2020 will remain in people’s memories for as long as they own one. Not least for the tragedy and disruption that the COVID-19 pandemic has caused, but also for the fact that it has acted as a catalyst for changes in human behaviour and accelerated trends that were emerging.In this episode of Talking Property we bring together some of those behavioural changes – short and long-term in nature – that will impact property markets across the Pacific.
Associate Director Research, New Zealand, CBRE
Tamba specialises in high density residential research with a focus on the Auckland apartment market and build-to-rent (BTR).
Director Research, Australia, CBRE
Kate is passionate about driving thought leadership around innovation and transformation in the retail sector. Kate has worked in property economics for 13 years including time working inhouse with a major retailer.
Associate Director Research, New Zealand, CBRE
Gergely has been part of the New Zealand research team for the past eight years, and is responsible for CBRE’s occupier research across the office and industrial sectors, providing insights for engagement with New Zealand’s largest corporate and industrial occupiers.
Featuring Kate Bailey, Tamba Carleton and Gergely Gaspardy
Thursday 19 November 2020
Hello and welcome to Talking Property with CBRE. A podcast in which our team of experts share their commercial real estate insights. My name is Bradley Speers, I'm Head of Research CBRE Australia and I'm your host for today's episode.
Over the next little bit we will be talking about findings contained in a report produced by the Australia and New Zealand Research teams, the report is titled Building Resilience Through Real Estate Post-2020. I'm joined by members of CBRE’s Pacific team Kate Bailey, who is our Head of Retail and Logistics Research in Australia, Gergely Gaspardy who covers New Zealand Office markets and Tamba Carleton, who is our Residential BTR specialist in New Zealand.
The report covers four themes, the first those themes that we will be exploring is around time savings. COVID lockdown has resulted in white collar employees working from home, numerous surveys across the globe have indicated that employees have enjoyed the fact that this has saved them time in commuting. Looking ahead, we're expecting a gradual shift to people increasingly working from home.
A question for you Gergely, does more people working from home represent a threat to office demand and something that landfall should be concerned about?
Good question Bradley. I think demand for office space is likely to be soft in the short term and there are multiple reasons for that. One is obviously a cyclical reason, that is a typical trend in the economic downturns and when there's uncertainty and that's underpinned by our surveys, which show that the vast majority of occupiers think that their portfolio will decrease even if only slightly in them some circumstances. But there's also the structural reason that you mentioned with more people are working from home, or working flexibly, which is again also expected by their employers and that is also underpinned by a survey which shows that support for working from home in a more formalised manner is high on the agenda for occupiers. But it’s obviously not for everyone and we also understand that analysis around the growth in productivity might be short term, typically driven by fear and anxiety at the beginning of lockdowns, whereas in the longer term that might change and bite into that productivity. Some of the Asian reports that have been that recently published indicate that there's a push for employees to return to the office by their employers, and anecdotal evidence does exist in New Zealand as well that some businesses do want their employees to return. So I think it will be interesting to see how this will pan out in the future. But more than ever, I think what is important is to create a space where employees want to be and if that is the case, then employees will want to come to the office because they will know that that's the best place for them to do their work. That leads us to your question Bradley so, I don't think that landlords should be worried. They should be looking at how their tenants use their space and help their talents to create spaces that their employees will like and will want to come too.
Great, thank you Gergely. A question to you Tamba, look, feedback that we're receiving from clients and indeed survey results that we’ve also viewed indicated that more employees will want to work from home, two or three days a week seems to be that sweet spot. If there are more people working from home, what does that mean for the residential sector in terms of demand from a locational standpoint?
Well, there's a lot of different impacts that working from home have but I think it's important to know that working from home isn't going to be the same experience for every employee. So there are some people that are willing and able to work from home, and there are other people that are not willing and not able to work from home so that 2 to 3 days is an average across the entire employment market but it's very specific to each person’s individual role as well. So basically, to answer your question, what it means for developers is increased opportunity. So rather than being confined to location centred around employment nodes, if people are willing and able to work from home, that opens those locations for more intensive residential development. Where previously that might not have been possible because they might have been too far from employment. So, the benefit of that is that it's likely to be areas with lower land values, and that will enable more affordable housing to be built.
In the Auckland context some of these town centres on the outskirts of the region of the likes of Drury, Warkworth, Pukekohe. Up until this point, traffic has made living in those locations really hard if you don't work locally because they might be more affordable in terms of house prices but the transport cost and the cost of time is really high.
