Rebecca Kent (host)
So, working from home has turned out just fine for many people, and now businesses are inevitably
rethinking how much office space they actually need and where it should be located.
While some companies are delaying any firm decisions until stability returns to the economy, others are taking the bolder step of negotiating new leases now to take advantage of some good deals.
So what are they? Who is doing it? And what are their thought processes?
That’s what we’re discussing – and more – in this episode of JLL’s Perspectives podcast.
I’m Rebecca Kent.
Rebecca Kent
It is another episode of JLL's Perspectives podcast and to discuss what questions businesses are making around office moves in this very uncertain time. I've got a trio of experts from Team JLL. That includes Kate Pilgrim a Tenant Representative in Victoria.
Kate Pilgrim
Thanks Bec. Nice to be here.
Rebecca Kent
And James Montague, a director in office leasing in Queensland.
James Montague
Afternoon Bec.
Rebecca Kent
And Anthony Walsh, our workplace design expert based in Sydney.
Anthony Walsh
Hi Rebecca. Great to be here.
Rebecca Kent
Excellent. Really nice to talk to you all. So there's a whole lot of debate right now about the value of the office when lots of people have proven they can do their jobs pretty effectively at home. And this obviously has implications for how much office space businesses need. And I can't help but think that companies who have office leases that are expiring this year are probably in a bit of a predicament about whether they should take less space or more space or space in a different location, especially when they don't know what the business itself might look like down the track, given the uncertainty. Kate, maybe you can explain some of the thought processes that businesses in the market for new offices are having at the moment.
Kate Pilgrim
Yeah, sure. Thanks Bec. I think it really is mixed, to be honest, amongst the occupiers in the market at the moment. So there has been a lot of discussion around what re-entry to existing space looks like. But then there's also the future of the workplace, and with the positive take up from a lot of people on work from home, what is that going to look like for future? So it really is no one size fits all across the board. And it really does depend on lease expiry dates, size of the tenants, type of industry, and I guess how bold some of these groups want to be as well.
Rebecca Kent
So say I've got a lease expiry looming in a couple of months’ time. What's different about the conversations that are being had now, compared to I guess more normal times?
Kate Pilgrim
Yeah. Well, I guess there's a few different factors - there is the workplace and base requirements, but there's also the market conditions as well. And the change in those market conditions and the deals and sublease space that has entered the market. So there's a lot to consider.
And on the space requirements side, it really is: what are my future space requirements with this work from home piece? And with a vaccine not yet found, what are the implications for the re-entry into the into the office - requirements now, but also hopefully post vaccine. What will that look like?
And I think the sense is that the ongoing work from home will continue to trend, but the workplace will be somewhere to come for that experience and connection and collaboration throughout the workforce.
Rebecca Kent
And James, you're on a bit of an education campaign, I suppose, around how the term "work from home" is perceived.
James Montague
I like how you've described it as a campaign. Rebecca. It certainly feels like that at times.
We've spent the last three months working our way through COVID and finding our feet - probably more intensely over the last month. There are a number of calls that we’re making that are really open conversations with businesses about coming back to the workforce – everything from five-person organisations to 1500-person organisations and everything in between.
There's this really mixed response around work from home. And I think there is a bit of confusion around the responses that these businesses are getting from their engagement surveys around work from home. They're seeing their employees really enjoying and embracing this new way of work. But that can't be permanent. In my view.
I really believe that the workplace needs to be somewhere that all of the staff come together and that's where the culture really comes into play for a business.
If you're saying wholesale, carve out 30 percent of your workforce, and they’re now permanently working from home, come Christmas party time, you're going to see 30 percent of your business, and you won't even know who these people are. They could be anybody because the bringing the people together and the engagement that you have as an organisation gets lost.
Anthony Walsh
That's the real interesting thing, James is how often do we need to come together to maintain the social capital of a business?
There are plenty of examples: Trello comes to mind of coming together once at the Christmas party, and even in the office, they conduct all their meetings virtually. Versus another model, which might rely on a weekly or two-weekly engagement piece to support whatever type of work they're doing. That's the really interesting question and it's hard to give a wholesale answer, right?
James Montague
What we find is the people that are enjoying it are usually the ones that do very high-focus, productive work that requires them to sit in a space and get through process-driven information. And so they're not necessarily collaborating on everything every part of the day. And so if they don't have to travel 45 minutes to get into the office in the morning, and they can still do the job, and then they don't have to travel for 45 minutes to get home, they get an hour and a half back.
And it means that they can go and make a cup of tea and come back a nd they're still an hour in front of themselves throughout the whole course of the day.
