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Building an outlook for commercial property

The COVID-19 pandemic has changed how we relax, shop and even work – potentially forever. This has implications for the major project pipeline in Australia's commercial property sector, which has been built on the expectation the central business districts in our cities will be teeming with people.

It appears inevitable the forced experiment of remote work, effected by lockdowns, will lead to a permanently higher share of remote workers. This would result in lower demand for office space - although this could be partially offset by social distancing requirements - and less foot traffic in key employment and retail hubs.

The retail pipeline has also been hit by a wider take-up of online shopping. The growth of online retailing was helped by remote workers and cohorts who infrequently or never shopped online before their access to bricks-and-mortar retail was limited by lockdowns.

Additionally, the lack of tourists and uncertainty about border closures appear to have taken a toll on the major project development pipeline.

ANZ’s latest Australian Major Projects report paints a gloomy picture for the highest-profile work underway in the commercial property sector.


The most pervasive potential structural change produced by lockdowns is a higher share of remote work. Office occupancy rates for most CBDs are still well down on pre-pandemic levels. Occupancy rates will increase as social distancing requirements ease, but they’re unlikely to see a full recovery for some time.

In the Property Council’s January survey, while health concerns were still an issue, the most commonly cited influence on the current level of occupancy was “preferences for greater flexibility including working from home”.

According to recent research from Investa, the uptake of CBD office space could fall by 15 per cent in 2021 as more city workers include remote working in their routines. An international survey of 10,000 white collar employers suggested 40 per cent would work remotely after the pandemic. Another survey found 60 per cent want some flexibility on where and when they work in the future.

Concerns about remote working, including productivity, socialisation and team work impacts, may be a partial offset though.

Lockdowns appear to have disrupted the major office construction outlook, particularly in Melbourne. But the current dip in the pipeline is also due to the completion/near-completion of some large office developments.

The potential pipeline for major office projects is surprisingly high over the forecast horizon. But it is unclear how many and how quickly recent approvals will move into the construction phase, given the high levels of uncertainty, and actual activity may significantly undershoot plans.

While the economic recovery will underpin employment growth in white collar occupations, the increase in remote working may weaken the relationship between employment growth and demand for office space.

It’s possible a shift from larger CBD projects to smaller suburban and regional projects will occur, reflecting a higher rate of remote working, businesses looking to cut costs, and some degree of population decentralisation.

At home

The increase in time spent at home over 2020 for most households boosted retail turnover. Households that maintained their income directed expenditure to household upgrades and home entertainment in lieu of their usual travel and non-home entertainment spending. Retail turnover in the second half of calendar 2020 rose 9 per cent year on year.

But more time at home has undermined bricks and mortar retail. ANZ spending data show while some of the growth in online shopping was temporary, part of the movement online is likely to be structural, as the share of shopping that occurred online was elevated even at times when movement restrictions eased.

Uncertainty about state borders and international travel restrictions are also weighing on tourism.

Tourism spending equated to around 10 per cent of total retail spending and 35 per cent of dining before the pandemic. The flow of tourists is particularly important for airport retail developments, luxury retail districts and flagship CBD retailers.

Key factors for retail developments in the longer term relate to the impacts of increased work-from-home arrangements.

More home-based workers would mean less foot traffic in key retail hubs and a higher share of online shopping.  But remote work may also lead to some degree of population decentralisation, increasing demand for smaller retail centres (eg supermarket-anchored centres). This could see a shift from larger projects in cities to smaller suburban and regional projects.

A less centralised population may also increase demand for bulky goods centres, particularly if remote workers continue focusing their spending on their home environments going forward. Large home-related purchases such as furniture and white goods are less sensitive to online shopping and tourism trends than other retail categories.

Stay a while

The hotel sector suffered severely in 2020. Ongoing uncertainty about travel has hit spending and, as a result, shrunk the major hotel development near-term pipeline. Some borderline projects will now almost certainly not go ahead within the forecast horizon.

But confidence in the tourism property sector has started to recover from its lows. According to the latest ANZ-PCA survey, the forward-work schedule for tourism construction is back to pre-pandemic levels.

Within this recovery, there may be a shift from capital city hotel developments to the regions. Capital-city hotel developments face substantial downside risk from the slow and uncertain recovery of international visitors. Business travel, another key segment for capital city hotels, is also at risk, as pandemic conditions push more business activity online and organisations look to cost reduction.

Regional hotel demand may benefit from international border closures. With international travel off the books in 2020, Australians have looked for alternatives to their international holidays. Domestic travellers are far more likely than international or business visitors to venture outside capital cities.

Recent domestic tourism has favoured intrastate travel, due to the volatility of state border restrictions, but ANZ Research expects demand for domestic tourism to include more interstate travel in due course.


ANZ Research expects the dip in major project activity to recover as borders open and the faster-than-expected economic recovery helps confidence.

But structural changes, including increased online shopping, remote working and potentially less travel, could slow growth in demand for several years.

At this stage, the extent to which these structural changes will dim longer term prospects is unclear.

Catherine Birch is a Senior Economist & Adelaide Timbrell an economist at ANZ

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