JM
Hello and welcome to Talking Property with CBRE, a podcast in which our team of experts are clients and industry specialists share insights into the way we live, work and invest through the lens of commercial real estate. My name is Janet Martin, I’m the Regional Director for Workplace Strategy and Change Management across Australia and New Zealand. I'm your host for today's episode.
Over the last two years, the world has changed significantly. The way we live interact with one another and work has flipped on its head. We've seen a huge shift to flexible working or hybrid working, and what we knew to be a traditional office or workplace has been put into question, people's priorities have changed.
In today's episode, we're talking expectation versus reality. What did we anticipate would happen to the workplace as our cities reopened and what is actually happening in workplaces today, in real time. To help me discuss this, I'm joined by Sameer Chopra, CBRE’s Head of Research in Pacific and Head of ESG research across Asia Pacific. Thanks for joining me today, Sameer.
SC
G’day, how are you Janet?
JM
Good! Great to have you here. So, Sameer, I'm going to jump straight in my first question to you. I keep hearing the term ‘flight to quality’. So for our listeners, can you start by telling us what this flight to quality actually is and why do we keep hearing it? Why is it such a hot topic?
SC
Society and people aspire to buy and have better things, and flight to quality is exactly the same but in the commercial real estate context. So you know, tenants who upgrade their premises are basically called flight to quality, could be moving to a more desirable location, for example, you know, with water views or an upgraded office building with good amenities. So, these types of moves in commercial real estate, we just call them flight to quality.
JM
So in recent years, the purpose of the office then has come into question. Is there still a need for it? Do businesses need as much space as they had and practises such as flexible and hybrid working? How are they coming into play? So, in short, my question is, as we settle into this new world or this new way or working, is the need for the workplace coming in to question?
SC
Look, the debate has constantly evolved in the past 12 months. I suggest just keeping your options open, sort of be nimble and flexible. But, you know, if you look at the data on the ground. Firstly, we're seeing an increase in tenants upgrading their premises and paying significantly more to do so. So on average, if I look at our own leasing book, tenants are paying 10% more in their new premises than their previous premises and this is where we're seeing this flight to quality come to life. You know, tenants are moving into buildings that are far more expensive than are better buildings, and they're willing to pay more for it. There's not too many tenants out there that I can see who are downgrading their office space. So there's more demand than before for this upgraded premises, which is a really good story for our landlords.
JM
Thanks for that. So I guess the question leading on from that, then, is our people sacrificing the amount of space to have higher quality space. Have people reduced their space requirements for new workplaces?
SC
Yeah, look, if you think about you know, tenants who are releasing or have renewal's or relocating their footprint. What we find is that the footprint is actually increasing, we're seeing this especially so for tenants that take up less than 5000 square metres in space. On average, their footprint has increased by 7% so there's a lot of conversation about reducing the size of the office but the data is suggesting that the behaviour is different. And like I said, many businesses are spending more money and taking up more space.
JM
Interesting. So with these trends, then shifted premium assets and an increase in footprint. So what's happening across the board, or is this about specific industry types?
SC
Look, there's a couple of industry segments that are particularly interesting. The tenants on the move, you know, we see them amongst engineering companies, client services companies, private wealth, advisory, investment banks, etc. So if you think about engineering and design firms, you know these guys used to be located on the periphery of the CBD but now they're moving into the centre, also benefiting from very robust conditions at their clients. We've also seen a real growth in wealth advisory industry in recent years, and so these people are also moving in and upgrading their premises and then just speaking to a few legal firms recently, many of them want to also get much closer to their customers, like investment banks. So they're moving into the financial district, and it's the same theme across tech as well. But, you know, if I was to pick a couple of industries, I'd say this theme is dominant in engineering firms, design firms, wealth advisory firms and select pockets of professional services.
JM
That's interesting. So what does this mean then, for older stock? We've talked about this flight to quality or people potentially wanting new stock but does this then mean for older stock that there's pressure on landlords to upgrade their assets and companies and organisations investing in new fit outs if they're not moving?
SC
Janet, look, I see this kind of similar to, you know, people who upgrade to premium economy and from premium economy, the business class and then from business class to first class. It's kind of similar in that the landlords are responding to this shift. Those who are not are probably going to see vacancy rise for them. There is a bit of banks from landlords you know, with how much power you know some of their clients and employees have right now and how occupiers are responding to these employees. But broadly speaking, about ¾ of inquiries right now come with things like, you know, pre fit out, requested as part of it. So we're definitely seeing this theme pick up and what that encourages. You know, start making the steps towards this because you do not want vacant offices.
JM
Correct. Couldn't agree with you more and it's an expectation that I've heard and seen has been a strong demand for it and tech fit outs and potentially newer forms of it, and doing away with maybe traditional spaces like a large boardroom that's very locked in in terms of its use. Is this the reality in terms of the broader trends that you're seeing, is this playing out in real life?
