WFH?! How businesses are dealing with head office lease negotiations in 2021
Many firms are still deciding what to do with their office space in the post-COVID Aussie economy. In 2020, national office vacancy reached its highest level for more than a decade. Alongside this, prime CBD office rents fell more than 10 per cent in Sydney and Melbourne.
It’s anticipated that this soft rental growth will continue through 2021, providing impetus for tenants to push for more favourable terms in negotiation, whilst simultaneously rationalising office footprints and adopting flexible lease solutions. Head offices are still crucial for many firms, particularly corporates, whether workers are coming in part-time or not.
So – the market remains occupier-friendly. And the rise in remote working is real – but it’s far from a one-way trend. The question remains for businesses – how to reduce occupancy costs, and maintain or improve productivity?
The options for how to deal with the office question abound – downsizing, relocation, negotiating a rent reduction or re-negotiating terms, lease renewals and extensions, strategic portfolio planning, lease audits, sub-leasing, co-working, and even expansions! Whatever you think may be best, there are a few general guides you can follow to improve the likelihood of a good outcome:
- Plan ahead (ideally a six to 12 month lead time for moves or negotiations)
- Look for incentives (e.g rental abatement, rent-free, fit-out contribution)
- Talk to a professional tenant representative (eg a conflict-free, independent broker who does NOT work for the lessor)
- Assess your current rents, space usage, design, and ‘make good’ options
Remote working, or ‘working from home’ (WFH)
To demystify the remote working hype, it’s important to ask: what’s different and what’s actually stayed the same?
A year of mass lockdowns forced people to work from home, and showed businesses that some work can be done remotely, spurring some to adopt new, hybrid working models. Smart companies are ‘leaning into’ workforce preferences that enhance their operational efficiency.
And it’s clear that some of the ‘culture-shift’ is going to be long-lasting: a 9,100-respondent pulse in The Deloitte Global Millennial Survey 2020 showed more than 60 per cent want the option to work remotely more frequently, even after the pandemic fades.
However, overdoing it on work-from-home policies can cause business issues – including a lack of innovation via collaboration, reduced team cohesion, higher staff turnover, less or poor quality in-house training and mentoring and more – that lead to a reduction in productivity. This loss of face-to-face working and culture building can cost businesses more than potential office lease savings.
It’s also clear that many aspects of work haven’t changed: people still need to meet in person for certain roles, tasks and forms of collaboration and team building. Offices retain a central role in corporate life (and in small-medium size business) for these reasons.
A global JLL survey of 2,000 office workers in 10 countries showed nearly 75 per cent of respondents still want the ability to come into an office, while 70 percent consider the office as the best place for team building and connecting with management.
Furthermore, in Australia there is a is a strong push by Federal and State Governments along with private sector employers to support a return to working from the office.
Balancing WFH options with a vibrant, amenity-driven office culture is surely a worthy goal.
So, what to do – stay, move, downsize, rationalise?
In the 2021 Deloitte Commercial Real Estate Outlook Report, 200 Aussie industry leaders weighed in on how their companies are enhancing post-COVID resilience. About a third of finance sector respondents plan to rationalize their commercial real estate (CRE) footprint over the next six to 12 months. Rethinking office space amongst these firms is widespread – for example, prioritising use for face-to-face interactions and team-based activities. But it’s worth noting that this trend towards rationalisation predates the pandemic – it’s a hangover from large-scale restructuring in the sector, including the retreat of major banks after the Hayne royal commission.
Other industries, such as materials businesses have responded differently. The mining sector is an example of a sector that increased their office footprint in the first nine months of 2020 – by a total of about 7,500 square metres.
It’s also important to note that the top 100 companies occupy only 13 per cent of office space across all major cities: they aren’t representative of office tenants. Many non-top-100 firms aren’t facing the same pressures or rationalising in the same way.
Moving out of cities
Lower costs, better connectivity, and new worker-consumer hubs mean relocating, or rationalising office footprints may be attractive to many businesses. The relocation of commercial real estate zones within and between cities around Australia predates COVID, but the process has been accelerated.
Commercial real estate in regional areas is set to see high demand in 2021, with the June quarter of last year showing the biggest movement out of capital cities and into regional areas ever recorded. Whether it is a shared workplace building in Byron Bay or office complexes around Melbourne or Sydney’s three cities, all these city fringe, suburban and semi-regional locations are increasingly relevant.
