Bankers are already bracing for an oversupply of commercial office space in Sydney and Melbourne. But they fear the situation will worsen if corporates rethink their need for a big CBD office.

(These concerns eased after Safe Work Australia guidelines were updated on Wednesday.)
But more profoundly, the bankers worry that as the business community rethinks how it organises its workforce post-pandemic, there are likely to be fewer new offices in the centre of big cities, and a greater willingness on the part of corporate bosses to allow workers to work from home, at least for a few days a week.
The bigger problem is that unless an effective vaccine is developed … high-rise offices are not a very good proposition.
A leading banker
Such decisions would allow big corporations to reduce how much they spend on real estate, which is an attractive proposition in the straitened economic environment.
All the more since so many corporate bosses – in industries such as finance, technology, law and accounting – have discovered that allowing employees to work from home has done little to dent productivity, and in some cases has even improved worker output because of the reduced commuting times.
Still, that doesn’t mean that we’re likely to see virtual corporate head offices emerge any time soon. Most corporate chiefs still believe in the benefits of being able to assemble their employees together under one roof, at least for part of the week.
CBD’s clouded future
But many are now questioning whether this needs to be done in expensive CBD offices, or whether lower-rise offices in less ritzy locations would suffice.
And this, in turn, has major implications for the valuations of CBD office towers.
“The one area where I’m worried that the risks are being significantly under-estimated is office property,” says one leading banker.
“I don’t think it’s so much a problem in the short term, although there are some tenants who are no longer paying rent. The bigger problem is that unless an effective vaccine for coronavirus is developed, in the longer term, high-rise offices are not a very good proposition.”
The banker adds that the central problem isn’t the office per se. Once employees are in the office, it’s possible to use social distancing and scrupulous cleaning to limit the spread of the virus.
“The big problem is getting to the office, and getting out of the office – it’s the public transport and the elevators,” he said.
“I think that if the virus persists, the whole concept of the CBD will be under a big cloud. You could really see a major shift in corporate behaviour.”
Major corporates are unlikely to decide that they can do away with an office altogether, because there are big advantages in being able to bring employees together.
“People need to have somewhere where they can come together fairly frequently, if not every day,” he says. “You don’t really find out what’s going on through Zoom conference calls.”
But he adds, the coronavirus pandemic could easily encourage a shift to lower-rise office parks, where there is less dependence on elevators because people can take the stairs.
These office parks would also allow for reduced dependence on public transport, because more people could drive to work as more parking would be available.
“I think there’s potentially more risk there than is appreciated, because such a shift would be catastrophic for office values,” the banker said.
It’s a major worry for the country’s big four banks, which have some $63 billion of loans secured by commercial office space.
According to the Commonwealth Bank’s third-quarter trading update, offices make up 23 per cent of its total $72.9 billion exposure to commercial property – or around $16.8 billion.
In its half-yearly results, National Australia Bank said its total commercial property exposure amounted to $60.8 billion, of which offices accounted for 28 per cent (or $17 billion).
Similarly, commercial offices account for around 28 per cent of Westpac’s $67.6 billion commercial property book, or some $18.9 billion.
And around 22 per cent of ANZ’s $46.5 billion commercial property book is to commercial offices, or around $10.2 billion.
RBA warns of rising vacancies
Bankers aren’t the only people keeping a close watch on the commercial office space market. The minutes from the Reserve Bank of Australia’s latest board meeting show the central bank is also alert to the risks.
“A large amount of new office space was expected to be completed in Sydney and Melbourne in 2020,” the minutes from the May board meeting said.
“Members noted that demand was not expected to keep pace with stronger supply in the near term and therefore it was likely that vacancy rates would rise and office rents would fall.”
The minutes added that “rising vacancies and reduced rent would be likely to lead to lower valuations, which would pose challenges for leveraged property investors and developers”.
Bankers pointed out that the souring outlook for commercial office market had come at a time when the City of Sydney had decided to relax building height restrictions in parts of the CBD.
The changes will remove the 235-metre cap on building height limits and allow for towers at Barangaroo, Central Station, Circular Quay and Town Hall to be as high as 330 metres.
“This could be just the wrong time,” one banker warned.
Still, other bankers are less pessimistic. They believe the market will adapt to this oversupply of office space, with some being repurposed for residential use.
And others said corporates would find that it was important to have large offices in the centre of the city if they wanted to attract talented employees in areas such as technology, finance, law and accounting,
“If we moved our head office to Parramatta, I think there’d be a lot of very unhappy employees,” quipped one banker.