
Incentives & Rents
Currently, incentives are still ranging from low 30’s to 40% driven by stock with higher than market vacancy levels. Different precincts have different metrics, with the western core lagging behind stock opportunities in the core and mid-town. We see incentive levels maintained in the short to medium term with 'hidden incentives' such as delayed start dates continuing.
We expect face rents to remain fairly flat, with a tenant-led market right now. As we move into 2022 and 2023 we will see minimal face rental growth across the Sydney Commercial Market.
Sublease space from the initial lockdown in 2020 was c.180,000sqm, now down to approximately 130,000sqm. Most of this sublease space has been withdrawn, for example, Macquarie and Deloitte, while the rest has been absorbed with above-market deals, quality, high-level fit-outs, attractive rents and medium lease tails.
In summary, it is evident the lockdowns have had a significant impact on the corporate real estate market and economy. The physical workplace will remain with a hybrid model adopted, a tenant led market will continue to see attractive incentives causing a continual drop in effective rental levels.