TwentyTwo’s Dean Croucher recently led a panel discussion at the RICS ANZ Real Estate Conference 2022 focused on ‘How are occupier behaviours affecting demand for real estate?’.
The aim of the online conference was to provide a platform to discuss the future of the commercial real estate sector in the context of a rapidly moving business environment due to changes in real estate policies, shifts in market sentiments and variance in global growth.
On the panel for Dean’s session were Matt Pedrazzini, Director of Tenant Advisory in Colliers’ Melbourne office and Paul Murgatroyd, Director, CBRE Advisory and Transaction Services – Officer.
The session focused on workplace attitudes and behaviours post-pandemic, underlining the fact that a combination of remote and office working is becoming one new type of workplace norm. With a clear realisation however that no one model fits all and there’s more to real estate than the office sector, three key questions were debated.
What key decisions/issues/challenges are occupiers confronting in making decisions about their future real estate needs?
As Melbourne-based Matt says “most clients are really thinking ‘what’s next?’” in the post-Covid world. “Predicting the future has become incredibly difficult” he continues. “Some people are saying ‘We’ll just stick with what we’ve got’ and others are going a bit crazy with one company closing all of their offices. That is the biggest fundamental problem. How do you plan for the unknown”. The issues are multi-faceted from attempting to understand how a new hybrid way of working impacts decisions (location, hub/spoke model, how space is fitted out etc), continued low utilisation making it difficult to forecast future demand to recognising that the flight to quality requires additional rent and CapEx commitments. Paul highlights that it’s very different across different locations and sectors. “There’s no one size fits all” in terms of occupancy levels in New Zealand confirms Dean. “We’re still adjusting back to what is the new normal and that’s creating these challenges.” The conversation then continued to the importance of doing a workplace strategy in such complex times – “you don’t know what you don’t know. Any kind of workplace strategy is a benefit in this market” says Matt. “It’s a good investment” agrees Paul.
How are clients/businesses/occupiers adapting to this new ‘environment’?
Moving onto how businesses are adapting to the new environment, the panel starts by highlighting the importance of technology – “Technology has made all the changes” says Matt. “When you get back into the office – yes, we 100% need better meeting room technology. It’s really important to plan for the future so you can work with any system that might become prevalent in the future”. So with this increased integration and reliance on technology, additional investment is needed to support new fitout investment; it’s not just about base building and fitout. “The great thing about tech is that it’s enabled us to have a different office” says Matt, emphasising the revalidation of future space needs that not only challenge traditional assumptions of desk sharing ratios, but also determines a change in the way managers lead, how staff are managed and how teams collaborate. It could also lead to an increased reliance on co-working space for overflow space and meeting rooms to reduce organisations’ footprints. Dean focuses in on the increased need for smaller spaces over larger meeting rooms, particularly for one-to-one virtual meetings. “We’re also seeing earlier integration of technology in fitouts” says Dean. “The whole technology space is moving at a rapid pace”.
Can we provide a regional overview of what’s happening at a high level?
Dean then moves the conversation on to focus on the regions, given the fact that he’s NZ based, with Matt and Paul in Melbourne and Sydney respectively. “We’ve touched on utilisation and how you plan for space in the future. I’m interested to see whether you’re seeing an increase in co-working space to supplement the core space you may be leasing? We’re seeing that as a trend here in Wellington”. Paul confirms that’s the case in Sydney “to a degree”. “The decision is more about ‘are we going to get rid of our office?’ for smaller occupiers and utilise co-working. There’s not too many examples so far of a company moving and having reliance on third-party space. It’s definitely getting incorporated, especially in newer developments. It’s more separate than complementary”. “It’s interesting to see the landlords pivot” says Dean. “The best example is Precinct who purchased a co-working business a few years ago and they’re increasingly putting that into their new developments which is a clever vertical integration model to try and grow their small businesses up through their portfolio over time”.
The shortage of quality stock in most markets and the flight to quality is another dynamic TwentyTwo is seeing in New Zealand as clients look to smaller, but higher quality space, possibly pointing to the need to attract talent, brand expression etc. “It’s probably the most prevalent feature of the market you can point to” says Paul. “In Sydney CBD, the premium-grade vacancy is around four per cent or less while the overall market vacancy is over 10 per cent. Incentives have obviously gone up by circa 15 per cent from pre-pandemic to now so there are opportunities for company to upgrade. It’s a different market if you’re looking in the traditional core CBD for some space compared to B-grade space. So there’s a definite flight to quality”. Matt agrees that the situation is similar in Melbourne but “it’s probably more a move for experience, not quite quality. People want to be around activity and activation. They want to see some life, otherwise why didn’t they just stay at home? That gives them a reason to go. You need young talent to come up through the business and that’s how you grow”.
“A lot of cities are trying to reposition themselves and work out what their purpose is” states Dean. “New Zealand has the same issues. We’ve got low vacancies at the top end. We’re still seeing new development. In Wellington, we’re seeing a seismic drive with a lot of stock coming out of the market and being repositioned and upgraded. And Auckland’s CBD has seen significant redevelopment. There’s still a lot of shortages in the market, despite all of the other factors in play” concludes Dean. So it’s very much a case of ‘watch this space!’ in terms of what the impacts are.