‘Hub and home’: New norm for workers is a grim reality for office owners

Office landlord GPT’s boss Bob Johnston is not quite ready to pull up the white flag in the battle to get workers back to city offices, but he admits the remote working trend is here to stay.

Workers, scattered across their home offices and armed with technology – from messaging to video-conferencing apps – are not in a rush to return to the towers. And even those keen to get back are tilting towards a hybrid model – dividing their time between open plan offices and their work stations at home.

As bosses and staff hash out the best way forward, executives like Johnson face the grim prospect of seeing their glittering properties lying underused, if not vacant for some time to come.

Landlords are scrambling to respond to a “quantum shift” in  workers’ behaviour.
Landlords are scrambling to respond to a “quantum shift” in workers’ behaviour.Credit:Louise Kennerley

“COVID restrictions showed that working from home can be effective and now I have no doubt more people will participate in flexible working going forward,” he concedes.

But Johnston, who helms the $8.8 billion ASX-listed company, is confident the novelty of working from home will subside, as the loosening of restrictions and vaccines gets the wheels turning again towards life before COVID-19.

“We do expect that many organisations will retain an element of working from home, but we also expect there will be a strong recovery in office space utilisation in 2021, as the focus changes from managing the pandemic risk to business growth,” Johnston says.

With more city offices currently emptier than they are full, it’s a bold prediction and one that Australia’s largest, most reliable, and income-resilient real estate investment trusts (REITs) are hoping will come to pass.

Across the country leasing activity in office towers remains depressed and recent commentary from the high-profile corporate chiefs is not pointing to a quick rebound.

Telstra’s Andy Penn is confident the telco can manage a remote “anywhere” workforce, while National Australia Bank’s Ross McEwan believes good technology platforms will aid its offsite efforts.

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Penn and McEwan’s enthusiasm for remote working may not be equally shared by all of the blue-chip clients of office landlords, a point Kevin George, head of Dexus’ $22.5 billion office portfolio, is taking some solace from.

According to George, the impact of working from home on both “near-term and longer-term leasing demand is still not clear”.

“The uncertainty created by COVID-19 is delaying some customers’ decision-making, particularly in Melbourne. As a result, we expect that the Melbourne office market will be challenging over the short term,” he says.

Melbourne’s woes are of particular concern for GPT, which has 38 per cent of its real estate in the capital hit hardest from extended lockdowns. It is finding it difficult to lease vacant buildings in the city like 550 Bourke Street, a 12-year old A-grade tower left empty when Deloitte jumped ship to become the anchor tenant in Mirvac’s new office at 477 Collins Street.

“The timing of COVID was a headwind for our 550 Bourke Street leasing campaign,” GPT’s head of office and logistics Matthew Faddy says. “There’s no doubt we’ve got work to do to be able to get that leased well and quickly.”

Nonetheless GPT remains a “big believer” in Melbourne, though Johnston concedes that it will take longer for the market there to recover compared to Sydney.

“We expect it will take a little bit longer to recover … but the pleasing thing here in Sydney is we’re starting to see people back, the roads are busy, activity is happening.”

The pleasing thing in Sydney is we’re starting to see people back, the roads are busy, activity is happening.

GPT boss Bob Johnston

Dexus is also hoping for the best, with George saying workers will slowly but surely drift back into the city and offices. “I think that the reality has set in that they really do want to be back together in the office,” he says.

In the lead up to Christmas last year, corporate Sydney dusted off the virus and focused on the future, he says. “We’re hoping to see a similar thing in Melbourne.”

However figures released by the Property Council of Australia this week, show occupancy still has a long way to go. Returning workers pushed occupancy in Sydney’s towers to 48 per cent in February, but Melbourne’s most recent lockdown saw occupancy rates in the city slide to 24 per cent.

Big landlords are shielded from immediate flight risk by long 10-year leases locking in blue-chip tenants, but they face an existential threat of their glass towers losing relevance to a modern dispersed workforce.

