By PMG CEO Scott McKenzie
The media continues to spin stories about the slow demise of the office. However, the office isn’t going anywhere – it’s just adapting and doing so differently across metropolitan centres.
In New Zealand, we are seeing structural shifts in the market around long-term office spaces and occupier demand. Firms will continue to need a base to operate from, but the way in which they operate day-to-day will become more fluid.
The Colliers New Zealand Research Report (March 2021) shows the office yields in Auckland and Wellington remained stable in early 2020 and firmed in the second half of the year. The investment confidence was then due to the “better than expected economic performance and sustained Government support,” coupled with the low interest rate environment that saw new record low yields.
In the prime CBD office sector (as of Q4 2020), CBRE reported a “resilient” 2.7% vacancy rate in Wellington and an “unchanged” rate of 8.3% in Christchurch. This is due to a limited new supply of prime office space in both cities, and Wellington continues to be underpinned by growing Government requirements for space.
For Auckland, we have seen an increase in prime vacancy to 9.6%, predominantly due to over 70,000 sqm of sublease office supply coming to market, as reported in CBRE’s Auckland Property Market Outlook (December 2020). While a number of firms are actively looking to sub-let some of their space, we note very few have actually relinquished their space. With time, it is highly likely that a number of these firms will effectively take this space back to support growth, or recognise the need to provide physical space for their people to interact.
CBRE’s Asia Pacific Leasing Market Sentiment Survey (February 2021) reported overall average leasing sentiment has turned positive for the first time since July 2020, indicating the Asia Pacific market is seeing a renewed uptake of leases. This more global look at occupier demand is a supportive sign for the office sentiment on a wider scale.
Subleasing and Coworking
As Stuff shared late last year, “Jack Dorsey, the head of Twitter, says the company’s staff can work from home “forever,” but Reed Hastings, the founder of Netflix, says homeworking is “a pure negative”.
We’re seeing those in the former category may reduce their floorplate, but they aren’t disappearing altogether.
As lease terms tie many in (for medium to long-term periods), many businesses are adapting, hot-desking, and introducing a more flexible in-office policy, like three days in-office and two at home. Some are even bringing in other businesses to share their space – subleasing to alleviate the difference between their commitments and downsizing.
What we are seeing in the New Zealand market is that rents for flexi-coworking spaces are often similar to rents for long-term leases. The benefits attracting businesses is that they pay only for what they use and can scale up or down as required, along with larger shared amenities and meeting spaces.
If the past year has taught us anything when it comes to running a business, working flexibly and remotely provides real advantages. It also highlights that the net can be cast wider for the right, talented employees. But as we’ve mentioned in previous articles (The Trend of Flexible Working Won’t Kill the Office and Working From Home and The Future of Office – A Global Update), the office environment has necessary benefits.
As Barfoot & Thompson CEO Chris Dobbie puts it: “Offices will always be necessary. They are critical to collaboration and company culture. People feed off each other for ideas and personal interaction. We are keeping ours, and other major companies will be too.”
There is also plenty of new research to support that the vast majority of New Zealanders prefer to be in an office. Most recently, the New Zealand Herald reported on the “emotional rollercoaster workers are on as New Zealand goes up and down through alert levels.”
The article speaks to a recent independent survey conducted by Nature for employment site SEEK, which revealed: “nearly half [of 4000 people interviewed] found working from home was one of the toughest challenges.”
Additionally, 35% reported that being physically isolated from colleagues was the biggest obstacle, as they’d lost their regular touchpoints to help them feel like they belong.
Belonging Trumps Flexibility
The World Happiness Report 2021's chapter Work and Well-being during COVID-19 reported the leading driver for happiness at work as belonging, with flexibility second.
The report (Lessons for the “future of work”) references this workplace revolution, with some companies getting rid of their office entirely . “However, this risks overlooking important potential negative impacts of homeworking full-time,” the report says. “This shift could undermine social and intellectual capital, which may harm companies and their employees in the long term.”
“In this context, social and intellectual capital can be visualised as stocks that are slowly being depleted when working mostly from home. These stocks are normally replenished by new in-flows of people, places, and ideas. For workers, social and intellectual capital is built by shared experiences with co-workers and unplanned social interactions that broaden one's thinking.”
It concludes: “A flexible homeworking model that still affords employees opportunities to network, collaborate, and socialise in person could provide the necessary in-flows of social and intellectual capital and lead to large productivity dividends . These and other insights derived from applied well-being science can help societies build back better in the post-pandemic world.”
The Facts Are Clear
The office is a necessary part of the business world for both a company’s health and well-being and the people that work there. This is because businesses now and in the future will always need a physical place to come together, no matter how often the space is used day-to-day.
As long-term investors, we do not pick the peaks and troughs of the market. We look at long-term trends and make acquisition decisions based on whether a property is the right one (aesthetically, structurally, and environmentally), is in the right location, and has the right tenant mix for our funds.
PMG has a suite of commercial office properties across its funds, including in Pacific Property Fund Limited and PMG Direct Office Fund. Despite the current pandemic environment, the latter (which owns eight office properties across New Zealand) continues to be one of the best performing funds in our portfolio.
As part of our aspiration to become a funds manager of choice, PMG strives to provide everyday New Zealanders with the opportunity to invest in unlisted commercial property, which historically has proven resilient to economic cycles . This will continue to include the commercial office sector as an important and strategic part of PMG’s diversified portfolio.
We continue to watch the office sector carefully and act accordingly in the best interests of our funds and investors.
 1 Lebowitz, S. (2020). You could save more than $10,000 a month by getting rid of your company's offices. 5 CEOs who did just that told us how they made the decision. Business Insider. Retrieved from: https://www.businessinsider.com/ceos-no-offices-fully-remote-virtual-work-coronavirus-pandemic-recession-2020-10
 Davis, M. A., Ghent, A. C., & Gregory, J. (2021). The Work-at-Home Technology Boon and its Consequences. Available at SSRN 3768847.
 Past performance is not an indicator of future performance.
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