Commercial property sector seeks flexibility

Office space being downsized in 2024

Commercial property sector seeks flexibility

The commercial office is changing as tenants seek shorter leases and more flexible arrangements, however there’s still plenty of advantages for commercial property investors.

John Preece (pictured above), chief property officer of flexible workplace provider Hub Australia, said the changing nature of the commercial office market meant short-term tenants could deliver a higher return than those on long-term traditional leases, albeit they needed more active and intensive management.  

“Many traditional investors will struggle with this, as they and their advisers struggle to adapt to the new market dynamics, but for those who can be creative and identify pockets of opportunity, there are of course potentially great rewards,” Preece said.

Brokers guide investors through changing office market

“Consultants, brokers and advisors who can gain a deep understanding of these changing dynamics and harness the opportunities that exist will be well placed for success.”

Preece, who previously worked at Knight Frank and CBRE, said flexible workspaces were key in the new work era. 

 “Sydney's office occupancy has stabilised at approximately 65%, and Melbourne at 50% since early 2023 when measured against pre-pandemic levels,” he said.

“Considering the pre-pandemic office occupancy was already sitting at a relatively low 50% to 60% in real terms we are now looking at actual occupancy of circa 25% to 30% here in Australia.  

“This is backed up by a recent study by XY Sense which shows office utilisation in the APAC region is only 27%.”

Preece said in 2024, there would be downsizing of office space in Australia, with organisations gradually reducing their physical office footprint as leases expired, driven by the changing nature of work.

Demand for high-quality, good design workspaces

Preece predicts Australia will also see a trend towards high-quality, well-designed spaces.

“However, on the supply side, fit-out cost escalation in the region of 40% over the past 24 months presents a barrier to the creation of new premium-quality flexible workspaces,” Preece said.

“For flexible workspaces, demand has levelled out after a spike in 2022 – though it remains significantly higher than pre-COVID levels. Desk sharing has become a more common practice, moving away from the traditional 1:1 occupancy model.”

More demand for hospitality spaces

Preece said in 2024 he expected to see more changes to the flexible workspace sector as it moved through a phase of “consolidation and innovation”.

Hospitality-driven spaces such as meeting rooms or event areas would remain in demand particularly during the core weekdays of Tuesday, Wednesday, and Thursday.

“There is also a growing demand from building tenants for flexible workspaces, way outstripping pre-pandemic levels,” Preece said.

“It’s also partly why we see landlords are now offering high-quality suites with shorter lease terms and more frequently partnering with flexible workspace operators within their buildings.”

The changing demands of commercial tenants has also resulted in particular locations being more desirable than others with lifestyle locations such as southeast Queensland proving popular.

“When combined with the build up to the 2032 Brisbane Olympics, this is a location that is likely to see solid demand in the coming years,” Preece said.

Locations such as the Gold Coast have also been identified as a commercial property hotspot.

A PropTrack study, released at the end of last year revealed the Gold Coast remains a focus for many overseas property buyers.

Preece said core CBD locations were likely to remain the preference for HQ spaces for major organisations across Australia, but with flexible working now entrenched, the scale of spaces would likely to be smaller (and significantly so in some instances), leading to reduced demand for office space in CBD locations. 

“There will also be a shift to quality – ‘smaller, but better space’ – leading to obsolescence of older, lower-grade office stock, much of which will need major repositioning or complete redevelopment/conversion to alternative uses.”

Valuers, financiers slow to adapt to market

Preece said many buyers understood that the nature of commercial office demand had changed, however, valuers and financiers were, in general, much slower to adapt to the changing demand-side dynamics. 

“Often they struggle with the perceived weak security of tenure, attributing significantly to lower valuations to assets with short-term flexible lease arrangements, and thereby preventing many buyers from transacting when debt is required,” he said.

“The same can apply when contemplating the valuation of an asset where a flexible workspace operator occupies a substantial part of the building, for the same reasons.  

“This is changing, but here in Australia it is a very slow process of adaptation by valuers and financiers.”  

According to Preece, whenever there is fluidity and change in any sector, there are opportunities. 

“The commercial office sector is facing a multitude of challenges at present, driven by significant demand-side shifts and far greater geographical flexibility than we have perhaps ever seen,” Preece said.

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