Sydney’s Green Square — anticipated to be the most densely populated region in Australia after an $8 billion investment in urban renewal — is an example of new non-CBD locations offering commercial and retail options with lower occupancy costs. The 2024 metro station roll-out and growth in other amenities, spilling over into nearby Alexandria, means more businesses are considering city-fringe spots like these. With proximity to public transport, major road networks and the airport, it’s one of many new growing, connected urban hubs, including Parramatta, Liverpool, Macquarie Park, Rhodes, Campbelltown and Penrith — and that’s just around Sydney.
In addition to offering more competitive rentals, locations outside major city centres also provide security against any future CBD-shutdowns. While the prospects for these may be increasingly slim, it’s worth considering that relocation may mean your business can keep operating through a full or partial lockdown. However, while suburban office space could also see a boost in interest in 2021, it’s important to note the role of offices as talent attractors and keepers of culture – people like to interact, and the value of shared physical space for relationship building, teamwork and career progression for young people has been demonstrated by its absence through last year.
Commercial property industry participant Grant Atchison asks, “If you have a large workforce, can you separate them into different buildings and continue to operate during a shutdown? That’s going to be a risk management element [for corporates].” Again, this expedites a pre-COVID trend — corporates have been disaggregating their office portfolios and relocating components of their business to the “Parramattas of the world” for some time. Previously secondary urban and regional centres are now prospects for new office sites.
Towns in NSW like Orange, Dubbo, Wagga, Tamworth, Bathurst, having prospered from local tourism whilst international borders are shut, are increasingly developing as regional centres, and likely destinations for ongoing migrations of businesses and workers from major cities in the coming months and years.
Beyond office, there was significant growth in vacancy rates on all CBD property types, including, retail, industrial and residential in 2020. Supply outpaced demand in a big way, with a negative net take-up of space of 193,700 sqm during the third quarter of 2020, according to figures compiled by JLL.
However, it’s been clear that since late 2020 office workers have been returning to CBDs. There is a buzz returning to the city, and office space high on the agenda. In mid-December, the public health order requiring employers to allow employees to work from home was repealed in NSW, while Victoria has been slower to ease restrictions. In other states, most restrictions have been pulled back for some time.
New South Wales
Tom Mott, State Director of NSW Office Leasing at Savills Australia echoed the words of many professionals working in the office market when he said that the Sydney CBD office market in 2020 was ‘like no other.’
Chaos and indecision reigned for occupiers. But on the leasing front, this actually led to opportunities – incentives pushed above 30%, and most deals came with a complex package of extensive access periods, rebates, capital contributions, fit-outs, and hand back rights. This means that while face rents rose, countervailing incentives meant that effective rents fell sharply over last year. Deals on some office space got a lot sweeter for occupants.
Already in 2021, there’s been an increase in inspections, proposal requests and leases in the final stages of execution – showing how businesses are continuing to place value in their office setups.
Smart businesses of all sizes have been thinking strategically about how to best organise their teams and office space. Some occupiers are looking to retain or implement desk sharing policies and capitalise on the reduced spatial requirement, whilst keeping a close eye on the impact on productivity, collaboration, learning opportunities and culture. Businesses that strive for quality and amenity in their office environments are going to be better placed to encourage their staff to return from the home office.
Despite the challenges, there were a number of high-profile Sydney CBD leasing deals, including Barrenjoey Capital Partners’ 3,250 square metre sublease at1 61 Castlereagh Street, Resolution Life who secured a 3,200sqm sublease at 400 George Street and FTI Consulting who secured 1,200sqm at 1 Macquarie Place. More negotiations and deals momentum is forecast to continue into 2021. 95% of all leasing deals during 2020 up to 3,000sq m had an existing or new fit-out – showing how tenants are looking for value.
As leases come up for expiry in 2021, Sydney-based businesses can do well to get informed about the healthy incentives on offer around the market that may enable them to get more bang for their buck on an office space, or secure a new fit-out or refresh.
Melbourne, Australia’s biggest office location with approximately five million sqm, steamed back to life in November 2020. Activity comes as some tenant requirements are contracting, others are expanding, and still others are seeking to reconfigure.