If we think about the ideal living situation as a 15- or 20-minute city, so your home, your work, your favourite bar or favourite cafe, all of these are within 15 to 20 minutes. These outskirts cities are now part of that if you can work from home. Another benefit is less reliance on transport connectivity. So, a smaller commute effectively none if you're working from home but if you're not spending an hour and a half on the motorway or an hour and a half on the train or bus, that's got benefits for emissions. If we think about fewer people using those resources, that means there's probably no justification for investment in them, so that's a bit of a counterbalancing but overall, the climate benefits are quite significant.
And what about in terms of residential building design? Are we going to start to see houses with two studies, so the two partners could be working at home at the same time?
Well, I mean, it's possible, but you must think about more flexibility rather than a set study. So, houses should be flexible to suit changing needs of a household for one week it might be a study for another week it might be a guest room for another week it might be something else entirely or storage. So, the other thing when working from home is that living and working in the same place can be quite tiring and lonely. So what potentially could be an opportunity is separate but close by local working space where you can get ready at home, leave your home and go to the office, which maybe less than a five minute walk away and then do your work and it's got that mental separation of ‘I'm at work’ versus ‘I'm at home’. Because if you're working and living in the same space, I mean we all experienced it with lock down, right? It just blends into one monotonous time and it's quite draining for your mental health. So, I think houses will be more flexible in their design but in terms of working from every home it may not be ideal.
And Kate, in the retail sector if there are more people working from home, what is that going to mean?
Bradley, what it really does is it just changes everybody's ant trail. If you think about your normal week of spend you might get up in the morning, have a coffee at the train station, go out for lunch when you’re at work, get a sandwich, buy a birthday present, Friday night drinks - all of a sudden that spend won’t away, it might just move back to your local area, which is great because we have seen vacancies start to creep up in our suburban shopping strips for some time now and this could really put a whole lot of money back into them and really increase the vibrancy as well.
And while we’re talking about retail, people have also saved what time shopping this year, with online retail sales increasing as people went into lock down, supermarkets in particular saw online sales increase coming off a low base compared to other forms of retail it’s likely that many of those that made the shift online grocery will continue to use that option.
Kate, what impact do you see this trend in high levels of e-commerce having on retail logistics and things like cold storage?
I think you're spot on there, Bradley. I mean, grocery online retail has always been the most challenging part of e-commerce and I guess, suffered a little bit and hasn't seen the same exponentially growth as other parts of the retail sector over the past few years. But lockdown really drove a lot of new customers towards shopping online. An example of that is my 94-year-old grandmother, who uses her iPad for Woolworths Online in Regional Victoria. I mean, there is just a huge number of new customers that you would think would never have been attracted to online shopping, that now this is really embedded in how they live their lives and how they shop. Obviously, the impact of that is going to be how can supermarkets and food retailers do that in a cost-effective way. We saw in Melbourne in the most recent lock down Coles having to close three separate stores to act as Last Mark fulfilment centres just to be able to keep up with demand and so what that’s going to do is really drive the creation of new dark stores, for shopping centres and a lot of that cold storage space as well.
The second team in the report is titled More Local, Less Global and focuses on the fact that closed borders mean that the Australian and New Zealand economies and property markets will need to rely more on internal demand then demand from overseas. This is especially the case for residential and hotel demand. Also, an early impact of COVID-19 was the strain on supply chains, as factories in China shut down. This has caused a rethink about diversification of supply chains and indeed suggestions that more goods need to be manufactured locally, which would buck the trend of a shrinking manufacturing sector over the past few decades.
Kate, do you subscribe to the notion that there will be more manufacturing done locally?
I don’t think I do Bradley. Look, we definitely saw some really significant breakdowns in supply chain earlier on in the pandemic and businesses have been sort of starting to move away from China in part because of the increasing wage growth in that country and starting to look to diversify their supply chain over the past three or four years. What we have been working with is a just in time inventory model where you would have just the amount of inventory you need and you would be able to import more when you needed it.
What we're probably going to see now is that groups will start to hold more inventory. They'll be able to facilitate orders and make sure they stay on top of inventory. So, I think we'll probably start seeing groups really start to think about their supply chain and really start to stop any gaps that are in there but I don't think there will be a significant shift to local manufacturing any time soon.