Faced with a seismic shift in behavior GPT, Dexus and other office landlords are getting their head around the buzzword dominating the market – flexibility.

Dexus’ George says while the idea has been on the radar of landlords for some time now, the trend has been propelled to new heights by the pandemic. Now property owners are scrambling to ramp up solutions.

“We knew the future of office was going to involve more flexibility. What’s changed is the quantum shift in organisations moving to provide more flexible work practices,” he says.

The landlord, which owns buildings such as the MLC Centre in Sydney’s Martin Place and 80 Collins Street in Melbourne, is planning to expand its Dexus Place and SuiteX flexible tenancy offerings, which give its tenants the option of leasing extra space for just one hour, or anything up to 10 years.

Offerings of that sort may well become more common as the need for flexible space starts to ramp up across the sector.

“The feedback from a lot of our big customers is that there is likely to be a greater demand for flexibility, but not likely to change in direct proportion to the space that they will need,” says AMP Capital’s head of real estate Kylie O’Connor.

But the trend may exert significant pressure on landlords reliant on rental income, which is under attack on multiple fronts.

Incentives, the sweeteners (like rent-free periods and office fitouts) that landlords offer tenants to coax them into signing a lease, are rising fast, eating into the books of real estate trusts.

Over the next year, they are expected to hit 30 per cent in Sydney and Melbourne, and rise even higher in Brisbane.

REIT analyst with investment bank Jefferies, Sholto Maconochie, says research points to companies shedding up to 20 per cent of their office space, a fall that will be partially offset by COVID-19 density requirements.

All up, about 10 per cent less space will be required in city centres, he estimates.

“This is before new supply comes online,” says Maconochie, in an ominous nod to the wave of gleaming glass towers currently under construction in Melbourne.

“Our view is there is a flight to quality space, but at reduced rents,” he says. That will put significant pressure on the owners of B, C and D grade offices who can’t match the incentives offered by big landlords.

Businesses renegotiating rents will need more flexibility, although not necessarily less space. Even if staff work just three days out of five in the office, the space they need is broadly unchanged, he says.

Another post-pandemic workplace scenario being considered is the “hub and spoke” model, where staff are devolved from CBD headquarters to new office digs in the suburbs. It’s a script Maconochie dismisses. “Hub and spoke is just a buzzword,” he says. “Hub and home will be the new norm.”

Meanwhile, investors, shaken by the pandemic, have marked down office and retail REIT shares across the ASX.

Pre-pandemic Dexus’ shares were around $13, now they are marking time at $9. GPT’s shares are trading at two thirds of their pre-COVID value.

GPT, historically reluctant under Johnston’s leadership to buy back shares, has announced it will acquire 5 per cent of its stock, roughly $443 million at today’s market price.

“Given the sustained, I guess, weakness that we’ve seen in the share price, it is pretty compelling buying,” says Johnston.

“We are trading at around a 25 per cent discount to net tangible assets and an even wider discount to net asset value. We have ample capacity to fund that [buyback] as well as continue investing in growth opportunities.”

Darren Steinberg is confident CBD office occupancy will steadily rise.
Darren Steinberg is confident CBD office occupancy will steadily rise.Credit:Rhett Wyman

The financial pain may persist for a little while longer but not everyone in the industry believes that flexible workplaces will necessarily translate to lower occupancy and lower income.

Dexus chief executive Darren Steinberg doesn’t subscribe to the theory that large corporation’s need for more flexibility will result in them using less office space.

“Flexibility doesn’t necessarily mean less value. In fact, it means potentially more value and opportunity. If you think about what smaller tenants or even larger tenants are paying for flexibility. They’re willing to pay a premium for it.

“It’s a little bit like an airline ticket. The cheapest airline ticket is the one that has the least options and the least flex, but the most expensive airline ticket is the one that has the most flex,” he says.

“We are confident that the office will remain a core part of our customers’ needs. And we’ll continue to deliver solid long-term returns for investors.”

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