What a difference a year makes! A little over a year ago we published a report Is office market risk adequately priced? In that report we flagged potential downside risks from a substantial increase in east coast office supply, the projected increase being the largest since the 1990s. The main risk we saw then was that space absorption is closely linked to the state of the economy, and should the economy slow, increased supply would pose downside risks to rents, vacancies and capital values.
One year on, the slowdown in office absorption observed last year has accelerated for a reason none of us expected. COVID-19 has resulted in working from home becoming the norm for office workers along with an acceleration in the secular trend towards online shopping. As the economy starts to recover, the likely pace and strength of the recovery in the office and retail property markets is uncertain. In prior cycles, landlords could count on improving business conditions to lead to an increased appetite for office space and for increased activity to translate to in-store spending.
This time it is not so clear cut. The “hybrid” work model post-pandemic is yet to be settled with analysis needed on the optimal office/working from home mix for productivity and whether this differs by industry and work type. Structural shifts to online shopping for low value goods and services will likely continue. Finally, how broader macro factors play out, particularly population growth and wages growth will also be important for the outlook for both the office and retail property sectors.
The week ahead
Australia: A big week domestically with key labour market data and three potentially important RBA speeches. On the labour market, Weekly Payrolls for the week ending 31 October are on Tuesday, followed by the Wage Price Index on Wednesday and Employment on Thursday. There remains a lot of uncertainty around the outlook for the labour market given the tapering of government support and conflicting reads amongst the partial indicators – payroll job numbers fell in early October, while job ads bounced, and JobSeeker numbers fell. Rounding out the data is a preliminary read on Retail Sales on Friday. Governor Lowe is also scheduled to speak twice this week, tonight at 7.40pm AEDT on “Covid Our Changing Economy and Monetary Policy ” and on Wednesday on a panel. Assistant Governor Kent is also speaking on Tuesday.
International: Virus cases and vaccine news remains front and centre with Moderna expected to report Phase 3 results and Pfizer/BioNtech potentially applying for an emergency use declaration by the end of the week. Key data points include: US: Retail Sales on Tuesday and UK/EU trade talks ahead of the EU Summit on Thursday.
Chart 1: Office vacancy rates have lifted
Chart 2: Australian online retail spend still well below the US
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