Commercial fallout: The impact of COVID-19

Commercial fallout: The impact of COVID-19

15 December 2020

By Cath Dickinson

The Coronavirus pandemic has impacted us all and the real estate industry certainly hasn’t been immune. We’ve come a long way in recent months, but there’s certainly still a way to go. Kymbal Dunne, Partner and Joint National Head of Private Office at Knight Frank, shared his thoughts about what’s in store in the commercial space.

Reduced need for office space

As time has gone on and everyone came to realise that there’s no quick fix and the impact of the Coronavirus will continue to be felt for months, and possibly years, to come, businesses have started to look at their space requirements.

“Many are questioning the need for office space,” Kymbal said. “Working from home quickly became our ‘new normal’ when restrictions were imposed early on in the pandemic. Yes, some have returned to working at the office, but many have not. Others have settled into a hybrid pattern of working, with some days at the office and others at home.

“This has led many business owners to question how much office space they need and if there is the potential to reduce their footprint and, in turn, their costs. Then there are other business owners who are questioning the need for office space at all, because they’ve proven that they can operate effectively with their team working from home.

“What do you need office space for if your people aren’t able to use it or don’t need to use it?”

Kymbal observed that while it’s pretty much business as usual in the suburbs, it’s an entirely different story in Sydney’s CBD.

“While things are starting to come back to life, it’s certainly not like it used to be,” he said. “Yes, we’re witnessing more people returning to work, however occupancy levels are not even at 50 per cent, whereas they were up around 96 per cent pre COVID-19. Many people are continuing to work from home and only go into the office when they need to.”

Kymbal added that the impending end of the JobKeeper subsidy in late March 2021, coupled with the end of rent support for tenants on 31 December 2020, means that tenants with leases due to expire are weighing their options.

“They’re asking themselves, ‘do I really need this space?’ If the answer is ‘no’, then they’ll walk away. Then there are those who don’t want to give up the entire space and are looking for ways they can sub-let a portion of it. But this comes at a cost, because to do so generally involves a significant discount – up to 50 per cent.

“I believe the greater majority will sit tight and observe, maintaining their existing footprint – particularly as we’re still waiting on clarity around the timing and roll-out of a vaccine.”

Kymbal went on to predict that the fallout of the COVID-19 pandemic is still really to be seen.

“Let’s face it, JobKeeper has been keeping many businesses afloat,” he said. “Without it, they would have gone under months ago. They’re effectively ‘zombie’ businesses. I think, unfortunately, we’ll see a lot of vacant offices and shopfronts when JobKeeper ends, as we’ve prioritised the pandemic response, though the impact of the recession continues to play out in the background.”

Fewer international buyers

Commercial agents working with international clients have felt the impact of the COVID-19 pandemic particularly keenly.

“People still want to transact, however travel restrictions and quarantine requirements are posing problems,” Kymbal said. “I might have properties they’re interested in, but getting here to look at them is an incredibly time-consuming endeavour.

“First, they have to apply to enter Australia and approval can take several weeks. Then they have to go into hotel quarantine for two weeks. Then there’s the issue of our internal border restrictions. They might be looking at properties in several capital cities. While the majority of our internal borders are open at the moment, we’ve seen how quickly the Premiers are prepared to slam them back down again at the slightest whiff of an outbreak.

“Together, all of this makes international transactions far more difficult. What used to be a quick trip in and out of Australia, is now potentially a six-to-eight-week exercise, which is, quite frankly, untenable.”

Kymbal said that the upshot is that many projects involving international clients have been put on hold.

“We’re regularly reviewing conditions, but it’s certainly been difficult and there have been long delays,” he said. “Really, the only way we can move forward is if the international client has a partner based here in Australia that can do all the legwork for them. But even in these circumstances, things are still a lot slower and more tentative than they’ve been in the past.”

Changing needs

While the impact of the COVID-19 pandemic has certainly been felt across commercial markets – and will continue to be into the future – there is cause for optimism.

“So many businesses are demonstrating great resilience,” Kymbal said. “They’re pivoting and rethinking what they’re offering to ensure they remain viable and relevant to their clients. This is really inspiring. At Knight Frank, I find myself working across so many teams and specialties. Our service offering has become laser-focused and multi-disciplined. We’re effectively offering a better level of service, but to fewer clients.

“Things have certainly changed and, in so many ways, will never return to what they were, but businesses willing to embrace change and the opportunities that come with it will not only survive, but prosper.

“Likewise, the commercial market needs to adapt to meet the changing needs of businesses. I believe we can expect to see far more lease flexibility in the future.”

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