About half of Australia's workforce will work from home two days a week in the wake of the pandemic, which in turn will spark a 5 per cent net fall in demand for office space, according to a new report by one of the country's largest property funds managers.
The paper, published by QIC Global Real Estate concluded that, with the gradual recovery of labour markets, demand for office space is projected to be reduced by 700,000 sq m in 2020 and another 300,000 sq m in 2021, from pre-COVID levels.
As a result QIC anticipates a drop in rental growth as vacancy rates rise, from a forecast of 3.1 per cent per annum in effective rents in the Sydney CBD without a substantial shift in people working from home, to just 0.3 per cent per annum.
The funds giant also believes the structural shift towards working from home and the associated risk to the office market has not been "appropriately priced into current office market valuations."
The real estate investor, which consulted with more than a dozen of Australia's largest corporate office tenants in October about their intentions, expects corporations to retain "flagship" offices in CBD locations with quality fit-outs to support culture and innovation while accepting a greater propensity for employees to work from home.
QIC has calculated that on average 50 per cent of white collar workers will work from home two days a week post-COVID-19, based on Australian Bureau of Statistics data that showed 32.1 per cent of employed people were already working from home in 2019, before the pandemic.
The authors of the report said their view was more conservative than employee surveys to allow for the fact that not all staff could work efficiently from home and not all employees would allow for such flexibility.
But QIC said corporate occupiers were already reviewing their existing office footprints to see what extent they could be reduced, with a number already placing space – particularly lower-quality stock – on the sub-lease market.
"As businesses encourage employees to return to offices it will become more evident to what extent there is surplus space in existing tenancies," the report said.
"This will lead tenants to reduce their leased space on expiry's and renewals or drag on the growth of office demand going forward as that surplus capacity is absorbed."
As employees sought greater flexibility with their offices, demand for space and how it is used, will shift, the report warned.
Companies will demand infrastructure that allows for the digitisation of businesses and remote working, more areas for team collaborations, a reduction in density levels as well as an increase in hot-desking, supported by booking systems.
"The trend of accommodating more people into a smaller footprint may now need to reverse, given the requirement for social distancing between employees and greater emphasis on health and wellbeing going forward. This would result in more space per employee," the report said.
The co-working sector, which had suffered this year because of the pandemic, was expected to make a strong comeback, according to QIC.
"Prior to the COVID-19 pandemic, co-working facilities managed directly by landlords or by third party providers (for example WeWork) provided flexibility for occupants to more easily adjust their accommodation footprint as required and offer enhanced collaboration environments," the report said.
"The initial impact to co-working from COVID-19 has been negative as people worked from home and avoided communal environments, but this is expected to be temporary."
"It is likely that the importance of co-working will increase in line with structural changes in the office sector as occupants seek greater flexibility and suburban locations".
While many in the real estate sector are sceptical about the "hub and spoke" office model taking off as a result of the pandemic, QIC said there would be additional demand for decentralised office locations, which would support the emergence of town centre development opportunities.
"Organisations will take less fixed space and will use other forms of accommodation to flex up and down, reduce costs and better utilise space," QIC said.
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