Will COVID-19 be the demise of CBD commercial?

JPMorgan to sell Melbourne CBD mall at bargain basement price

1/2 the price they paid in 2016

 

Yeah it's dropping hard. However, this makes it affordable for new businesses to sprout.

 

I’m Melbourne based so haven’t yet experienced anything but stage 2 lockdowns for a minute.

For those in the lucky states, what’s the CBD like? Is it business as usual or much quieter?

 

Im from a coastal town, business as usual, shopping malls jam packed everday, no social distancing going on here unfortunately

 

This mall did poorly even during the best of times. Never been there once. Not even sure what stores they have..

But in general most shops in cbd will be heavily impacted by lack of students and office workers. They will not survive if things stay this way. The cbd is a ghost town right now. Probably very good for those living there right now.

 

So had a call today with my Salesforce BDM and we were discussing working from home.

He said already a few of his clients are now 100% WFH. Leases not renewed and company will now be totally remote.

Just the beginning.

 

This is the future tbh.

The longer we are in lockdown the more future-proofed our businesses become.

And the myriad of commercial property looking to be leased will open up opportunities for smaller businesses that could use their location.

People will take a loss but there will be some better organisation and distribution of space in the future.

 

A grade buildings which have large floor plates, contiguous floors etc aren't configured for small tenancies and require more investment to break up the floors to achieve multiple tenancies eg more tearooms, more comms cabling, greater heat loads from additional equipment, removal of interconnected stairs, lift lobbies/access corridors to exits not contained in tenancies etc

Multi-floor tenants are much easier on the PMs, lower risk to owners/funds managers.

 

yeap and after Covid contained with vaccine or effective/efficient treatment/testing we will see unemployment ramp up even more with a lot of outsourcing of these jobs overseas. Got to keep the investors happy

 

I think this is a very easy but simplistic assumption to make (and a lot of people make it).
The argument being made by many as that well if we cant micro manage people in an office environment we might as well just do away with them in full for half the cost to the Philippines.
And at that level I get it... But lets now think more about what WFH means.

Outsourcing is almost always at the cost of customer service and quality. I don't think anyone can argue that point! Sure their will always be a few exceptions but in a huge majority of the cases the trade-off on cost is considered worth it......
Sure you might have to spend days going back and forth with Indian developers and having painful communication meetings but its still 1/3 the cost of an Australian developer = worth it.

Firstly what is a significant cost for any CBD based company? Office Space, Electricity, Work Spaces, OHS..I could go on for days but the cost of that prestigious CBD location really hits the balance book. So lets say we can do away with 3/4 of that...Balance Sheet is looking A LOT better.

Now lets think about the Australian workers. Most CBD workers cannot stand the daily commute which is why they choose to live in proximity to the CBD. Heck im in a 1million dollar townhouse because im 14km from the CBD. My colleague one of the best developers I have seen wont leave Southbank because he hates public transport.

Now lets say even 25% of the CBD based offices take this approach and are almost full WFH. All of a sudden the requirement to live near the CBD is redundant. So what does that mean? Well straight up we can save 50% of house costs! Why do i need a 1mil townhouse 14km from the CBD when I can live at the beach for 500k and still have the same great job.
Whats that worth to me? I tell you right now, if you survey 100 people, 90% will happily give up a percentage of their wage for this.
Do I want 150k and be 14km from the CBD with a 800k mortgage. Or do I want a 100k paypacket and be 50km from the CBD with a 400k mortgage....I know which one will in the long term saves me money...and happiness.

So we now have businesses which have released a huge amount of cost from a CBD location. We now have staff willing to be paid less because technically its still going to be a hell of a lot cheaper than what it is now.

The next thing we can move to is just how critical "Australian Made" is going to be. This will soon enough become a major selling point in any tender. But for now im going to leave this one alone.

If however we just focus on points 1 and 2. Then sure we might not still be as cheap as a Philippine worker but maybe the cost saving is 20% and when we are talking those numbers I struggle to see anyone making the argument its worth it.

OH and I haven't even started on what our Government should be doing to support the annihilated University industry to support home grown skills. I'll let everyone work this one out themselves.

 

Here's one example of not doing it right. It was cheap but has tarnished the airline manufacturer's reputation.

This will take alot of negotiating with unions EBAs etc. It's not going to be easy & I could see that the left will hammer this as an attack on workers' rights & hard won conditions rather than the improvement to lifestyle, cost savings (all round) and improvements to productivity.

 

Some really great insights here.

In terms of moving further out and taking a paycut that is offset by cheaper housing what do you believe are stopping you and others from doing so?

It seems like a logical financial move yet most including my wife and kids just dont want a bar of it. I even told her she could retire and we'd still be better off!

Another interesting example I can give was when Consumer Affairs moved functions from the cbd to Ballarat. They offered staff great incentives to move over such as free rent and no stamp duty yet it astounded me that there was less than 5% interest mainly attributed to their younger workforce..

Perhaps social ties and being in the thick of the action are more sticky than expected? I cant see my kids ever wanting to move away.

In saying that I also really struggle to find anything decent under 650k within 2-3hrs drive except for maybe rosebud.. geelong seems ok but areas around main strip are pushung $1m already and the water doesnt look that great. any locations you like?

 

A few structural issues which need to be considered:

• Once you move out of the 'city's & sell up, you'll never be able to afford to move back
• Lack of jobs/opportunities
• +1 may not want to retire
• Lack of infrastructure (choices of hospital & specialists, schools, traffic lights, toll roads etc)

 

It's a great question and a fantastic point.
Proximity to the CBD is a huge driver for many but of course its not the only thing.
There are several other factors in suburb desirability but of all those things proximity to Family and Friends are the biggest reason people choose certain suburbs to live in.

So to your question I would say a couple of things.
1 - This WFH is all very new. So to answer why I and others are not doing it well its still a massive unknown. Sure businesses are already transitioning but we are still smack bang in the middle of this pandemic. So their is a lot of uncertainty but this will become more realised in the next 1-2 years just how adopted it is (which i believe 80%+ of companies will now provide WFH at some capacity).

2 - Family and Friends is the chicken and egg question. It will just require some movement to start the snowball effect. I believe WFH and the cost of housing will be enough to shift a percentage of people to regional. Lets use a small figure of say 5%.

Lets say I have a group of family/friends of say 100 people.
Now lets also say I like the idea of living by the beach but I have no friends or family there.
But what happens when 5 of that 100 make the move and I now have a few friends living by the beach and 1 cousin so I decide that's enough to make the move.
I then have a few of my friends who have had the same thoughts and with me moving they have a larger network so that's enough for another friend to make the move and hence the snowball effect begins.

Its really no different to how anyone ends up in a suburb but in this instance I see it happening on steroids. This pandemic has highlighted so many things and one of them is definitely living in hustle and bustle is.....

 

And don't get me wrong, its not going to be for everyone. A larger majority would sit on this side of the fence.

My wife often speak about it and she is really keen on the idea.
But even I am 50/50 due to the family/friends scenario.
I do however know of 1 friend who is actively looking in Geelong.
I also have a number of friends who ave caravans and holiday houses in Ocean Grove and TBH I would probably see them more if I moved up there!

So when the dust settles and I see what direction my work is taking then I am very much considering making the move towards the Geelong area.

 

'Bloodbath territory': why the worst is yet to come for Australian commercial property'Bloodbath territory': why the worst is yet to come for Australian commercial property

We ain't seen nothing yet.

 

My company just spent over $1 million on renovations for our office. We moved out Sept- Nov for the renos, moved back in Dec into our beautiful new workspace, then this happens....