The world of office space provides plenty of challenges, but also opportunities if you know where to look, argues Pendal’s JULIA FORREST

• WFH and rising interest rates challenge office property
• Some winners to emerge from the sector
• Find out about Pendal Property Securities Fund

OFFICE space is on the mind of many businesses as work-from-home tension between workers and bosses plays out.

Commercial property, and specifically office property in Australia, has had a challenging time since the pandemic.

The Covid-driven work-from-home phenomenon, along with rising interest rates, have created a very different environment for the sector.

“It’s been very hard to get people back into the office,” says Julia Forrest, who co-manages Pendal’s property securities funds.

“It seems to be more difficult in Melbourne than anywhere else.”

“The physical occupancy in Melbourne is running at about 47 per cent, though recently there have been some big employers mandating staff to be back in the office 50 per cent of the time,” she says.

“That will help.

“Physical occupancy is still pretty low in government because staff have only been mandated to come back into the office one in every five days. That has an impact on retail services and amenities.”

The doubt over the number of days people are spending in the office has made it difficult for government and the private sector to re-sign leases.

It isn’t clear what the demand for space will be in 12 months or two years, let alone five years.

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“Up until recently, we have just seen tenants sign short term leases because they’re not confident about what their occupancy needs will be.

“Landlords have been willingly accepting two-year leases, which they haven’t done in the past, and in some cases one-year leases,” Forrest says.

These short-term leases affect long term returns, but also the amount of finance a landlord can get against a property asset. It’s also triggered creativity between landlords and tenants.

“We’ve seen large tenants commit to new buildings and large amounts of space, and they’ve negotiated contraction rights – the ability to hand back floors,” Forrest says.

“That’s not new in itself. What is different is that they have the ability to reduce the amount of space, even before they occupy the building. Until now, there’s never been contraction rights before commencement.”

Opportunities remain

Forrest says there are still opportunities to find good returns in commercial property, citing 555 Collins Street in Melbourne which has just been developed.

It has a good range on tenants, including Amazon, will open close to fully tenanted, and the construction contract was well negotiated, she says.

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“Obviously it’s a tenants market, but office landlords are being a bit more creative. I don’t think things are getting worse, but I do think things will stay tough for quite a while,” Forrest says.

Proeprty investors shold also keep an eye on the unemployment rate.

“Normally you see elevated vacancy rates when unemployment is high,” Forrest says.

“The problem is you have vacancy rates high when unemployment is at 50-year lows, so there’s not a whole lot of employment growth coming through that’s going to fill the space.”

About Julia Forrest, Pete Davidson and Pendal Property Securities Fund

Julia Forrest has managed Pendal’s property trust portfolios for more than a decade. She has 25 years of experience spanning equities research and advisory, initial public offerings and capital raisings.

Pete Davidson is Pendal’s Head of Listed Property. Over the past 34 years Pete has held financial markets roles spanning portfolio management, advisory and treasury markets. he specialises in the property, retail, insurance and infrastructure sectors.

Pendal Property Securities Fund invests mainly in Australian listed property securities including listed property trusts, developers and infrastructure investments.

Pendal is a global investment management business focused on delivering superior investment returns for our clients through active management.

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