SB:
Hello and welcome to Talking Property with CBRE podcast in which our team of experts, our clients, and industry specialists share insights in the way we live, work, and invest through the lens of commercial real estate. My name is Sass Baleh, Head of Industrial Logistics Research in Australia and Director of New South Wales Research. I'm your host for today's exciting episode, which we delve deep into the future of Sydney as we predict the city will accommodate an additional half a million people between now and 2030. This forecast population growth makes Sydney one of the strongest growing cities of the developed world. So we will delve into what this means for retail spending demand for office space, and how will industrial spaces evolve to cater for this growth with predictions that their global economic headwinds in the coming six to 12 months. We're also asking our in-house experts for their take on what occupier sentiment will look like in the coming year to help guide investors. Our experts include Tim Starling, Head of Retail Tenant Advisory, Pacific Mike O'Neill, Senior Director Industrial Logistics, and Jenny Liu, Head of Change Management Pacific. Thank you for joining me today. Before we get started it might be worth giving a brief description of what you do. How about we start with you Tim?
TS:
So I look after the retail talent advisory business across Australia and New Zealand. We act for a number of luxury retail brands. We've got some sports goods brands and we've got a number of entertainment occupiers as well, and basically we are their outsource property arm.
SB:
Great. And Jenny...
JL:
Thanks Sass. So Jenny Liu, Head of Change Management at CBRE. I lead our workplace change consultants in the Pacific. We have a really diverse team of experts with backgrounds in architecture, organisational behaviour and psychology. We also tap into a broader network of 750 workplace consultants globally within CBRE and our purpose is really to help our clients leverage their workplace to optimise employee and business performance.
SB:
Fantastic, and Mike...
MON:
New South Wales Director for Industrial Logistics and I'm fortunate to run a team of operators across the four offices in Sydney, covering South Sydney, North Sydney and Western Sydney.
SB:
Fantastic, thank you all. So I have the first question, so we'll get straight into it. Now the long term macro fundamentals for New South Wales look strong. However, given the global headwinds expected over the next six to 12 months, what is the current sentiment for occupiers? Now this is a question for all sectors, but let's start with Tim on retail.
TS:
Yeah, thanks Sass. So I think we're all very aware that the retail sector, particularly the bricks and mortar side of things has had a particularly tough run of late. You know, we went straight from bushfires into a pandemic and now, you know, just as we're coming out of the back of that and we're starting to see some great normalisation and you know, spend getting back to, and in some instances ahead of where we were in 2019, sort of last affected year, we're now faced of course with these headwinds that you talk about. So it's a pretty frustrating time for retailers, you know, having just got back on their feet. We're now looking at the next 12 months saying spending is certainly going to tighten. People's wallets either through energy cost, fuel costs, or mortgage rates will certainly have an impact. So I think going into these next 12 months, um, people are particularly wary of what that means and I think it means people are just going to pull back in terms of that expansion that they were looking at previously. So I don't think we're seeing the full force of it yet. So it's not doom and gloom, but certainly people are very wary about what's coming our way.
SB:
I think, um, that might be similar as well translating into the online retail spend. So Mike, what are your thoughts with respect to the industrial logistics space?
MON:
Sass, I think the occupiers are probably facing different challenges. Certainly from a property perspective. There's a lot of evidence to suggest that industrial occupier revenue has been accelerating for some time. On a positive note, however, with 0.1% vacancy occupiers have been faced with over 20% rental increases and that real shortage in the market has meant that a lot of users are really faced with a lot of compromise. So that may mean staying in premises that don't work ideally, or relocating and compromising on location, size, configuration or timing. Whilst those rents we estimate are only 10 to 15% of occupancy costs. Some of those costs that Tim touched on - fuel, energy, shipping costs, outgoings, and then, you know, shortage of labour, particularly casual labor, has all put a lot of pressure on occupiers. Another pressure on supply is the fact that construction costs have gone up by over 20% in 2022 alone. That's meant that a lot of developers considering multi-level plans have slowed down, particularly when we are finding rents including for secondary assets have gone up. And we're finding that some developers are putting those plans on hold and pushing the rents for their existing sites.
SB:
And in that shortage of labour, Jenny, what are you seeing in the office space?
JL:
So what we're seeing is there's definitely more competition. Workplaces are really having to compete to provide this amazing experience to draw people back in. We're seeing a high demand for premium office space with a flight to quality and tenants really looking to trade up on quality and location. Given that such a focus in retaining and attracting the best talent. With hybrid working, you know, occupiers we're finding are still figuring it all out, but contrary to what we originally thought, we're not downsizing. In fact most of our clients are growing and wanting to absorb this in our current footprint or expand their existing footprint. We're also seeing an increase use in flexible space, co-working space, you know, serviced office amenities to supplement existing premises, as we navigate through what the new normal is. What we are seeing is people are returning to the workplace, which is great and occupancy is at 53%. Many organisations in fact feel that this might be the new normal.
