The effects of COVID-19 have raised fundamental questions for the office sector, including new approaches to space utilisation, the reassessment of premises strategy and the nature and scale of office demand, combined with the implications for rents and capital values. Major changes are already taking place and a key question is whether these will be in place for the short term or whether we are seeing structural shifts that will persist going forward.
For APAC as a whole, after recession in 2020, we expect a recovery in 2021 led by China, the largest economy in the region. However, The pace of pick-up in India, where COVID-19 is still spreading, is hard to predict. Since real estate tends to lag the overall economy, We may not see a substantial pick-up in space absorption across our nine core markets (Shanghai, Beijing, Tokyo, Hong Kong SAR, Singapore, Bangalore, Sydney, Melbourne, and Auckland) till H2 2021.
The pandemic’s effect on office fundamentals
In recent years, occupiers have targeted higher office density, with lower floor space per worker, greater shared office space and consolidation of functions in central headquarters.
“The trend to higher density has boosted economies of scale, but it cannot continue considering COVID-19. Looking ahead, we expect most occupiers to adhere to standard social distancing guidelines, with a distance of at least 1.5 metres between staff. In addition, occupiers have created a combination of collaborative and focused working spaces, supplemented by health and wellness facilities”, says Arpit Mehrotra, Managing Director, South India at Colliers International India.
Medium-term prospects for demand, supply, vacancy and rent growth: Absorption to pick up from H2 2021
Colliers expects aggregate absorption in the nine core markets to touch a low of ~24.8 million sq ft in 2020. This forecast relies heavily on Bangalore, but also on further recovery in China. Higher growth should help leasing activity pick up across APAC by late 2021. In the long run, the Tier 1 Chinese and leading Indian cities should drive demand for space.
Heavy supply to push up vacancy
Over 2020-2022, it sis expected that the aggregate new supply of 17 million sq metres across our nine core markets. This is the highest level of supply of any three-year period from 2007 onwards. Supply should jump in H2 2020 in Shanghai, Beijing and Bangalore, while Tokyo stays firm. From 2022, supply in Shanghai should ease, but stay high in Bangalore. It is expected that the aggregate vacancy in the nine core markets to rise from 9.1% at end-2019 to a peak of 14.0% at end-2022 before easing.
CBD to survive, but suburbs may prosper
The traditional CBD is not expected to lose importance in those cities that have dense urban centres and rely on mass public transport (at least after COVID-19 is under control). While the need for social distancing and a rise in teleworking will have some impact, the critical mass of businesses in these CBDs should ensure that they can adapt. However, Colliers predicts greater interest in suburban office locations from now on. For example, there is continued interest in suburbs of Bangalore such as Outer Ring Road, North Bangalore and Whitefield that offer ample quality space for occupiers to expand.
Expect to see changes in the future work ‘place’, ‘space’ and ‘pace’
As offices reopen after the COVID-19 crisis, Colliers expects firms to adopt a more diverse real estate strategy stressing employee choice. This may well involve a combination of retaining headquarters in the CBD, perhaps at a reduced footprint, coupled with suburban hubs, flexible space and remote working. The global work-from-home experience has shown that remote working is here to stay in some capacity; both employees and their managers see the benefits. However, home working will complement office work, not replace it. Physical offices will remain as an anchor and key to promotion of corporate culture and mission.
Investor sentiment in uncertain times
Investors should be open to properties occupied or managed by flexible workspace operators, or enter partnerships with these operators, which provide flexibility for landlords. This argues for a more versatile approach, such as considering new management and leasing structures as opposed to the traditional way of corporate anchor tenants. The new models and possibilities that are emerging will also require investors to look beyond standard valuations.
“Investors should consider looking past traditional CBDs to decentralised districts and business parks, given the changing definition of ‘core’. They should also consider tactical partnerships with flexible operators to attract and retain tenants by extending services and offerings” said Piyush Gupta, Managing Director, Capital Markets and Investment Services at Colliers International India.