There’s been no industry in Australia or the world untouched by the impacts of the ongoing COVID-19 pandemic - and with NSW and Victoria currently combating a ‘second wave’ of the virus, it appears the return to ‘normal life’ as we knew it could be increasingly distant. In this article, we take a deep dive into the wide-ranging and likely long-lasting impacts on Sydney’s commercial property market – one that just 12 months ago was making headlines for strong offshore investment, the topping out of landmark developments and CBD rents upwards of $2,000 per square metre.
So from the near-empty trophy office towers and complex rent reduction requests – we get the low-down from CI’s industry experts on where the impacts are felt and how we’re helping our clients navigate the ‘new normal’.
How have commercial property landlords and tenants been affected?
David Matkovic, CI's Head of Commercial Asset Management, said most office landlords had been happy to grant rent reductions thus far and were sympathetic to their tenants. "[They] understand their obligations under the Code of Conduct and are forthcoming when it comes to providing appropriate relief in accordance with this. Commercially savvy tenants also understand these requirements and the two parties often come to an agreement fairly quickly, provided both are dealing in good faith."
There have been challenges, however, noted Mr Matkovic, with some landlord/tenant relationships strained due to the impact of the pandemic. "This has mostly occurred when tenants have not been across the Code, their obligations and/or have sought rental relief greater than the negative impact on their business operations."
"Approaching each situation with consideration and understanding of what both the landlords - our clients - and tenants are facing, has been crucial in helping us navigate the challenges and achieve solutions."
There’s no denying the leasing market has been one of the hardest hit by the pandemic, said Ben Kardachi, CI's Director of Office Leasing for Sydney CBD. “We have seen many tenants decide not to renew leases, or relocate for the time being until the outlook for their business and future office space requirements are better understood. The effects are still flowing through and will continue to, spurred by the Federal Government’s decision to extend the Job Keeper program until March 2021, with tenants withdrawing from current lease negotiations advising they won’t require office space until after the program has ended.”
“Therefore, it’s likely there will be significant and long-lasting impacts of COVID-19 on Sydney’s office leasing market, most likely in the form of spikes in vacancy and falling effective rents. It’s possible that the full extent of the impact actually won’t present itself until in 2021 or beyond due to these aforementioned factors.”
However, market activity has not stopped completely. Mr Kardachi cited a number of lease transactions to have taken place, triggered by some tenants acting swiftly to cater for a reduced on-site workforce and/or seeking more dynamic space that allows for the physical distancing requirements. He added, "Some occupiers - whose businesses have not been as negatively impacted to the extent of others and perhaps were planning a move in the medium-term –have taken the opportunity to relocate their workplace during this time. Higher incentives and more flexible lease terms on offer are presenting some appealing opportunities for those tenants ready to take action."
Meanwhile, Beau Stewart, CI’s Director of Tenant Representation for NSW said the pandemic had given insight not only into the impact on his clients’ office space requirements, but their broader business operations and current and future plans.
"While sectors such as travel, leisure and event operators have been some of the worst hit by the pandemic, the impacts on other businesses, from financial services to media and entertainment, are wide-ranging,” Mr Stewart said. “We have had a significant increase in the number of not only rental relief negotiations we're assisting clients with, but requests for early lease surrenders to allow for downsizing, short-term space renewals, and 'stay put' negotiations in favour of relocations.
"A number of our clients have understandably paused their office relocation plans during this phase. For many tenants, it's about keeping operations and revenue at a sustainable level and providing strategic advice as to how their commercial office decisions will impact this."
While Sean Doolan, CI's Associate Director for Tenant Representation in Queensland, supported Mr Stewart's comment, he noted that there were marked differences between the impact of COVID-19 on the respective states' sectors. "The unique and rather fortunate position that Queensland is in with minimal cases of COVID-19 remaining, has allowed the city to recover faster than its NSW and Victorian counterparts. The overall impact on the sector has been felt less, with more businesses back at work and willing and able to make informed commercial property solutions for the future."
So, how is the Sydney commercial property investment market faring?
John Bowie Wilson, CI's Director of Investment Sales for Sydney CBD, said, “Many institutional owners are understandably approaching the market and future investment activity with caution, with some more risk-adverse than others. The number of transactions taking place have slowed significantly. There will inevitably be an increase in the amount of distressed asset sales, however, this will take some time to filter through the market, whilst the Government stimulus is still flowing. Having spoken with lenders, more forced sales will occur later in the year when transaction volumes pick up and valuations are reset. There are already various properties being prepared to be brought to market, however, we note there is a strong number of investors wishing to return to the market subject to a change in pricing metrics. We believe this will continue to grow while the recovery gains pace, albeit slowly.”
Furthermore, the impact of COVID 19 on commercial property occupation has focussed buyer interest on suburban assets which are cost-effective and less affected by social distancing limitations on business. That’s according to Chris Veitch, CI's Director of Investment Sales for North Sydney, who added: “Low-rise suburban office buildings with plenty of car parking, on comparatively very low rents to office towers in the Sydney CBD are an appealing proposition for tenants and therefore investors. They offer tenants an accessible place to conduct their business, in whatever form that may need to be in the coming years and as the rents are low, occupiers can afford to take more space and retain flexibility.”
Mr Veitch said that the majority of CI’s transactional activity exchanged during the pandemic had so far consisted of smaller suburban assets, typically with development potential – due in part to a pause in divestment of large trophy assets, in and around the CBDs and the desire for developers to maintain a manageable pipeline. “We have advised our clients to run on-market campaigns as that allows us to channel very healthy levels of buyer demand into producing a result as it easy for buyers to be distracted. It also gives vendors clear visibility of the market so they can make an informed decision. While caution will remain, we do expect an increase in transactional activity across the suburban and CBD markets later in 2020 and into 2021 as the sector rebuilds confidence.”
And while the pandemic has grounded global and much interstate travel, a number of offshore buyers remain aware of the benefits of Australian commercial property investments, said CI’s Head of Asia Desk Shirley Fan. “Offshore investors are still active and seeking opportunities. We have witnessed high demand and enquiry for steady income-generating assets including industrial sites with future value-add options,” Ms Fan said. “We expect further strong demand for distressed assets placed on the market due to lack of liquidity and funding pressure, and in some cases is the type of asset offshore investors are most interested in acquiring during this time,” she concluded.
Looking for advice on your current or future property needs? Get in touch with one of our experts today:
Asset Management, David Matkovic: +61 2 8238 0025
Office Leasing, Ben Kardachi: +61 419 230 278
Investment Sales, John Bowie Wilson - Sydney CBD (+61 423 000 882) and Chris Veitch - North Sydney (+61 434 566 355)
Tenant Representation, Beau Stewart - NSW (+61 400 505 545) and Sean Doolan - QLD (+61 403 775 985)
Asia Desk, Shirley Fan: +61 452 531 797