The closure of international borders and lower levels of migration are impacting demand for hotels and residential accommodation in Australia and New Zealand. It's unlikely that this will improve until at least the second half 2021 with the international borders expected to be partly closed or fully closed until then.
Tamba, both Australia and New Zealand have benefited from higher levels of migration over recent years, particularly residential markets, but with lower migration based on the fact that international borders will effectively be closed for much of 2021 what's the impact going to be for residential demand?
It's quite bad isn't it? Demand for inner the city and CBD apartments in Australia has been weaker because these apartments have traditionally been more popular with new residents and with the border being closed, there haven't been any new residents to occupy those units, so they have been impacted with weaker demand. In New Zealand, it was a little bit different. So for us, COVID really started to have an impact at the end of March and traditionally February and March, up to early March are our strongest take up months and that's when vacancy really goes down, because we have a lot of people arriving into the country to start work or especially to study and these are traditionally the occupiers of CBD apartments. So, we had low vacancy in mid-March. It did go up with COVID, it peaked in July at 5.4% but that has come down to 4.6% and that's really been enabled by a holt to rent growth. So, rates have been reasonably flat during that time, which is allowed increasing affordability and take up for occupancy. A little bit different with the pure student accommodation, though, so in Australia, the study rental market had fewer overseas students which really impacted a vacancy rise in Sydney and Melbourne in particular, same in Auckland. We've had closed borders which has kept the international students here, but it's stopped new ones from coming into the country.
And how can developers respond to lower levels of demand due to lower migration?
Well, there's a lot of things that developers can do to respond to this, but they have already been building in resilience over the past few years just due to the changing development environment. So, in Australia and New Zealand, stock has been proven to be quite resilient because it has been catering, more to owner occupiers than investors. Investors don't have strong demand in times of economic meltdown, but people always need somewhere to live right? So, owner occupier demand is a lot more resilient than investor demand and both in Australia and New Zealand, developers have been catering to that owner occupier market, more and more with apartment living becoming more mainstream. So, with the downsize in market in particular the assets typically a larger in size and a higher quality build and there is demand for that still.
The CBD stock that hasn't pre-sold in Australia, they will find their selling conditions challenging. It's a little bit less of a concern for Auckland because we've had very limited CBD launches over the past few years and we've got only 330 unsold CBD apartment so less of a concern for us. But in Australia, if developers are wanting to clear stock, they will need to provide incentives to potential buyers and that could be price discounts, although that's not recommended because it will annoy the people who already have apartments in that building. But there's other forms that we've seen come through in the commercial sector as well, with incentives such as rent-free periods when you sign up.
In the long term, though, if pre-sale conditions remain challenging, there'll probably be a shift to Build-to-Rent. So, Build-to-Rent is purpose built rental accommodation, it does yield lower than Build-to-Sell, but it's also a lot more stable and there's demand for rental much more than there is for ownership given the high barriers to entry for ownership.
In New Zealand, we have a lot of Kiwi’s looking to come home. 500,000 have indicated that they expect to come here in the next two or three years, so this is increased demand for housing and in Auckland we've seen 15% house price growth in the last year, which is not what anyone expected given the economic environment but it just goes to show the weight of demand.
The next section of the report is titled Recessionary Shift to Thrift and this is basically looking into the impact on property markets and the fact that we are in an economic downturn. Unfortunately, the impact of recession and economic downturns is that businesses and households tighten their belts and they reduce spending. There remains an air of uncertainty regarding speed of the economic recovery in 2021 and as a result, we're expecting office tenant demand will be weak and vacancy will rise.
A question to Gergely, what strategies do you think office occupiers will employ as they look to minimise costs over the coming 12-18 months? And do you see, these as being short term strategies or longer term to permanent?
I think that some will be short term, some longer or even permanent, but I guess the big question is how much of those short term solutions will support companies longer term strategies? Obviously, subleasing some of the excess space is one of the more obvious short-term solutions and we do see quite a lot of that happening in both of Australian and New Zealand cities since the beginning of COVID. Leaving the CBD for cheaper, smaller, more suburban locations. That can also be part of the solution for some companies and in New Zealand, AMP who decided to leave the Auckland CBD made big news back early on but whether that will be their long-term solution I'm not 100% sure.
