How COVID-19 has changed commercial property
By entrenching flexible work, COVID-19 has changed the way office space is used, while helping industrial property climb into the limelight.
Demand for the traditional CBD office has declined and is expected to remain lower than it would have been in the absence of the pandemic, while industrial property, such as logistics and warehouse space, remains in high demand, the Reserve Bank said in its latest assessment of current economic conditions.
According to the RBA’s Statement on Monetary Policy, office vacancy rates have risen sharply in Australia since the onset of the pandemic. And while this has been most pronounced in Sydney and Melbourne, an increased use of remote-working arrangements has been recorded across the country.
The ABS Business Conditions and Sentiments survey, released in April 2021, indicated that the share of businesses with remote-working arrangements had increased notably following the onset of the pandemic and had been largely maintained despite activity restrictions being progressively unwound since mid-2020.
Namely, occupancy rates have remained 10-30 per cent below pre-pandemic levels even in cities that have had little transmission of COVID-19.
And with firms said to be adopting a hybrid model for their office staff, the RBA expects office construction to decline.
“Office construction activity over the next few years is likely to be well below 2020 levels,” the RBA said, noting that developers and private sector analysts have noted difficulties in attracting the tenant pre-commitments necessary to obtain debt financing.
But while the office sector faces an uncertain future, tenant take-up of industrial property, such as logistics and warehouse space, was 45 per cent higher in the March quarter than its 10-year average.
The RBA pointed out that strong growth in food sales and firms increasing inventory levels in response to pandemic-related supply chain issues have supported demand for industrial property.
On the other hand, the bricks-and-mortar retail sector is facing increased challenges as consumer shift to e-commerce.
As such construction commencements of retail floor space over the past year were around 70 per cent below the 10-year average and are expected to remain weak for a number of years.