The trends that will shape commercial real estate in 2021

Amid a turbulent 2020 that has been described as ‘turbo-charged change’, CBRE has just launched its Building Immunity Through Real Estate Post-2020 report to help investors and users of commercial property thread their way forward into 2021.

The report, which was launched on Thursday 26 November by Zoltan Moricz, Senior Director of Research for CBRE New Zealand, highlights a number of key trends in human behaviour that will shape and impact New Zealand’s commercial property sector over the next year and beyond.

Time savings have been a notable feature of the working landscape as white collar employees have cut down on commuting. Although the amount of time employees spend in offices on average will decline from pre-pandemic levels, and some occupations and roles will increasingly occur at home, CBRE says that this trend won’t sound the death knell for office demand.

“Instead,” says Moricz, “it will present an exciting period as workplace practices evolve in conjunction with office lease expiries. Technology will be pivotal to this evolution, coinciding with the rollout of 5G networks and the growing trend towards cloud computing.”

There are limitations to working from home though, he adds. “Lockdowns have taught us that effectively all meetings can take place on digital platforms if necessary. However, these platforms may allow for communication but lack the connectivity that occurs face-to-face in meeting rooms. Where businesses need to connect with clients, meeting rooms will still be important. Furthermore, workplace culture, learning & development and watercooler moments are hard to foster on digital platforms. The office environment therefore runs little risk of becoming obsolete and will remain the primary location for most white-collar businesses.”

That said, Moricz says that some tasks and roles will increasingly occur at home. “Suitable occupations would be back office or ‘focus’ roles that can largely be done with digital connectivity alone. This could lead to some people choosing to live further away from their work if they go into the office only 2-3 days per week. This presents an opportunity for developers to build residential assets in urban fringe locations they hadn’t previously considered. The price of land close to the CBD has been a considerable impediment for potential build-to-rent (BTR) investors, but this burden could be reduced in cheaper urban fringe or even regional areas.

“In New Zealand this will likely provide added impetus to emerging urban fringe locations around Auckland, such as Drury, and nearby townships including Warkworth and Pukekohe.”

Moricz adds that lockdown saw a structural nudge upward in online retail sales, which is set to accelerate, with ongoing real estate impacts. “Online spending in New Zealand in August 2020 was up 31% on August 2019. This has driven requirements for new ecommerce space. CBRE Research analysis shows that an additional 350,000 square metres of warehouse space will be required annually until the end of 2022 to accommodate growth in e-commerce, and large multi-national developers including LOGOS are developing spec build industrial buildings in Auckland’s Wiri and Otahuhu industrial precincts to meet that need."

According to Prologis analysis, ecommerce requires three times as much space as bricks and mortar retail, which will result in a surge in demand for warehouse space.

“Ecommerce will drive demand for new warehouse space and infill delivery hubs. Additionally, demand for cold storage will increase as more grocery shopping is done online. Moreover, to accommodate changing consumer expectations, infill development in close proximity to the population base will become increasingly prevalent. Existing secondary stock with minimal racking would be ideal to be repurposed for last mile delivery provided it is well connected to the road network and surrounding population. It is anticipated that as online retailing has been widely adopted during COVID-19, the roll out of infill last mile delivery warehouses will be accelerated.”

Demand for data centres will also increase as a result of more people working from home. The Internet of Things, partly driven by the adoption of 5G technology, will also drive increased mobility of data usage. Investors are aware of this, with 50% of respondents to CBRE’s 2020 Asia Pacific Investor Intentions Survey expressing an interest in data centres, compared with just 27% in 2019.

Andrew Stringer, Senior Managing Director of CBRE NZ, says that vulnerabilities in New Zealand’s supply chain were exposed when product flow from China effectively stopped during lockdown. “As a result, governments and businesses are reviewing supply chains, and over the coming years we expect a gradual increase in supply chain diversification. This could result in a small shift to local manufacturing - some forms of manufacturing will return to local shores while other forms could stay local rather than being transplanted to locations in Asia with cheaper labour costs.”

Industrial property markets stand to benefit from these initiatives, he says. “Manufacturing typically requires high levels of investment into plant and equipment that has a long lifecycle, meaning that manufacturers don’t change locations frequently and would be more open to longer leases. It is important to note, however, that progress in boosting manufacturing will take some time.”

A key trend that CBRE has spotted is what it calls ‘the shift to thrift’. Driven by the H1 2020 recession and prospect of prolonged weak economic growth, many businesses and households are cutting back on spending, which will continue into 2021.

From an office occupier’s perspective, Stringer says that the search for thrift could see an acceleration in the evolution from traditional office workforces to hybrid workforces to reduce occupancy costs and increase flexible working practices.

“Economic uncertainty will cause some office occupiers to defer making long-term financial commitments by signing long-term leases for office space; instead, they will adopt short-term solutions provided by flexible space operators such as coworking providers. Over the longer term, some occupiers may deem flex space an optimum solution that enables them to efficiently dial up or dial down their space requirements. Despite the near-term challenges faced by flex operators, flexible office space is here to stay. The all-or-nothing proposition where an employee is either full-time remote or full-time in the office is now in the past. The onset of COVID-19 is set to accelerate occupiers’ decisions in allowing employees to choose a location that will be most productive for them.

“However, we expect the bigger story over coming years will be how companies will evolve to optimise workplace strategies to get the right balance of productivity, employee satisfaction and occupancy costs. We also expect that occupiers of commercial real estate will also increasingly focus on ESG as a key consideration when choosing which buildings to locate. Landlords will stand out in a positive way if sustainability and values aligned with environmental, social, and governance (ESG) goals are at the core of their corporate DNA.”