Lockdown Impact on the Office Vacancy Factor

April 29, 2020

One of the most asked questions I am getting is: What will the impact on the vacancy factor be, as a result of the national ‘shutdown’ and beyond?

Before I answer that, you need to know that in Sydney, Australia the vacancy factor currently sits at an extremely healthy 3.9% with Melbourne at 3.2% and the national average at 8.3%*. Those are exceptionally strong numbers (low percentages) particularly when you consider that every market has some degree of obsolescence, meaning stock supply which is unattractive and unappealing to demand.

 Interestingly, the definition of vacancy factor is an expression of total vacant space as a percentage of stock. The space needs to have the tenant physically occupying it for it to no longer be considered vacant. Occupied has always meant ‘bums on seats’.

 So, if I take my building - Angel Place, 123 Pitt Street Sydney with its NLA of 47,150 sqm where 3,500 people arrive and work each day and I take the literal definition of occupied BOS, how much is unoccupied as a percentage?

As a result of the ‘shutdown’ there are less than 100 people working from the building. Most of those comprise a small call centre operation, which is part of a large investment company who occupy almost a third of the building. These people are needed to handle customer questions from investors and superannuants. Angel Place is therefore comparatively dormant to a typical busy day.

Under normal circumstances each person in the building occupies approximately 13.5 sqm, which means that if we say 100 people, then just 1,350 sqm is occupied out of 47,150 sqm or specifically 2.86%. So, under the ‘shutdown’ we have blown out from 3.8% as a city average to 97.14% in this one example.

Of course, this is a technical assessment and under highly unusual circumstances which are out of the market’s control as neither the building owner or the tenants of the building want this situation to continue, providing health and safety can be assured. Right now, they can’t. It is encouraging though with our country’s success; through increased virus testing now showing fewer confirmed cases of infection. In fact only thirteen (13) new cases across the entire country yesterday. Containment of the population by lockdown looks to be one of the best global outcomes to be achieved by any country. Consequently, it will be interesting to see how the Property Council of Australia (PCA) responds and I’d anticipate the definition will require adjusting.

In the meantime, I have called upon a couple of my US colleagues in the massive New York and San Francisco office markets and our Chief Economist in Australia to tackle this vacancy factor challenge with me.

 “We are in a similar state in New York and other markets across the US. If space is temporarily vacant because of COVID-19 and what we’re calling social distancing measures, we are not factoring that into our vacancy rates”. said Stephanie Jennings, Managing Director of National Research – Newmark Knight Frank (New York). In San Francisco and the Bay area where the technology juggernauts and unicorns are based my colleague Andrea Arata, Director of Research - Newmark Knight Frank (San Francisco) agreed with Stephanie’s view and how they would respond to the challenge.

 “The bums on seats methodology, based on physical vacancy, has great merit as a pure measure of space utilisation. However, it is not a perfect measure of actual availability, in that it will record as vacant space that has been pre-committed by tenants who are yet to occupy it. Alternate measures based on availability as opposed to physical vacancy are probably more relevant for tenants as a measure of what is actually available to them to lease. In practice, there is usually little difference, but the COVID-19 situation certainly throws up an interesting question with the prospect of a rise in sub-lease space and the timing of when this is included in vacancy”. Ben Burston, Chief Economist of Knight Frank Australia

So there you have it from our global heads of research, the expert collectors and interpreters of property data. The verdict is that common sense should prevail, whereby space which is under contract but not occupied because of government rulings, is considered occupied because it is unavailable to other parties. However, there will come a point where space is under contract to tenants and rent is not being paid so it will be interesting to see how we tackle that scenario, particularly if it becomes apparent the tenant has no interest in re-occupying the space.

We must watch the market closely over the ensuing six months where the Australian Government and other world governments have thrown financial support behind business and workers to ensure that there is protection through the enforced hibernation period.

 *The vacancy data is compiled by the PCA and January 2020 was the most recent published data. The next assessment is in July 2020.