The rise of hybrid working and the increased uptake of on-line shopping, in the response to the COVID 19 pandemic, has had a profound impact on both office and retail property markets in Australia’s major capital cities.
Improved working flexibility, technology and less commuting have underpinned an uptake in working from home by Australian employees. The structural shift in the role of the city office and the 9-5 working model has created challenges for all capital cities across the globe. This shift has taken place despite numerous incentives and, in Australia at least, the return to the office appears to have stalled. While estimates vary, the evidence suggests, the percentage of office workers physically in the office will be well down on pre COVID 19 pandemic levels.
The future balance of working in the office verses at home is still unknown. To determine the possible magnitude of this change in working behaviour on city centre offices and retail centres, three scenarios were considered based on two years of monthly office occupancy rates, as defined by the Property Council of Australia.
It was found in the most optimistic scenario, around 440,0000 fewer daily office workers would be in the office each day, across Australia’s major capital cities, resulting in just under $1.6 billion lost in city centre spending per year. This is according to a new study by the PAR Group, an independent property research collective.
The PAR Group’s analysis, undertaken by Damian Stone of Y Research and Rob Ellis of the Data App, examined the potential impact of continued lower than pre-pandemic office occupancy rates on retail spending across Australia’s six largest capital city office markets.
This study, not a forecast of the future spending patterns, but estimates based on three scenarios, thereby providing a guide as to likely environments.
The scenarios are, going forward:
- Scenario 1. The monthly city office occupancy rate remains at the average of the past two years to July 2022 (The average across the 6 cities has ranged from 70.9% in Perth to 23.6% in Melbourne);
- Scenario 2. The highest city office occupancy rate for each capital city between July 2020 and July 2022 (The average across the 6 cities has varied from 85% in Perth to 49% in Melbourne) and;
- Scenario 3. The average city office occupancy rate over the past three months May – July 2022 (where the daily occupancy rate has stabilised during the current Omicron Wave and is free of lockdowns).
For each of the scenarios, the number of office workers compared to pre-pandemic occupancy levels, was calculated. It was also assumed each office worker spent, on average, $15 a day in retail; representing the cost of coffee and lunch. Clearly, daily spending assumptions may differ, so the results should be viewed as indicative and reflective of different states of the world.
Applying these assumptions, the potential change to both the number of office employees in the major capital cities and retail spending was estimated.
The main findings were:
- As a benchmark, based on pre-pandemic office occupancy levels, Australia’s daily office workforce should be approximately 1.22 million workers.
- Based on occupancy trends over the last 24 months (scenario 1), there are an estimated 711,713 fewer office workers in Australia’s city office buildings. Based on the highest occupancy rate for each capital city (scenario 2), there would be approximately 422,404 fewer daily office workers. Finally, assuming office occupancy rates over the past three months (scenario 3), there would be an estimated 557,814 fewer daily office workers.
- With respect to spending, based on pre-pandemic occupancy trends, Australia’s daily office workforce would have spent $4.6 billion per annum in its cities. The following chart illustrates the estimated daily workforces and retail spending across Australia’s major capital cities from pre-pandemic and under the three scenarios outlined above.
- In terms of lost annual retail spending – the impact of fewer office workers spending a typical $15 dollars per day could lead to between $1.58 billion (based on the most optimistic month of occupancy, scenario 2) up to $2.67 billion (based on average over the last 24 months – scenario 1) lost from CBD based retailers, mainly food and beverage retailers.
Change in daily City Office Workforce
Change in City Spending (annual)
- Whilst retail spending is likely to be lost from the city centres, spending in the suburbs, in particular local food options will, in all likelihood, see increased trade.
- As a cross check of the scenarios, an analysis of pre and post COVID shopping centre turnover (MAT) was examined. Whist there is some variation, city centre shopping centre MAT is, on average, 40% lower than pre-COVID levels, according to publicly available information for Sydney. Over the same time period, retail turnover increased for Australia by over 18%, while MAT for non-Sydney retail outlets invariably rose dramatically.