SB:
And that 53% occupancy, is that Sydney focused or is that nationally?
JL:
That's nationally.
SB:
Okay and I assume it'd probably be a bit higher in Sydney.
JL:
I'd say Sydney and Melbourne. Yeah, definitely.
TS:
I think it's quite poignant to point out that footfall is down. You know, we're at 50% in Sydney CBD, but retail spend is back in line pre, so we've got 50% less people, but the spends the same. So it means the conversion rates up all the restaurants and bars are packed. So whilst we're adjusting to the norm in terms of footfall, when people are in the CBDs, they want to spend, they want to shop, they want to dine out.
JL:
You think about how hard it is to get a reservation in the city <laugh>. Well,
TS:
I know it's great.
JL:
It's fantastic.
TS:
It's not, but it is.
JL:
And aren't we back to pre pandemic levels in terms of attendance at concerts and sporting events?
TS:
Yeah. So clearly people are, you know, when they're gonna make the trip into town they're spending, which is what we need.
SB:
Yeah. So looking at more the next five to 10 years. So in our Future Sydney report, we noted, as I mentioned before, population will be a real key driver of demand with respect to retail spend as well as industrial space requirements. So question to Tim first is how do we see this evolving in the next five to 10 years? Are occupier space needs changing?
TS:
Yeah, it's an interesting one. I think if you look at a number of the sectors, particularly leisure, there's a significant shortage in labour in that particular sector and I think migration, when we talk about migration, I think we need to talk about tourism as well because a lot of that tourist population was working in that leisure sector. So I think population growth is fantastic for us. From an occupier standpoint, I think it's gonna make things slightly more competitive because the planning laws on retail, certainly in Sydney dictate that space is incredibly tight. So if there's more population and there's more spend, there's gonna be more competition from occupiers to acquire bigger, better stores in better located grade A locations and I think that's gonna drive competition. So, you know, we're in this really nice period for occupiers at the minute where deals are probably once in a generation because of the pandemic's factors on what it's meant for for commercial retail rent but if we see a pretty steady population growth and spend starts to return back to pre pandemic levels, it's only gonna create more competition in the market. So, um, it's great for a number of sectors, but for occupiers as a whole, I do think it will start to drive competition back and create more of a landlord market again.
SB:
Yeah. And do you think we'll see other users occupy the retail space such as, you know, last mile logistics?
TS:
Yeah, I think, um, there's a lot of discussion around these department stores, both discount and others being Myer and David Jones and what the future of those businesses are. Now what we're seeing is a significant downgrading of space in that sector and we're seeing a lot of leisure occupiers come in, but now with everyone having got used to pandemic spending online and the speed of delivery, the importance is now absolute forefront for people to get their product as quickly as possible. So a lot of retailers are now testing those last mile deliveries in shopping centres in some of those dead spaces. So I think faster and quicker product to clients is certainly where we're going as an industry and I think that we're only at the infancy of what that looks like space wise and I think it's got a long way to go.
SB:
Yeah, totally agree with you on that one. So we're speaking on delivery times and shorter delivery times. Mike, what do you see happening or evolving in the industrial logistics space over the next five to 10 years?
MON:
Well, there's certainly, until at least mid 2024, we're expecting a real shortage in supply. We've seen occupiers move to that well publicised just in case model versus just in time. I think will be interesting to see what transpires as shipping costs begin to come off and consumer spend with increasing mortgage rates, whether in fact, some of the occupiers don't move back towards just in time, particularly these inflated rents. But that will be interesting to watch and I think your estimation Sass, I I believe it's around a need for an extra four square meters for every new Australian...
SB:
Yep. Four and a half square meters, Mike.
MON:
Yeah. So that, that would mean that we're needing to accommodate an extra million square meters of space. And so it equally, we are seeing some of the larger groups move towards automation, but that's, that's probably reserved for the largest groups in the market. So in summary, I suspect we certainly need to increase the amount of supply over the next two to three years, but it'll be an interesting one to watch in 2024, 25, what the demand is like.
SB:
Yeah. And with respect to automation, um, you touched on it there, do you think, you know, by 2030 say we'll see a lot more fully automated warehouses or do you think there's still gonna be more of a hybrid?
MON:
Well, recent examples that we've worked with for the largest groups, it is a hybrid solution where it is a combination of both. And so I suspect that will remain the case for, at least for the medium term unless, of course it's among the biggest occupiers.
SB:
Yeah. And those, um, occupiers that have opted for more of a hybrid solution, do they have specific requirements with respect to their height clearance and um, some specifications of the building?
