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With the last 12 months proving pivotal for office markets, commercial real estate now has the clearest picture since the onset of COVID-19 of how this segment is likely to perform for the foreseeable future.
According to John Preece, the chief property officer at Australian co-working provider Hub, there are four major elements that solidified over the course of 2023 and will now determine office markets in 2024.
- Downsizing
While much has been made of CEOs’ desire to get workers back into offices, it’s clear that a return to the office culture of the past is not currently on the cards. As such, the continual expiry of leases that were signed pre-pandemic will see many business leaders rethink their office needs.
As Mr Preece explained, this will see conditions continue to tip in favour of tenants.
“In 2023 we saw Sydney’s office occupancy stabilise at approximately 65 per cent, and Melbourne at 50 per cent, when measured against pre-pandemic levels. Considering the pre-pandemic office occupancy was already sitting at a relatively low 50 per cent to 60 per cent, then in real terms we are now looking at actual occupancy of circa 25 per cent to 30 per cent here in Australia. This is backed up by a recent study by XY Sense, which shows office utilisation in the APAC region is only 27 per cent,” he noted.
“We’ll therefore continue to see the downsizing of office space in 2024, with organisations gradually reducing their physical office footprint as leases expire, driven by the changing nature of work,” Mr Preece forecasted.
- Flight to quality
But though physical space may be in abundance, the type of space that tenants are increasingly favouring might still be in short supply.
“There is a clear trend towards high-quality, well-designed spaces, representing a flight to quality,” Mr Preece said.
But bringing more high-end offerings onto the market might not be as simple a proposition as it initially appears.
“On the supply side, fit-out cost escalation in the region of 40 per cent over the past 24 months presents a barrier to the creation of new premium quality flexible workspaces,” he observed.
- Flexible workspaces
“For flexible workspaces, demand has levelled out after a spike in 2022 – though it remains significantly higher than pre-COVID levels,” Mr Preece commented.
That demand is set to keep pace over the course of 2024, with Australia seen as a market where co-working can thrive. As such, it wouldn’t be a surprise to see more spaces and new players in the subsector this year.
“Demand varies on operator brand, space quality and location, but a study by Instant Offices places Sydney in the top 10 cities globally for flex space demand,” Mr Preece said.
Those in the industry will be watching to assess changing demand, noting that with new, hybrid ways of working, the traditional thinking on how much space is required for a staff pool of a certain size is also in flux.
“Desk sharing has become a more common practice, moving away from the traditional 1:1 occupancy model. As we approach 2024, the flexible workspace sector is navigating through a phase of consolidation and innovation.”
- The “third space”
“While the commercial property market faces significant headwinds, hospitality-driven third spaces remain in demand,” Mr Preece observed.
Property providers in both residential (the first space) and office (the second space) are now aware that it’s the add-ons – the communal offerings that add lifestyle desirability and offer social perks – that are increasingly tipping prospective tenants over the edge.
“There is a rising demand for spaces dedicated to meetings and events, particularly during the core weekdays of Tuesday, Wednesday and Thursday,” Mr Preece said.
Office landlords have noted this trend and are increasingly partnering with firms like Hub to offer flexible spaces within their buildings that can be accessed by any occupants. According to Mr Preece, third-party managers of communal spaces are expected to be increasingly tapped to add the amenities that office workers now expect.
“With the normalisation of management agreements in Australia, it’s opening new avenues for expansion and partnership with flexible workplace operators,” he noted.
ABOUT THE AUTHOR
Juliet Helmke
Based in Sydney, Juliet Helmke has a broad range of reporting and editorial experience across the areas of business, technology, entertainment and the arts. She was formerly Senior Editor at The New York Observer.
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