SC
The situation is moving and evolving very, very quickly, you know, six months ago, no one saw the need for boardrooms. There was this huge demand for increasing the number of Zoom rooms. No one thought we do large group meetings, conferences, one deemed like something that would occur but what we've seen in the last couple of months is that things have flipped on their head, particularly the last three months or so. You know, I was speaking to a client recently who brought this up, and I said, “look, we're all sitting in one big large boardroom. There's about 14 of us in this boardroom and we're discussing whether we need boardrooms or don't need boardrooms”. I think people are increasingly wanting to have an in person connection. We have more meetings that are in person than Zoom right now. Personally, I've attended three large conferences recently in person conferences, so I'd say Zoom works, But it doesn't cut it for everyone all the time, and people are craving this personal connection. Virtual is doable, but there's nothing like in person and you know quite often it's a great way to build relationships with clients. So I'm not dismissing either one. All I'm saying is, you know I come back to this be really nimble because the situation is evolving really quickly. Six months ago, I would have said we needed more zoom rooms. Today I'd say I can't get enough boardrooms out there every time you try and book one. It's really, really challenging to actually find a boardroom that's still available.
JM
It's interesting. So it sounds to me like your observations are that deciding is a particular trend or a way things that are going to play out is, in a sense, cutting yourself off from new developments. There's a real need to be able to respond to how people are evolving in their behaviours. So certainly my experience working with clients has been that at first there was a lot of talk about quite expensive and quite locked in ways of create hybrid rooms, if you like, with forms of technology where some people could be in the office and some at home or otherwise. That kind of discussion now has abated somewhat, such that now people are keen to look at how to have lots of face to face connections and a greater variety of types of interactions to what they did pre covid, but also to allow people to work virtually in the office. So there's also a need to have almost another layer of spaces for people to be able to connect with those outside of the office when some people, clients and others are not in the office, so there's a whole range of layers now to how people work. To me, it sounds like there's a driving force behind this flight to quality. So let's talk a little more about employee expectations and the comment I've heard is there's a lot of power now with employees. How have they shifted in the last two years Sameer.
SC
Yeah, look so back to being nimble, even employees have different expectations that keep evolving and your safest bet right now is what is going to keep your staff happy whilst also allowing you to make money. So do business, meet clients, do those sorts of things and increase productivity. Right now, the jobs market is very hot, very, very hot. If you look at the jobs data on Seek earlier this month, you know there was 220,000 jobs on Seek. Pre-pandemic a good number was about 130,000. On the market, 150,000 is fine. 220,000 job ads shows that the jobs market is absolutely sizzling, so the demand equation has definitely shifted and you know what an employee wants from a role has changed as well and there's a whole range of sort of conditions out there that employees consider as part of the package. You know what sort of workplace is it, what sort of hybrid conditions are out there? The terms of employment have increasingly shifted into the hands of the employees, so you need to be aware of this, and that's what I mean - stay nimble, stay nimble in how you set up your workplace.
JM
I agree. I've spoken to some recruiters who have talked about how it's not just money, but now people are asking specifically about hybrid working and indeed the experience they're going to have in the workplace. So these are, in a sense, part of the package that they're looking for and they're really specifically asking those questions.
My experience again working with my clients has been that their staff want to be able to get their work done at work and have ease of work and fewer friction points. So in terms of flight to quality, it's not necessarily about brass or marble, it's as much about high quality working environments that allow for a sense of self control, the ability to use it again, really nimbly and really easily and the ability to have a range of spaces and places within a floor plate and potentially beyond on the ground floor or third spaces that help a staff member and indeed their team work really well together. So I think the reassurance I would give landlords this is not necessarily about shiny things, but it is about ensuring that workplaces, buildings and workplaces offer high quality working environments where people can easily get their work done. Because during lockdowns, people had ease of working at home, and so their expectations are higher. Sameer, did you have any further comments you wanted to add to the above? It's been fascinating hearing you talk about this.
SC
No, you know, I just say that the puck moves every sort of three months on where this thing is going to sit. I like the concept of, you know, making workplaces fit for purpose. Make it easy for employees to work, regardless of whether they're in the office or at home. My probably biggest observation has been two things. This whole concept of flight to quality should not be underappreciated. It's a human need and the other one is in person connections matter quite a lot. There is this real desire to do in person meetings.
JM
and Sameer, I want you at my next dinner party in person. Thank you for that. Thanks for listening to our podcast today. Talking Property with CBRE. If you like this show and you'd like to check out more, please visit cbre.com.au/talking-property or subscribe through Spotify and apple podcasts. You can also read our full brief on “Office Relocations Favouring Premium Rents” by clicking on the link in the show notes until next time we look forward to connecting with you again.
