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Shadow spaces add to office sector inventory

As office occupiers reassess their current and future space needs amid changing expectations about what workplace environments should look like, there’s been some notable corresponding changes in office property market fundamentals around New Zealand.

Bayleys’ director Auckland Commercial and Industrial Lloyd Budd, said New Zealand has been market-leading in adopting new ways of working and in recognising the importance of the workplace for attracting and retaining talent, and facilitating innovation for business growth for some time now.

“Pre-COVID, the office market was already undergoing change however, the last six months has accelerated some of those changes and helped people understand how important the workplace is.

“Tenants are thinking deeply about the purpose of the physical work environment, how their staff work, where they should be based and whether they need multiple locations to enable new styles of working.”

Changing work models – enabled by improvements in technology and reflecting global best practice – mean many businesses no longer require large tracts of office space consolidated in one central location.

Some are adopting a core + flex model with a more-condensed centralised hub supplemented with satellite space elsewhere, while others look to sub-lease excess space to avoid exiting an existing lease.

Globally, this has given rise to the concept of “shadow space” – space no longer required by a tenant and coming onto the market as sub-lease space.

Budd said Bayleys’ global real estate partner Knight Frank, addresses this new trend in a recent report Supply and Shadows where it found that in the Asia-Pacific region, shadow spaces add a layer of opacity to market dynamics.

“In line with what we’re experiencing in the Auckland office market, Knight Frank said with a pipeline of new stock coming on-stream, sub-leasing space will serve to amplify existing vacancy rates in the market and add some pressure on rents.

“In Auckland Central alone, there is an estimated 50,000sqm of shadow space available in the market – mainly from the travel, insurance and professional services sectors – and accounting for around 3.6 percent of existing stock.

“Added to the existing vacancy within the market, it is estimated that the Auckland office market is likely to reach a vacancy rate of more than 10 percent by the end of 2020.

Budd said this scenario is also playing out in Singapore, Hong Kong and Sydney.

“There are a number of factors in the mix here – the main ones being economic contraction thanks to COVID-19 across these markets and shifting attitudes around workplace strategy.

“In Auckland, we are noting more strategic considerations around the amount of space tenants think they need and there’s an element of caution about making big decisions right now.

“Tenants are generally committed to leases for a prescribed number of years and that arrangement doesn’t just change overnight if they decide they need less physical space.

“Sub-leasing the space that is redundant is not always an easy fix and does require solution-based advice and execution.”

Stephen Rendall heads Bayleys’ Real Estate Advisory team and said in dealing with larger corporate tenants, a carefully-planned and deliberate strategy needs to be worked through when space requirements are under the spotlight.

“Often businesses here are responding to a mandate from overseas headquarters that they reduce their operating costs and the lease is usually a sizeable line item that is targeted for scrutiny.

“There are always a number of parties involved here as the chief financial officers are tackling it from a finance angle, human resources departments are looking at people outcomes and what we’re left with is unused space that needs offloading – or needs to generate a return.

“Our advisory team can bring real-time data to the table and strategise potential – sometimes creative – solutions for all involved.

“Our property expertise is valuable to clients at a time when frankly, there are a lot of uncertainties still circulating.”

Rendall said while sub-leasing a portion of surplus office space may enable business tenants to actively reduce real estate costs without the upheaval of having to relocate or to incur early break-lease penalties, there are other factors to consider.

“Sub-leasing can introduce extra layers of complexity compared to a standard lease agreement and potentially, could weaken an occupier’s control over future negotiations so wise counsel is advisable.”

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