NEARLY $1.6 billion in CBD spending would be lost each year under optimistic scenarios for workers returning to the office, according to a new report, and discussions about the role of the city office need to revolve around a reduced daily office workforce and the prospect of “ghost buildings” and higher retail vacancies.
In its new report City Centres Aren’t Working, PAR Group analysed three different scenarios of how the return to the office of Australia’s 1.22 million CBD workers would play out, based on two years of monthly occupancy rates data from the Property Council of Australia.
In the most optimistic scenario – which incorporates the highest office occupancy rate for each capital city between July 2020 and July 2022 – 440,000 fewer people would be coming into Australia’s major CBDs each day. That average has varied from 85% in Perth to 49% in Melbourne.
Another scenario – the most pessimistic – was the monthly city office occupancy rate remaining at the average of the two-year period, ranging from 70.6% in Perth to 23.6% in Melbourne, which would see a vacuum of 711,713 fewer office workers in city buildings. A third scenario was maintaining the average occupancy rate over the three months to July, which ran into the latest Omicron wave but was free of lockdowns, and would see 557,814 fewer office workers.
The return to the office remained at a standstill in August, as workers sought to avoid the final phase of the Omicron and flu waves. Occupancy in Australia’s two largest markets were at just 53% in Sydney and 39% in Melbourne, according to the Property Council.
City centre retailers will bear the brunt of a reduced daily office workforce, in addition to dealing with fewer international visitors and reduced business travel, and the encroachment of online shopping. Based on the average worker spending $15 a day on coffees and lunch, PAR Group’s analysis showed between $1.58 billion and $2.67 billion would lost between the most optimistic and pessimistic outcomes.
Based on the number of retailers in Perth, the impact per retailer equates to up to $121,000 in reduced annual revenue from spending, and similar impacts are likely across other Australian cities, according to PAR Group researchers Damian Stone and Rob Ellis.
“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.”
They said that 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.”
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.