11 new premium and A grade office buildings, delivering close to 450,000sqm to the market, are big news coming into 2021. What’s more, post-COVID tenancy repositioning has resulted in around 120,000sqm of prime fitted space now being offered for sublease. Vacancy rates rose from 3.2 to in excess of 10% and incentives have increased (20% up) and there has been downward pressure on rents (approximately 10% ).
Mark Rasmussen, State Director of office leasing at Savills said “The growing consensus is that business needs to return to the office to drive innovation, service clients and remain competitive.” Companies shedding space may face unforeseen mid-term challenges, and also go against the increasingly buoyant economy, new business innovations and buy local surge.
The Melbourne forecast for 2021 centres around peak vacancy rates declining, and steady office rent costs, as well as transport issues being ironed out by the vaccination program and workplaces moving back to normality before Q3.
Brisbane experienced a much less direct impact from COVID-19, allowing a relatively early return to the office. However, worker occupancy was still sitting at approximately 65% of pre-COVID levels in November 2020 – reflecting the internal impacts on businesses with HQ’s in NSW and Victoria.
However, by late 2020 the city was the fullest it had been since the pandemic hit and there’s been a continued lift in momentum as delayed decisions are increasingly acted upon and businesses start to activate plans for the future.
Moreover, 2021 has seen positive steps from the State Government in encouraging office workers to “return to work”. It’s anticipated that vacancy rates will remain pretty stable with the uplift in enquiries and particular focus on fitted offices.
Office leasing in Adelaide remained steady towards the end of 2020, with transactions of various volumes going through. Sentiment across South Australia is positive and 2021 is providing immediate opportunities for new tenancies.
Local companies can find good value B grade stock with re-use of existing fit-outs, according to Andrew Ingleton, Director of office leasing for SA at Savills. Vacancies at 45 Pirie, 108 Wakefield and 55 Grenfell offer prospective space for occupants, as does the state government inspired investment into Space technology at Lot 14 and the Biomedical precinct adjacent the RAH on the fringes of the CBD.
Western Australia also wasn’t as affected by the pandemic as other Eastern state capitals, due to an early and sustained border closure. Confidence increased through the fourth quarter of the year, with plenty of deals brokered and preferences for tenancies with speculative fit-outs or rebirthed existing fit-outs and incentives allocated as rental rebates. Net face rent costs are expected to remain stable for occupancies in 2021, as are vacancy rates.
There was circa 42,000sqm of new sublease vacancy at the end of 2020, and tenants are increasingly better equipped to accurately predict future WFH ratios thus forecast future space needs. Furthermore, confidence in energy and resources markets is expected to flow through to businesses with office leasing requirements in those sectors.
Ongoing in 2021, lease expiries mean businesses may be looking to fit-out alternatives to leverage lower effective rents and access better amenity. As in other states, a return to work is being encouraged and there are new developments expected providing options for smaller and larger office tenancies.
Many employees are now returning, or have already returned, to the office – and there have been some changes to the way office space itself is being organized. More meeting rooms, well-equipped with video functionality, are necessary for distributed teams, and there’s also been some expansion in workspace ratios as many organizations have accommodate social distancing requirements and WFH arrangements.
Another thing is clear: greater flexibility is set to remain. Businesses are still working out the ideal office-home balance. While “work-from-home is not the panacea for satisfying all working needs and workstyles,” in the words of Marie Puybaraud, director of global research at JLL – offices also need to be redesigned to meet new working patterns.
Is now the right time to downsize, relocate or re-negotiate your commercial lease? There are plenty of tenant-friendly indicators in the market for office space that have carried over from 2020: the contraction in the demand laid the base for tenants to have the upper-hand in negotiating contractual terms, and landlords continue to offer leasing incentives in excess of 20% in order to secure tenancies. There has also been growth in subleased office space, which represents plenty of opportunities for tenants.
Lease expiries around this part of the year, along with attractive incentives mean businesses should be on the lookout for new sites. Alongside this, lease audit, portfolio review and strategic lease planning for the year ahead are crucial to ensure dates and opportunities aren’t missed.
Founder & Principal, Tenant Leasing Group (TLG)
Phil Reichelt is a property advisor & tenant representative with 25+ years experience in Australia and New Zealand.
He specialises in multi-site retail, mixed-use office & industrial, and warehouse leases of up to 5,000sqm.
Phil negotiates competitive rentals, incentives, and favourable lease terms for retailers, eCommerce, financial services, legal firms, and other commercial occupiers.