Those people, when I've bumped into a handful of them within our own business, they say they are really loving the fact they can work in their pajamas until lunchtime. But at the same time, they’ve really missed coming in and seeing people.
Anthony Walsh
I definitely agree with you on that point.
I guess what's interesting is, for those more client-facing roles, where you're out and traveling - potentially interstate - for short meetings, all of a sudden, they've got a lot of time back to do productive work. The sense of job satisfaction without getting an outcome is heightened in those operators. So I think I think there's been some shared enjoyment from different ways of working.
I think the CEO of VMware was in the newspaper talking about when he was connecting to other important parts of his business around the world, how informal and useful the conversations were compared to the pomp of a boardroom meeting, not to mention the travelling involved to get there. So I think there's a case for both working in the office, and remotely, but what the mix will be for businesses will be the interesting journey.
Rebecca Kent
James, businesses need to be making informed decisions. They've always had to do that. But what is some of the information that you're finding that they want now before they make a decision about relocating or looking at their office options?
James Montague
In terms of information that they're looking for now, it really is between what kind of deal can I get now and are there other ‘COVID deals’ available in the market.
Tenants that are active at the moment tend to be privately-owned organisations that are looking to capitalise on a low-demand high-supply environment that we're in at the moment.
And there is a bit of this sort of steam that's come out of an expiry because not only are there some legislative implications that mean that you can't kick a tenant out. There are also landlords being pretty flexible with their occupiers to try and help so that they can stay beyond expiry and look to find a solution within their portfolio. So it feels like a little bit more of a friendly set of circumstances for an occupier.
I don't think that I've seen many businesses in the Brisbane market that have definitively understood what their workplace needs to look like yet.
Rebecca Kent
So how are they going about trying to understand it? I mean, are they looking at increased take up of data or some sort of monitoring that they haven't used before? Are they talking to other businesses? Are they looking at how flexible landlords can be?
James Montague
For larger organisations I’d agree that they're doing all of those things. Smaller businesses are really just trying to keep their ear to the ground and having as many conversations with as many people as they can.
If you're a large business, capital constraints are going to make it difficult for you to make a decision.
So we've seen short-term extensions really become very common in the last few months looking to put yourself with an expiry in a more normalised environment so you can make a decision based on an economic situation that you feel as though you understand.
I think there's still a lot of uncertainty around what the future holds in the short term. But we're getting some positive sentiment from the occupiers we're talking to in that they believe long term that businesses will remain sound and they'll be able to operate in a pre-COVID way, but they're just not sure from what point that begins.
Kate Pilgrim
We've been talking about flexibility for quite a few years now. But I think now more than ever, given the uncertainty around the future, that flexibility is key. So that's in both in the design of the fit out to ensure that post vaccine or post COVID that these tenancies can continue to adapt and change to the required collaboration or workstation increase in requirements.
But it's also ensuring that there is some third space in buildings, and some co-working just in case they don't quite get that space requirement right. It's just good to have that in place for future proofing. Also flexibility in leases, ensuring that there are contraction and expansion rights, and also shorter term leases and break rights.
Rebecca Kent
Can you describe that concept of third space for those who are not entirely familiar?
Kate Pilgrim
Yeah, so this is overflow space, both bookable and non-bookable. So some new buildings and refurbished buildings have a lobby, for example, on the ground floor that can accommodate some overflow and some informal meetings. So it's more that informal co-working but more business lounge space.
Rebecca Kent
James, you mentioned COVID deals and I feel like you said that reluctantly. But can you elaborate on that for those businesses who are looking to take advantage of favorable prices or outcomes. What are they what's out there?
James Montague
The reluctance comes from the conversations that we're having with tenants are coming to us a fair period of time before expiry and saying what if we come to market now what can we get? And the expectation is that because we are in a low-demand environment they're going to get a really special outcome.
And I think what we're having to educate some of these users is if you're wanting to move from a b-grade building into a premium-grade building and get a half-price deal that's just not available, and you're not going to achieve an outcome that is that outlandish. And particularly not if your expiry is in two or three years’ time.
If your expiry is within a 12-month window, there are certainly going to be some landlords that are going to want to capitalise on that engagement and try and get a deal done. And I think some of the methods that have been used by owners are looking at delaying lease commencements, and working with the tenants to design and construct fit-outs that are enabling them to move in now, during COVID circumstances, but then future-proofing design moving forward.
I think there's certainly a lot of work that needs to go into that front-end piece more so than it did before, because gone are the days when you're trying to fit in one desk to eight people and thousands of linear workstations all in a row. I think there's going to be a change in how tenants look at their office spaces enabling more collaboration.
