It's been over 12 months since the COVID-19 outbreak took hold across Australia, locking down CBDs, emptying office towers, shutting shops and exposing the trials and triumphs of remote working.
While the impacts of the pandemic remain felt across the commercial property spectrum, the Sydney market is enjoying increased activity across leasing and investment. Employees are continuing to return to the physical office too, with occupancy for the Sydney CBD rising to 59% in April 2021, up from 50% in March, according to the Property Council of Australia.
With these factors in mind, we sat down with CI’s leaders to talk about the challenges, opportunities and the changing viewpoints born out of this not-so-new ‘normal’, one year on.
One key market change is the fundamental shift in the landlord-tenant relationship that's been seen – and one that's likely to remain, says David Matkovic, CI's Head of Commercial Asset Management. "The sudden changes brought on by the spread of COVID-19 presented unchartered territory for many landlords and tenants. Both had to quickly adapt and face unforeseen challenges, such as seeking and granting significant rent reductions, overseeing an entirely remote workforce, planning early lease exit strategies and more. Understandably, it strained the relationship at first," he said.
"It’s now clear however of the progress that has been made and the shift in the relationship that’s occurred, which includes a deeper appreciation for each sides’ perspective, business models and drivers. Additionally, many are still overwhelmingly grateful to have weathered the pandemic without major impacts to their workforce or operations. We are seeing a willingness from both sides to be more flexible and collaborative not only in negotiations, but when resolving day-to-day matters, to achieve a mutually beneficial outcome. We expect these changes to remain for the foreseeable future, particularly while some economic uncertainty remains.”
Office leasing activity across Sydney is picking up, too. "It's certainly a more positive story than it was six months ago," says CI's Director of CBD Office Leasing Ben Kardachi. "Many businesses reassessed their physical space requirements and desires during the pandemic. We are seeing those businesses with clarity around company performance and staffing levels taking advantage of the increased incentives on offer by landlords, and making long-term confident decisions of lease terms up to ten (10) years.”
Mr Kardachi said that while an influx of sub-leasing opportunities came onto the market during the pandemic, “It provided many tenants with the ability to move into fitted-out, ready to occupy space and assist with their longer-term leasing decisions, while continuing to operate from a central location,” he said.
“What's most evident now, is how landlords are rising to meet the current desires from tenants, including the want for fitted-out space. This is a particularly high priority for many tenants who lack the time or expertise to project manage the build of a fit-out, or are looking to reduce risk through a plug-and-play solution. Landlords are well aware of how tenants’ demands have and are continuing to change as a result of the pandemic, and are willing to go the extra mile to retain existing parties and secure new ones in order to compete with sub-lease options.”
It’s not just the demands of tenants that have evolved, but the mindset too – one key change being the increasing viewpoint of their real estate decisions and commitments through the lens of 'people, planet, and profit’ – known as ‘triple bottom line’ - and the role CRE plays in a broader business strategy. While this is well understood by those with larger or national CRE footprints, small to mid-sized tenants are now adopting it too, due to the economic and social impacts of the pandemic.
Beau Stewart, CI's Head of Tenant Representation said, “With almost all businesses forced to assess their economic position, viability and staffing requirements during the pandemic, the role that real estate assets play in their wider business strategies became very clear - particularly for those companies who may not have understood the relationship between the two quite as deeply,” he said.
"Additionally, it highlighted the intangible aspects employees enjoy about the office environment and how it can work to deliver triple bottom line benefits – financial benefits in terms of productivity and efficiency; social benefits in terms of engagement and human connection, and environmental benefits in the form of helping meet sustainability targets. We expect this mindset to remain prevalent, helping shape how tenants plan future requirements and the specifics of what they look for."
There’s positive news for the Sydney investment market too, according to CI. Buyer appetite has grown substantially in the last six months as Sydney emerges from the impacts and shock of the pandemic, said John Bowie Wilson, CI's Director of Investment Sales for Sydney CBD. "While the market remains symptomatic of the pandemic, with limited stock opportunities and vendor caution, we expect an increase in transaction volumes over the second half of the year and pricing metrics to be reset. Overall, what's become very clear is that well-leased quality assets, namely those with income growth potential through rental adjustments or located close to new infrastructure and amenity, strongly hold their value proposition throughout challenging economic times."
This is a sentiment that's true for suburban office assets too, with the market not likely to experience longer-term impacts from the pandemic, says Chris Veitch, CI's Director of Investment Sales for the North Shore. "Activity within the North Shore investment market is not showing signs of slowing down, buoyed by the current low interest rates and the broader recovery of the Sydney market. While COVID impacted the more physical elements of the buying and selling process during its peak, at the same time it highlighted the strength of suburban locations as commercial destinations; and the ongoing hunt for good solid income among investors. This is seeing low-rise suburban office assets within the $20 - $150 million range the current focus for many buyers,” he said.
However, certain locations such as Macquarie Park and North Ryde are experiencing particularly strong demand says Mr Veitch. “In addition to the traditional institutional investor base chasing stable income, we have additional competition for sites from the emerging Build-to-Rent asset class now permissible in B3 Commercial Core zones, B4 Mixed Use zones and B8 Metropolitan Centre zones. We’re also seeing data centre operators actively pursuing these markets thanks to the increasing reliance on technology.
“Infill industrial properties in Sydney metropolitan suburbs suitable for ‘last-mile logistics’ are high on the list for buyers too, driven by the ongoing consumer demand for e-commerce. These are all trends that have gained pace over the first half of 2021, as investors look to both stable assets and new opportunities to satisfy and generate capital,” he said.
Finally, while the pandemic may still have grounded most international travel, it hasn’t grounded interest from international buyers, says Shirley Fan, CI's Head of Asia Desk. “Interest from buyers across the Asia Pacific region for a variety of asset types remains evident and is set to pick up, led by those in core locations like the CBD and North Sydney. Many funds and private investors we are talking to are actively looking to allocate capital into Sydney’s stable and transparent real estate market."
For further information on what the Sydney commercial real estate market holds, or for advice on your future property needs, get in touch with one of our experts today:
Asset Management, David Matkovic: +61 2 8238 0025
Office Leasing, Ben Kardachi: +61 419 230 278
Tenant Representation, Beau Stewart - NSW (+61 400 505 545)
Investment Sales, John Bowie Wilson - Sydney CBD (+61 423 000 882) and Chris Veitch - North Sydney (+61 434 566 355)
Asia Desk, Shirley Fan: +61 452 531 797