Obviously, even before COVID, we have seen that models which are supporting a smaller core, CBD head office with spokes – that hub and spoke model with spoke offices in more suburban locations, that could be an option for some businesses. We can also look at the flexible space market which has been booming before COVID and we do think that it will longer term it will be an important part of the many occupier’s model going forward. But I guess the important bit is that at this stage, I think most of the businesses are in that impact analysis stage, so they haven't really made decisions regarding their portfolios but are trying to understand what impact this change will have on that portfolio. In that regard, it's actually quite interesting to see in some of our reports that over 60% of participants indicated in one of the global reports that they are aggressively pursuing contraction and exit options but at the same time, only about 30% of the company's indicated that they are highly confident in their ability to formulate a long term strategy today. So, I guess what businesses will need to be careful of is to make sure that their short-term solutions or what they think is that a short-term solution is not going to jeopardise their longer-term portfolio strategy.
And how do you think that landlords can facilitate this evolution, this change in workplace strategies?
I think landlords will need to address that through the offerings of their buildings and the agile building is one example, and we have been talking about that a lot even pre-COVID that new modern office buildings will have different elements in addition to the traditional office space and whether that's event space or fitted short-term suites or co-working space or a concierge service that they offer to their talents, all of these can be incorporated in buildings.
Another important topic, I think, for landlords consider, is any sustainability features that they can improve their buildings with, because increasingly both in Australia and New Zealand the sustainability will be and is an important consideration. In fact, in the latest Australian occupier survey, 90% of the participants indicated that that's one of the major and most important considerations when they look at location or make locational decisions.
Kate, in Australia this year, we've seen a high levels of retail turnover in spite of the fact that we've seen the economy basically contract in the first half of the year. The reason for this is a lot of people of working from home and they've upgraded their home offices or their backyards and what that is translated to is strong retail turnover this year. However, the outlook we think that given the fact that unemployment is probably going to rise to about 8% next year that spending might be a little bit more conservative. So, our base case is that retail turnover will be growing at a much lower level in 2021. So, Kate, in preparation for I guess, this lower level of retail turnover what can retailers and landlords look to do to reduce their costs?
Yeah, that's a great question, Bradley, I think one interesting thing we've seen in retail so far this year is it really has been an acceleration of trends that we were already seeing anyway. We'd already seen that mid-range fashion, fast fashion groups under a fair bit of pressure, really starting to look at their network and try and figure out where they need to be and where they don't need to be and COVID has really just accelerated that going forward.
How can retailers reduce costs? The most obvious one, and we see it every downturn as well, you know it's really rationalising your footprint, closing underperforming stores and putting investment back into high quality stores in high quality locations to really draw in customers. And really, I guess amplify your brand to the largest group you can. Maximising selling floor space is also important. So why pay rent on space when you've got a whole bunch of that which is being used as back of house. We know that a lot of groups are looking to create these spaces. I think Sneakerboy in Melbourne is a really great example of that. They have 55 square metres of space in their CBD location and 53 square metres of that is really active selling floorspace. You go and purchase something on an iPad and it’s sent to you later that day, and that's a really great way be able to rent less space and really up your sale density from that.
Without a doubt the most expensive cost to landlords and occupiers going forward is going to be cleaning. Post pandemic cleaning is exceptionally expensive. Coles’ have already flagged they're spending $100 million a quarter on cleaning and that filters down to smaller occupiers as well and that is a need to have, not a nice to have. So, groups are really looking at ways now that they can increased level of hygiene in a more cost-effective way. Whether that includes automation, whether that’s pushback on a centre level and how you can try and find some efficiencies in there.
And in regard to the residential sector Tamba, do you see cost considerations impacting demand for tenants or owner occupiers next year?
Yes, it will it'll change preferences and behaviour for sure. We've seen a change in preferences and behaviour with the onset of COVID. Pretty quickly people took stock of their financial situation and got their affairs in order. We saw very quickly a big increase in debt paid down and there have been job losses. So, in Australia there has been a rise in unemployment. In New Zealand we haven't really had a big rise in the unemployment rate, but we have at 11,000 job losses net. When you've got job losses, that means households may need to sell their dwellings particularly if their business owner who hasn't been able to access the wage subsidy scheme and they've got now lower turnover plus staff cost plus premises cost, that puts a lot of pressure on business owners and on their ability to pay a mortgage as well.
