This office tower at 44 Market Street, Sydney was sold at a 17% discount. If value can fall this quickly in prime city locations what does that mean for the value of sub-urban office space?
The COVID 19 pandemic has changed the way we work with remote working remaining popular. As office workers stay away from their desks the challenges of underutilised office buildings are becoming more and more present. A-grade office building values in the Sydney CBD have fallen nearly 20%. What will happen to the B-grade and C-grade buildings in less attractive suburban locations that are likely to fall in value by more?
Here are a few ways I’ve identified we can repurpose some of these older office buildings to future-proof them for a post-COVID world.
Repurposing office spaces, the London example
Owners of empty office spaces have been considering a range of diverse, alternate uses. Buildings that are close to public transport hubs and academic facilities have been transformed into research and laboratory spaces. Developers are also considering other uses, such as residential options, build to rent properties, student living and co living spaces.
While it’s important for the owners of these empty office buildings to find a use for them, it’s also an important consideration for our government that relies on a variety of property taxes from these older office buildings. Falling occupancy rates will inevitably result in lower rates and land taxes which means less money for roads, rubbish collection and public transport.
Many of these outer city office buildings risk becoming ‘stranded assets’, too expensive to refurbish and not viable to redevelop. As well, poorly maintained, vacant buildings have historically been associated with ‘unattractive’ neighbourhoods and crime. Being flexible on alternate use options is a potential solution to some of these problems.
Impact of remote working and the ‘donut effect’
The consensus is that remote working is here to stay. Researchers are indicating that 20 to 25% of the workforce will be working remotely in the longer term, a statistic that has big implications on the viability of office buildings.
This has led to a phenomenon some people are calling the ‘donut effect’, where town centres are hurt by office workers staying away. Businesses that rely on foot traffic to bring in business, gyms, cafes and dry cleaners are reporting a drop in profit as less and less people are working in an office environment. The easiest way that the ‘donut effect’ could be unwound is if people are forced back to work 5 days per week, which looks unlikely.
The question becomes, how do we fill the hole in the donut?
Filling in the hole
Overseas, developers are actively repurposing office spaces into hotels, science laboratories and residential buildings to adapt to changing needs. Leveraging proximity to ‘catalyst’ industries like education and health may work for some buildings, others, without those magnet attractors will remain problematic.
Policy makers are also reimagining cities and town centres focussing on the quality of life and promoting amenities by reducing cars and promoting pedestrian friendly areas. This will rely on revenue from rates and taxes that in turn relies on a vibrant and functioning city and town centre.
Repurposing underutilized office buildings offers hope in averting the ‘town centre death spiral’ caused by remote working. By embracing some changes cities can adapt and transform into vibrant mixed-use environments. However, ensuring productivity, urban amenity and housing affordability are key considerations for the future of cities.
If you’re interested in learning more about how you can unlock value in underutilised office spaces contact LandIT property consultancy.
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