But when I say ‘COVID deal’ it's hard to quantify because we just don't have the transactional evidence to support any increase in incentive at the moment. But with the active negotiations at play there's certainly a higher level of incentive or inducement, such as rent-free or more capital available to get those deals closed out that have a start date within a short window of time, so landlords can lock in that income.
Kate Pilgrim
What we've also seen is the first wave of sublease stock to hit the market, and we're anticipating that there's going to be an ongoing supply of that sublease market coming on by the end of this year, and maybe a larger wave that by the end of this year as well. So that's certainly going to, and has already, impacted on market conditions.
Rebecca Kent
More and more building owners are putting offices into the market that are already fully fitted. That’s another trend gathering apace, I understand, James.
James Montague
From what I've observed, there's certainly a higher level of investment and a higher level of thought that's gone into speculative fit outs.
Traditionally a speculative fit out is you do a 600 square metre deal in an 800 sqm floor and then the balance gets speculatively fit out - about 150 sqm. And that's where the market started.
But now we're seeing 1100 sqm full floors speculatively fit out with architecturally-design workplaces, and they're amazing. And the engagement that you're getting from the tenants that are looking at it is incredibly different to inspecting a vacant space.
Without having the exact percentages, you could say that the vast majority of requirements in the market right now I'm looking for fitted space, be that existing fit outs that they can modify or speculatively designed spaces that they can walk straight into.
Rebecca Kent
Anthony, I'm going to bring you in here. COVID has potentially been pretty dramatic and disruptive in terms of what business's requirements are from a design perspective. And as a workplace design strategist, I'm sure this is a really interesting and exciting time for you. Why is that?
Anthony Walsh
I think whenever there's a major cultural inflection point, it's an exciting time for design because it means change is happening.
From a design community point of view, some of these ideas have been talked about since … activity-based working was starting to be implemented Australia and beyond.
And so what's interesting from my perspective is to see how fast the conversation around that has accelerated.
We have a job over in Western Australia at the moment where some of the stakeholders were very hesitant about an agile-type environment and now, during COVID and post COVID they are advocating for a very different model, so I think it's really unlocked some entrenched views, which is exciting.
The other the other thing from a design perspective is to see how different companies have responded in the media to this.
You've got technology companies out there saying we're going to make some permanent changes, and we're going to a distributed model. And of course they sell technology that encourages us to connect remotely.
And then you've got the banks responding in Australia saying that all cards are on the table and we want to look at a different workplace model potentially. They're one of the highest consumers of CBD realty and probably with the most to gain financially, potentially from a different workplace model.
And I guess what's more interesting is a company like JLL, for example, a real estate company and a technology company, to see how we respond and make compelling and engaging reasons for people to come into the workplace. So yeah, fascinating times from a design perspective.
I think the other interesting shift is we've got to work with some building owners at the moment who are, instead of a very high density co-working model, are looking at much more amenity-driven, shared environments, with two or three times the budget of a typical workplace fit-out which makes it a pretty exciting design proposition for us and for the people that are going to go and experience those spaces.
Rebecca Kent
So what do you mean by shared amenity? Do you mean like a co-working space?
Anthony Walsh
Yeah, I think exactly that. Where perhaps a WeWork model was about how many small desk we can fit in an area to lease out to people, it’s now something with a higher degree of amenity, shared services, learning opportunities, bar areas, cafes, libraries, town halls and that kind of thing.
Rebecca Kent
And so might we see large organisations such as banks and financial institutions, as you mentioned, sort of move into that?
Anthony Walsh
Well, that's, that's the interesting thing. How much do we need our own personal office to reflect our brand? Is our brand about our physical space? Or is it about our people? And I think, to Kate and James's point before, it'll be a different mix for different companies.
Rebecca Kent
Aright, there's some really fascinating points there. And, you've all given such a strong picture of – even as uncertain as it is - what companies are starting to think about with regards to their space. So, Anthony, Kate, and James, thank you very much.
Anthony Walsh
Thanks Rebecca
James Montague
Thanks, Bec.
Kate Pilgrim
Thanks guys
Rebecca Kent
You were just listening to JLL’s Perspective podcast. If you thought it was interesting, useful, or even both send this episode on to your friends, colleagues, or manager, and make sure your subscribed to the series so you’re the first to know when a new episode has landed.
And if you want to know more about Anthony, James or Kate, who featured on this episode, pop over to jll.com.au/perspectives-podcast for their bios and to get in touch with them.
Thanks for listening.
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