For renters, if they lose their job, they might not be able to afford the rent, which means they might need to downsize into something more affordable or, if they're younger, maybe even move back home with mum and dad. So, the Build-to-Rent sector is well set up to accommodate sharing, and potentially it could be a move from renters or homeowners departing space that single household occupiers and then moving into a flatting type situation. Build-to-Rent often has a two bedroom dwelling at either into the unit, which enables some element of privacy and while the living and kitchen area might be reasonably compact, you've got this communal amenity, that you can escape to such as a full sized kitchen or kitchens with dining space, to host, friends, lounge, games, rooms, movie rooms, co-working space. Build-to-Rent is set up to accommodate sharers and this could help with rental affordability or for people who have had to give up home ownership for whatever reason.
It’s been mooted that the relatively high cost of dwellings in Auckland, Sydney and Melbourne in conjunction with the potential for white collar employees to increasingly work from home might see people moving further from CBDs and preferring to live on urban fringes or even commuter town. Is this a trend that you expect is going to materialise Tamba?
Yeah, so there have been some surveys done and in the Australian context, there will certainly be instances where that occurs so people might live further afield and commute to the CBD two or three days a week rather than five, because if they live really far away, five days is quite intolerable but maybe two or three is manageable. This will support increased demand for residential property on the urban fringes. But we don't think that there'll be a a mass exodus of residents from the inner and middle city locations because these areas are highly desirable for their proximity to amenity and opportunities, not just work. So, cities with residential locations close to the city, they stay expensive even in situations like this, and it really comes down to personal choice. Are you willing to trade off time with dwelling costs?
Certain jobs do require face to face contact and certain people desire face to face contact at work so they will choose to be closer to work, even if it is more expensive. In the Auckland context think about Ponsonby. It's always going to be expensive to live in Ponsonby. If you're waiting for people who live in Ponsonby to leave so you can buy a house for cheaper, it's not going to happen. Those people are not going to have an exodus to the outskirts of the city because they live in, possibly for reasons other than proximity to work. It's got bars, it's got nightlife, it's got opportunities, it’s got shops. It's got everything you like parks and things like that. So residential location choice is more than just proximity to employment, its values and preferences and that's what drives behaviour.
The fourth theme in our report is A Healthier Future. Social distancing is a term we've all become familiar with thanks to the pandemic. In Australia, we're still seeing social distancing measures on public transport, in workplaces, restaurants in pubs and shops. Perspex barriers have become ubiquitous. A question for you Kate, what are some of the social distancing measures that we've implemented in retail over the past 6-9 months?
I think I probably have a little bit of a different perspective to everybody on this podcast because I'm based in Melbourne, which has obviously had a pretty significant second spike and so the kind of idea of how long will some of these measures be in place, I think to Melbournians this is something that is really here to stay and I’ve talked to colleagues in different parts of Australia, who are a bit more relaxed when it comes to things like social distancing. So again, I think it's probably gonna depend on on where you are but we've seen dots on the floor about where you can stand, the number of people allowed in stores and of course Perspex everywhere really, it has become a boom for Perspex producers at the moment. So, whether that is at point of sale, whether that's within restaurants and cafes and gyms, we've seen a lot of those measures in place, and a lot of that, particularly in retail, might slow the spread of COVID but it's not going to eliminate the spread of COVID. But what it can do is it will give consumers the confidence that they can go back out and live their life like they did before, and that's going to be really crucial to get back to this sort of idea of COVID normal.
Kate some of those measures that we've seen in the retail environment, those social distancing measures, do you think that these are going to be permanent and once we've got past the COVID pandemic, which hopefully is sooner rather than later that these measures are going to stay in place do you think they’ll be quickly removed as fast as they went up?
Look, I think a lot of probably that physical infrastructure that's been installed to again point of sale screens and that kind of thing will probably remain in place. But it's going to be interesting to see how customer behaviour shifts and whether people will still adhere to remaining a metre and a half apart while you wait in lines and that kind of thing. So, I think most likely we'll see the actual physical infrastructure remain in the medium term. But yes, human behaviour can change very quickly I think, and we might start to see some people move around pre-pandemic.
Thanks everyone, for your great insight discussion today and thank you for listening to Talking Property with CBRE.
To learn more about how changing human behaviours and accelerated trends are impacting real estate look out for the release of our research report Building Immunity Through Real Estate Post 2020. If you enjoyed the show and want to check out more, visit cbre.com.au/talking-property or subscribe through Spotify and Apple podcasts.
Until next time.