Big offices shrinking as companies downsize real estate footprint

Utility heavyweight AGL has opted to sublease three floors at the EY building at 200 George Street, while NTT (formerly Dimension Data) is reviewing its 6000 square metre requirement at the GPT-managed Darling Park Tower 3, after the group said its global staff can all work from home.

Westpac opted to offer space to the market in February 2022, which it has subsequently leased to TPG at Barangaroo.

Micheal Cook, group executive at Investa said that tenants are also re-evaluating their office space usage. Whereas pre-COVID-19 offering flexibility was considered innovative, “today, to not offer it is suicidal”.

“Office owners and tenants alike have been slow to adapt. Third space operators like The Commons, Work Club, The Work Project, Justco and even We Work have been cutting the major property owners’ grass by absorbing space users from 100 square metres to 1000 square metres,” Cook said.

“An entire section of the market, which previously occupied low end A grade and B grade space has been usurped.”

But Cook said at the premium end and in new stock under construction it is a different story.

Investa has two new buildings under construction in Sydney – 39 Martin Place and 252 Pitt Street, known as Parkline Place, where enquiry levels are high and the lease commitments are running well ahead of schedule.

The Office of the Director of Public Prosecutions has committed to a 9250 square metre lease at Parkline Place and will join accounting and financial services firm BDO, which has leased 6600 square metres.

In Melbourne, NBN has 16,000 square metres of available space at 655 Collins Street, formerly known as Media House when it was home to The Age newspaper.

ANZ Bank has 13,000 square metres it is looking to re-lease at 839 Collins Street, while NAB has a large amount of space of about 25,000 square metres at its 800 Bourke Street tower in Docklands.

Australian Super is downsizing at its 130 Lonsdale Street office while NTT is also subleasing office digs at 35 Collins Street. IAG is offering 4000 square metres at 181 Collins Street, while ME Bank has space at its 360 Elizabeth Street office.

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Telstra has 23,000 square metres available at 300 La Trobe Street, but the telco only has two years left on the lease contract so has a short-term sublease strategy.

The space hitting the market underpins the tough conditions that office landlords and investors are facing and that is translating into lower returns for unlisted funds that also own buildings but are pressured to redeem units to worried clients.

Charter Hall’s Direct PFA Fund has said it will limit redemptions in the $2.5 billion unlisted office fund to just 25 per cent, saying it was unable to sell buildings at fair prices to realise cash.

The fund, which owns government-tenanted offices, has received redemption requests equal to 15 per cent of its equity, paid just 25 per cent of what was requested in February. It would pay another instalment “shortly” and the rest this year.

The uncertain economic outlook continues to take its toll on Australian core wholesale property funds as they recorded a negative total return in the second quarter of 2023, according to the MSCI/Mercer Australia Core Wholesale Monthly Property Fund Index, from MSCI Real Assets, a part of MSCI.

The overall quarterly total return for the index was -2.8 per cent for second quarter of 2023. The office funds were the main culprits as they recorded a -5.2 per cent fall in capital growth, as values start to see some significant adjustments.

Benjamin Martin-Henry, MSCI’s head of real assets research for the Pacific, said after months of speculation about when the market will see significant falls in value for the office sector, they have finally arrived. The one-month capital growth for June alone came in at -5.2 per cent, which drove the worst 12-month total return since early 2010.

Office funds recorded an annual total return of -4.4 per cent, comprising negative capital growth of -7.9 per ent and an income return of 3.7 per cent.

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