Australian CBD office market is not dead and will spring back to life

More Australians will work from home in the post-Covid era, but the CBD office market is not dead with one factor that will see the gap filled.

CBD offices will spring back to life in the coming years. Picture: NCA Newswire / Gaye Gerard

It is a question that everyone in (commercial) property is thinking about: what will be the impact of the pandemic-inspired work-from-home movement on demand for CBD office space?

There’s no shortage of vested interests suggesting that “things will return to normal” in due course. However, when I hear this I get the feeling that it’s more based on hope than on evidence.

I think that a net extra 10 per cent of office workers will continue to mostly work from home (for lifestyle reasons) but that this shift will be absorbed within two years by natural growth in the office worker market. And further that this two-year lull in demand, affected by stay-at-home workers, includes the pandemic years.

Here’s my contribution to this key question in Australian commercial property.

The CBD office workforce quantified

Barely 5 per cent of the workforce worked from home prior to the pandemic. During lockdowns various surveys reported in excess of 50 per cent of workers working from home. I think the pandemic has been sufficiently impactful and long-lasting for it to have caused a behavioural (lifestyle) shift in the Australian workforce.

As a consequence I think the long-term proportion of workers working from home will lift from 5 per cent to perhaps 15 per cent. This proportion might be higher in cities like Melbourne and Canberra and lower in cities like Adelaide and Perth.

The number of workers working in the CBD is measured every five years in the census, in the journey to work question.

At the 2016 census 521,000 workers worked at workplaces (including offices) within a 3km radius of the Sydney CBD centroid. The equivalent figure for Melbourne was 533,000 CBD-&-environs workers.

Most of these “CBD” jobs in Sydney and Melbourne were in professional services (eg law, accounting) and amounted to 113,000 and 97,000 respectively for our two largest cities. It is reasonable to assume that most of these workers worked in an office-style workplace.

But CBD office workers would also include workers in other industries like financial and insurance services, public administration and safety (eg public sector), information media and telco (eg Telstra) and administrative and support services (eg personal assistants).

These five industries jointly comprise what might be called the CBD’s “core office workforce” and in central Sydney (within 3km of the CBD) this cohort comprised 303,000 workers in 2016, up from 257,000 in 2011.

The equivalent core office workforce in Melbourne’s CBD was 258,000 in 2016, up from 229,000 in 2011.

On these figures Sydney’s core office workforce increased by 9000 workers per year in the early 2010s. Melbourne’s office workforce at this time increased by 6000 per year.

Another way of looking at this is to say that the office workforce working in central Sydney and Melbourne increased by 18 per cent and 13 per cent respectively over the five years to 2016, or roughly 3-4 per cent per year.

These were good years for the office market, which accommodated a burgeoning ‘‘knowledge worker’’ cohort that clustered and collaborated in the centre of our largest cities at this time.

The figures relating to the workforce working in the CBD-&-environs of our largest cities based on the 2021 census results will be published in the second half of this year.

Let’s just park the concept of the CBD office workforce for a moment.

The rise of the office workforce

Since 1984 the ABS has published a dataset every three months which estimates the workforce by occupation and industry. (This dataset is sourced from, and is adjusted by, the five-yearly censuses which ask workers their occupation and the industry within which they work, as well as the location of their workplace.)

The number of workers working in the five industries cited as comprising the core office worker workforce (ie professional services, finance, public admin, telcos and admin services) was estimated at 3.3 million or 25 per cent of the overall workforce in November 2021.

Some 37 years earlier in 1984 this workforce (as defined) comprised 1.2 million workers or 18 per cent of the overall workforce. Over almost four decades this cohort has increased, say, threefold and has captured seven percentage points in workforce market share.

Indeed, thus far during the 21st century this sector of the workforce has expanded by an average of 3 per cent per year. These numbers confirm that developing, managing, fitting out and selling commercial office space were good businesses to have been in during these years. Occasionally the core office workforce (as defined) would contract, such as in 1991 during the recession, in 2001, in 2012 and again in 2017.

However, the core office workforce did not contract during the pandemic. Or at least not according to this particular aggregation of ABS Labour Force Survey data. In fact the five-industry core office workforce jumped by 7 per cent over the two years to November 2021 or by 3-4 per cent per year.

If my assessment is correct, that the proportion of workers working from home will expand from a historic base of 5 per cent to an ongoing base of 15 per cent, then around 10 percentage points of the workforce will no longer require office space in the post-Covid era.

Needless to say this is not a good outcome for investors in and developers of CBD office space.

Faith in a rising CBD office market

But even if a net extra 10 per cent of workers does prefer to work from home post-Covid, this proportion is likely to be offset by just a few years of natural growth in the office worker (aka knowledge worker) population.

Indeed the ABS quarterly data shows that across much of the Covid era (two years to November 2021) the core office workforce (in five industries) jumped 7 per cent. By mid-2022 the two-year growth in the office worker cohort could top the 10-per-cent mark, thus offsetting entirely the Covid-inspired work-from-home shift.

What this means is that even if there is a 10-percentage-point shift in the proportion of workers working from home, the ensuing excess space in the market is likely to be absorbed by two year’s natural (and recent) growth in the CBD office market.

So, maybe there’s a soft balance of 2022 ahead, and which could extend into 2023, but that strengthens in 2024, and that gets back to booming in 2025.

But this outlook also presents opportunity for the bold.

Opportunity for those who dare

If my assessment is correct – that the underlying rise in knowledge work will (over time) offset any underlying shift to work from home going forward – then this will present opportunities for developers, investors and tenants who hold a positive medium-term view of the market.

The point is that when metrics, evidence and reasoned assumptions are applied to the CBD office market, it seems that there is capacity to absorb a shift in the way (and where) office workers deliver workplace value. Most will return to the office; some will never return. But the demand for office work is growing so fast that space vacated by a rising work-from-home crowd is likely to be absorbed by newbie office workers.

But there is more to this story. I think the amount of space per worker is likely to increase as the functionality of the CBD transitions from ­acreages of concentration-task cubicles to expansive, adaptable, changeable workspaces for training, lectures, seminars, workshops and client (and staff) entertaining.

Viewed through this lens, CBD and near-CBD office space goes through something of a Covid transformation where tasks requiring concentration are completed on ‘‘home days’’ and communal, collaborative, celebratory tasks are completed in the office.

So, when someone argues that work from home will diminish demand for CBD (and other) office space, point to this humble dataset produced by the ABS which shows over 37 years the steady, unrelenting, undeniable rise of the office worker. This growth will continue into the future as knowledge workers and digitisation commandeer a rise share of the overall workforce.

Bernard Salt is executive director of The Demographics Group; research by data scientist Hari Hara Priya Kannan