COVID-19: Driving changes in the property sector
In some ways, it feels a little premature to think about how COVID-19 will affect the property market, since we are not through the worst of it yet here in Australia.
But it is clear that COVID-19 is having a significant effect on the way we live and work, at least temporarily. As businesses implement continuity plans and direct employees to work from home, futurists and other commentators are predicting that this may accelerate the trend towards remote working and permanently shift working patterns (see for example: Alex Hern, “COVID-19 could cause permanent shift towards home working”, The Guardian, 13 March 2020).
So far, the office sector seems to have missed the structural changes driven by technology. Although over the last 20 or 30 years, companies have reduced space by adopting open plan and agile working, the overall growth in demand has seen low vacancy rates and high rent in the Sydney and Melbourne markets. Research to date has predicted this will continue for a while yet (see for example Sue Williams, “Sydney’s CBD office rental growth is at its highest rate ever: CBRE”, Commercial Real Estate News, 17 April 2019).
Contrast that with the retail sector. It has for sometime been feeling the impacts of technology. Major retailers such as David Jones and Myer are reducing or consolidating space and a number of smaller retailers have gone insolvent over the last year or two.
Last year, redemptions on retail funds saw high-value asset sales. The question for some time has been whether the retail sector downturn is cyclical or structural.
Increasingly, the answer seems to be that the change is a structural change, reflecting a permanent shift toward internet shopping. Shopping centres are adapting to this change, reinventing themselves as “lifestyle centres” by increasing leisure, food and other lifestyle offerings in their mix (see for example: Jeff Hardwick, “Lifestyle centres: reinvented communities or dressed-up shopping malls”, Architecture & Design, 5 March 2015).
Similarly the hotel sector has faced disruption driven by technology, facing competition from homestay providers. However, the hotel sector has not suffered in the same way the retail sector has because of an overall increase in demand.
Immediately before COVID-19, more people were travelling than ever before. This has of course come to a grinding halt. But sales for the travel sector companies that survive post COVID-19 are likely to rebound with pent-up demand.
Meanwhile, the office and industrial sectors have been in buoyant times. The industrial sector has reaped the benefits of the shift towards server farms, high-tech warehousing and internet shopping – it has benefited while the storefront retail has suffered.
Piper Alderman exclusive
However, if the predictions around changes to working life caused by COVID-19 eventuate, we could also see an accelerated structural disruption in the office property market driven by technology (the technology that enables remote working and collaboration).
Of course, there will always be a need for face-to-face collaboration, but perhaps not as much as we think. Certainly, if this large-scale remote working experiment works, there are incentives for companies to adopt remote working on a more permanent and widespread basis than they do currently. Remote working promises reduced office costs, improved flexibility for employees and the ability to tackle some of the thornier issues around retaining women during child-rearing years.
The interesting questions for the office sector and for urban planners will be whether this change in working life will be widespread and permanent enough to shift some demand from office to residential. Whether widespread remote working will change the face of our cities by shifting some density away from the central business district. Whether we can reap the benefits of decentralisation while at the same time protecting the urban environment and the benefits that dense living and working offer.
These impacts are yet to play out, and there are currently more immediate concerns. But in considering the overall economic picture, policymakers should consider the potential impacts that such a fundamental and sudden shift in working life might have.
Margot King, partner, property and development Piper Alderman