MON:
Yes, it would certainly, most of those groups are obviously finding it very hard to move into existing buildings, slab loadings especially important. There's certainly a push for more solar from a lot of those groups and even, talking about the needs for power for electric vehicles. And when we look towards the US we are seeing groups in Australia who are sort of looking towards that more of a cross dock type facility with the need to accommodate a lot of vehicles at any one time.
SB:
Yep and moving on more to the office space now, given our forecast is showing that white collar employment will continue an upward trend over the next decade, we expect the demand for office floor space to remain at relatively healthy levels. So are current office space requirements changing and how will this impact office developments in the medium to long term Jenny?
JL:
White collar employment has grown faster than the occupied stock in Sydney. Hybrid working means that we need less office space per employee than previously required. Despite this CBRE expect the total office footprint of corporates in the major Sydney markets to grow by half a million square meters over that period. What we do know, as I mentioned before, is the quality of the workplace has an important role to play in attracting and retaining top talent. You know, companies are moving to higher quality buildings with superior amenities and are willing to pay higher rent to provide a better workplace environment for their people. We know that there's a shift to focus on the holistic workplace experience and its alignment with the organisational brand and creating culture within organisations. Companies are shifting away from, you know, allocated and assigned seating to really redefining what work points should be and what they are and, and providing a menu of options for their people to choose from.
Another thing we know is hybrid working is here to stay and there's no one size fits all to that approach. Hybrid working requires a different balance of spaces and different workspace models to suit different organisations and work styles. Hybrid work policies are now enabling organisations to differentiate themselves from their competitors as well. But what we do know is that hybrid working means we need different types of spaces. We know that the purpose of the office has changed, right? People come into the office to collaborate, to socialise, to share knowledge that can't be replicated, um, face to face connection, although we know technology is a really good connector, can never be replaced, but the office is not just for, and I think this is where people get it wrong. It's not just for the social collaborations and interactions. We also do need to provide spaces for different types of work, like the quiet focused work. And for hybrid meetings, we need small spaces to be able to conduct those effectively. And we know also what we're seeing is that more and more post pandemic is that ESG credentialed buildings and well workplaces are being prioritised in terms of what clients are looking for and their people.
SB:
Yep. And do you have any examples from offshore occupiers that we think will occur in Sydney?
JL:
Yeah, so I mean, uh, you know, there's examples offshore and there are examples within Australia as well. So examples from offshore, you know, we see what Lego is doing with their headquarters in Denmark. You know, they're creating these self-contained villages with everything you need at your fingertips. Auditoriums, workshops, cafes, even accommodation for visiting employees. Similarly in the Google campus in California, you know, they've got 240 rooms for employees. They've got huge event spaces, really flexible areas for teams to work. It's quite modular, it's very agile. You know, there's a plethora of open and closed settings to choose from to really allow people to transition from collaborative to focus states of work seamlessly. We've got organisations providing childcare, doctors on site, rooftop gardens. There's a huge focus on hospitality. LinkedIn has a space set aside for networking. It includes a silent disco where people can dance with, with headphones on. You know, people are thinking about different ways to experiment and provide great experiences to magnetise people back into the workplace.
SB:
Great. And talk through, um, Sydney's emerging tech sector.
JL:
So as we know, Australian companies, particularly in the finance and tech sectors, have been creating really interesting work environments to attract and retain employees. If we think about, you know, the different workplace projects that have been undertaken in the last five years, you know, we've got CBA and their development at South Everleigh. We've got Macquarie Bank, AMP, Atlassian at Tech Central. I mean, that's gonna be an amazing development and really focusing on sustainability. Atlassian's office at Tech Central will be powered by a hundred percent renewable energy from day one of operation. They'll also have 50% less embodied carbon and construction compared to a conventionally constructed similar building and 50% less energy consumption compared to a conventional building. And just really emphasizing that this project will be a new benchmark for sustainability workplace design, and ultimately deliver the best space to engender collaboration, innovation, and excellence. We're also talking about, I mean, this links into some of the other things we're discussing around a 24 hour economy and precincts that really generate a lot of excitement and energy in cities.
SB:
Fantastic. Well, look, I think, um, our experts here have covered off a lot of key points with respect to retail, industrial logistics and the office space. And I think it's fair to say that the future of Sydney is looking quite attractive for investors and occupiers as well with a lot of growth potential in all three sectors over the next decade. So thank you so much for joining me. It's been a great discussion. And thanks for listening to Talking Property with CBRE.
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"Future Sydney Investment Destination". Simply click on the link in our show notes. Join me next time where we'll be discussing the impact migration is having on investors across retail, industrial logistics, and office sectors.
Until next time.
