It’s fun for now but the work from home trend could lead to the AI theft of jobs and offshoring of others.
A moment is arriving in the real estate market that I have warned about – in these columns: the re-valuation downwards – of commercial property in the wake of Covid and persistent home or now hybrid working. That this moment was coming has been obvious for some time although the levels of denial, self-delusion or downright refusal to recognise reality have been so elevated as to delay market acceptance of facts. I guess no one in the food chain – from the banks, the ultimate owners of much property, to landlords and developers – had any interest in crystallising the new, lower values.
But reality can only be deferred for so long: the judgement of the real market in offices is upon us, particularly where the return to CBD workplaces has been anaemic. Sydney is one such place where during the now mid-week peak – say Tuesday to Thursday – office occupancy of even top grade stock is still under 60 per cent, with public sector offices even emptier.
The bill is now coming in. The front page of the Australian Financial Review last week stated: “Office towers face valuation crunch.” The data is sobering. One of our biggest developers and landlords Dexus announced that it had sold its 26-storey A-grade office in Sydney to a Hong Kong private equity firm at a 17 per cent discount to its December book value.
“This should worry a lot of office owners,” one expert told the AFR.
This is A-grade stock. The losses mount as you go down the real estate alphabet to say, C-grade. This lower end stock has not been redesigned or recycled to meet contemporary worker demands for attractive, healthy workplaces, that could tempt them off their backsides to commute into town.
Many of these are under water, unable to meet modern ESG standards and worker expectations in the era of hybrid working. If up to the moment A-grade buildings have lost 17 per cent of their value in six months, just think of the losses in valuation at the lower grades.
We know that office demand is much weaker than anticipated when new buildings were commissioned say four to five years ago, as are rents. And this is happening at the same time as costs – interest rates, labour, energy – are rising. It is a perfect storm for property. Remember also, that this isn’t just a problem for banks, owners and developers: it’s a problem for the superannuation funds in Australia and elsewhere – and their beneficiaries– that have heavily invested in commercial real estate.
This shift away from offices and towards home working is coming as AI arrives, and as workers in formerly under-developed countries now have world class technical skills
By the way, what’s driving the current bout of property honesty about value in Oz is because the EOFY is at the end of June, not March as in the UK. Boards and shareholders cannot be bluffed at such times. But even then, some companies will have been consumed by optimism bias and still not embraced reality in the hope that something – and the market – will turn up. Don’t hold your breath. While there are contingent elements to this storm there is also structural change in the market for CBD offices.
The race to redesign or repurpose is on
Positively, where the resources exist, and where technically feasible, many owners are seeking to redesign their buildings for new uses and users. Grade B and C stock owners may invest to ensure their buildings meet new ESG standards and market needs if they can.
Others are looking to repurpose office buildings for other uses, including residential. So radical is this trend, of CBDs losing their single use purpose and embracing more mixed uses and focusing more on their capacity to attract folk in from the suburbs less for jobs and more for cultural activities, events, leisure and food and beverages – stuff you cannot get at home on Netflix or Uber Eats – that even Ed Glaeser, the doyen of city advocacy and the author of The Triumph of the City – now sees the future of Manhattan as less the global CBD of three years ago than as a “playground city”.
AI is on the way and offshoring is thriving
My own view is darker. This shift away from offices and towards home working is coming as AI arrives, and as workers in formerly under-developed countries now have world class technical skills. I think the likely scenario is the disempowering of the agglomerated CBD economies of the last 40 years without the decentralised home working economy replacing all the lost economic value.
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I see the decline of the WFH economy coming sooner than expected, as technology replaces workers and as more intellectual labour goes off-shore to lower-cost destinations with high-skilled workers. I am a pessimist, and see a double whammy of economic downturn both in CBDs and in the hybrid work economy.
This is because of the objective challenges, but also because I see little effective action being taken by governments or the private sector to meet the challenges or collaborate to do so.
If you think “something will just turn up” remember the Luddites. People get this history wrong. The Luddites were wrong in thinking new technology would only kill jobs. But they were right in thinking the new jobs were not all for them or for the areas in which their traditional economies had been located. We forget that the new jobs of the Industrial Revolution went to previously under-developed parts of the UK – in South Wales or the north of England. I think history is repeating itself, on a global scale while we are streaming at home and our politicians are completely out of their depth in the face of this massive change now upon us. Discuss!