- Previous PAR Group work, carried out in August 2021, based on scenarios of 1 and 2 per days per week working from home, estimated between $730 million and $1.6 billion dollars lost in Australian city centre retail spending. These current findings highlight a lower-than-expected return to the office than previously envisaged.
The following can be attributed to Par Group researchers Damian and Rob
“Hybrid work, incorporating time in the office and working from home could become a significant legacy of the COVID 19 pandemic.
With social distancing and health measures now largely removed, and with a high proportion of the population fully vaccinated, the return to the office is increasingly based on the preferences of individual companies and their employees. Office occupancy data, both in Australia and elsewhere, suggests the return to the office has stalled and is currently between 50-70% of pre-Covid levels in many cities.
Even with cities currently with a high daily office occupancy rate, such as Perth, at 71%, there is a still a smaller daily office workforce. The mode of transport into Australia’s city centres has also changed, with public transport patronage down, on average, over 20% from pre-pandemic levels. Additionally, the standard office hours of 9-5, popularised by Dolly Parton, has changed with peak commuting hours starting closer to school pick up times.
Media reports have wavered between the death of the office and a return to “normal”. The narrative that is emerging, based on office occupancy trends, is the outcome is likely to be somewhere in the middle. The current rise in office vacancies, is being compounded by strong office supply, as well as a drop in demand. Feedback from stakeholders, such as workforce strategists, tenant advocates, leasing agents and property owners, suggests there is no clear trend emerging from Australia’s major office occupiers in taking less space in current lease negotiations. While some companies are taking less space, due to increased working from home, some are taking additional space to create space for collaboration and social distancing. Planning for a reduced daily office workforce is an occurring trend, with an increasing proportion of new fit outs accommodating around 20% fewer workspaces than pre-COVID trends.
Consequently, it would seem, rather than focus on incentives to bring people back to the office, or employers strongly encouraging people to return, the discussion regarding the role of the city office needs evolve to planning for the potential long-term implications of a reduced daily office workforce and, with it, lower city centre retail spending.
Potential implications include:
- In the long term, structural vacancies in the secondary office stock seems likely. Captured by the lower vacancy rate of prime over secondary office stock, workers, when they are in the office, want to be in high quality, centrally located, buildings which offer a high level of amenity; a trend which was occurring prior to the pandemic.
- As for the older, secondary office stock left vacant in the core of our capital cities, redevelopment or re-purposing is likely to be un-economic, given the current conditions in the construction industry. This raises the possibility of ghost buildings and higher retail vacancies, thereby reducing the vitality of the city centres.
- City centre retailers, which rely heavily on the daily office workforce, will bear the brunt of a reduced daily office workforce. Combined with the impact of fewer international visitors and reduced business travel, let alone the encroachment of on-line shopping, many city retailers may find it problematic to adjust to the new economic paradigm. Simply based on the number of retailers in the Perth, the impact per retailer equates to up to $121,000 in reduced annual revenue from spending. Similar impacts are likely across other Australian cities. This lost spending will place pressure on already elevated retail vacancy rates.
- With a reduced daily office workforce, cities will probably need to focus on increasing the number of residents which will help underpin city-based retail. Incentives to redevelop older office stock will likely be required, services such as city schools will also need to be accommodated and planning schemes revised.
It would seem, under the most optimistic outcome, government, office owners, retailers, employers and employees will need to adjust to city centres with fewer people compared to the prior to the pandemic. Those which adjust the quickest will likely be best placed to establish the model for cities which meet the future needs of workers and residents.”
For further information, please contact:
Damian Stone, Principal and Chief Problem Solver of Y Research. M: 0433 525 414 or email: firstname.lastname@example.org
Rob Ellis, Director of the Data App. Mob: 0417 195 352 or email: email@example.com
Further research undertaken by the http://PAR.Group/ on the impact of the pandemic and e-commerce on shopping centres refer to the links below:
About PAR Group
Real Investment Analytics (RIA), The Data App (TDA) and Y Research are partners in PAR Group, an independent research collective offering a comprehensive range of property research and analytical services. The team is experienced in economics, property research, transactional and corporate strategy; all with extensive industry involvement in both the property and finance sectors. Visit: http://par.group/ for more information.