Office landlords and their 'exploding' platform

  • Publication: Financial Review
  • Published: 14 Jan 2021
  • Section: Property / Commercial / Office
  • Author: Michael Bleby, Senior Reporter

  • Justin Hatchett had a busy end to the year. After a pause mid-year as the pandemic put the planned moves of many large office tenants on hold, Hatchett's Green Furniture Hub is once again busy as facilities managers start plan their return-to-office scenarios.

    Hatchett's Sydney-based business, which acts as a broker of office furniture, distributing unwanted items from office fit-outs to organisations that can reuse that furniture and prevent it going into landfill, is a rough but clear barometer of activity.


    Time to say goodbye: Tenants are reducing office space as ways of work change. Nick Moir

    About half of his work over the last few months of the year wasn't the usual office churn, he says.

    "[These were] projects where a corporate has started to make a move to cheaper offices, consolidating or some corporates are already looking at return to office scenarios and reducing density," Hatchett says.

    The office sector finished the year in a state of flux. Fewer than half of Sydney CBD office workers had returned to their offices, Property Council of Australia figures from early December showed, based on a survey of members taken before the northern beaches cluster erupted.

    Melbourne offices remained at 13 per cent and a majority of landlords expected no material increase in occupancy levels for at least another three months.

    The frustration of the country's largest office landlords and their urging of bosses to bring staff back to the cities' CBDs has been clear. But with the pandemic putting a rocket under changes that had already started in the world of work, some landlords are struggling to accept that they need different business models.

    "Like any industry spewing out money for a long time, they’re going to resist that change," says Anthony Walsh, JLL's director of interior workspace design.

    "What’s been interesting during COVID to see is just how stubborn landlords are willing to be. We’re seeing quite a lot of instances where a tenant gets to the end of a lease and if they’re not getting the right experience from a landlord they simply move out."


    Pushing back: Tenants are willing to leave landlords who don't offer flexibility in leases and terms, JLL says. Nick Moir

    The risks for landlords are already apparent in the falling valuations of buildings and increases in incentives, Walsh says.

    But many landlords, protected by lengthy lease periods – with an average WALE of four-five years – had failed to understand the impact the pandemic would have in terms of reduced tenant demands for space and increased demands for better amenity and services, office designer James Calder says.

    "REITs have one-two years at most to quickly skill up and change the profile of their executive teams and to reinvent their business model or face significant decline in asset values," Calder says.

    "It isn’t a burning platform, but an apparently stable one that will explode in a few years."

    Not so, say the country's largest landlords.

    "Businesses will decide regardless of their lease tenure how urgent the need is to adapt their workplace and will act accordingly," says Dexus executive general manager for office Kevin George.

    "Some landlords including many of the REITs have selectively ‘forward leased’, agreeing flexible options relating to both the physical space and the contracting terms."

    GPT head of office and logistics Matthew Faddy agrees.

    "Having a long WALE in our portfolio is a good thing for sure, but we’re not sitting on our hands as a result of that," Faddy says.

    "We’re very in touch with what our customers are thinking about what they’re considering for their employees, how they’re looking at the workplace of the future, and we’re taking all that into account."

    Things are unlikely to go back to the way they were. The spread of the workplace to encompass the traditional office, home and other spaces will mean people use the office differently. The core space occupied by an office tenant – that over which they take a traditional long lease – will shrink.

    More space will be made over to other purposes, such as collaboration and working, even for food preparation and serving, as the range of tasks performed in an office building changes and the times people spend in an office – possibly for periods that start earlier and finish later than the traditional 9am-5pm shift – change.


    Many landlords have failed to understand the impact the pandemic will have on demands for space or better amenity and services, says office designer James Calder. Arsineh Houspian

    It will make traditional measurements of the effectiveness of offices, such as density of people per square metre, will no longer be appropriate. It doesn't necessarily mean buildings will have fewer people – there may be fewer seated at desks, but more in other areas.

    "You can’t bullshit people about what’s effective and what an office is for now," JLL's Walsh says.

    Some landlords have started responding to the way they lease space and provide services, to meet the changing needs of their customers. Services such as physical rights management – pioneered in New York by former ServCorp chief operating officer Marcus Moufarrige's Ility – will become increasingly important as landlords allow tenants to access short-term spaces and services.

    Moufarrige, whose service is about to expand to the UK following a successful 23,225sq m pilot program with Legal & General, says he is also in talks with two potential Australian clients.

    Hatchett is expecting his relocation work to continue in 2021, as tenants push ahead with planned office changes but also increasingly respond to their changed usage patterns.

    "I think there will be a proportion of organisations wanting to revisit their real estate commitments," he says.

    "As they see a distributed workforce across a range of functions can work, then why spend some of that precious cash flow on real estate space?"

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