Office tower rents could fall by up to 25pc: Macquarie Equities

Rents in office towers could plunge by up to a quarter if the market follows the pattern of past recessions, new analysis warns.

The pandemic has left a cloud over the commercial property market. Picture: AFP

Rents in office towers could plunge by up to a quarter if the commercial property market follows the pattern of previous recessions, a new analysis by Macquarie Equities has warned.

Property players had hoped that the fallout from the coronavirus could be contained to shopping malls, but office landlords are also being buffeted.

Sector giant Dexus on Tuesday warned of tough conditions and The Australian has been told by commercial agencies that manage mid-size buildings that 65-75 per cent of tenants are asking for relief.

Listed trusts focus on larger towers, which often have anchor tenants that are unlikely to ask for rent cuts, whereas mid-size buildings have a wide range of small tenants, some of whom are either cutting space or moving out.

In the 1990s recession unemployment soared to 11 per cent by 1993 and office vacancy hit a high of 22 per cent, partly driven by new buildings being completed. This drove a dramatic 80 per cent fall in net effective rents and incentives hit 50 per cent.

In the early 2000s, Australian unemployment held up in the tech crash but office vacancy hit 11 per cent and net effective rents were off by 20 per cent.

In the GFC, Australian unemployment bumped up to 5.5 per cent and Sydney office vacancy edged up to 8 per cent, but net effective rents still fell 30 per cent from peak to trough.

Macquarie said if global GDP growth falls by a forecast 8 per cent the domestic unemployment shock would be greater than in the GFC, but should return to about 6 per cent within two years.

“When compared to other cycles, a positive is the extent of monetary and fiscal policy support which should be a partial offset for office markets,” Macquarie said.

Asset values have historically not fallen as much as rents during downturns.

Macquarie said that while all office downturns are different, net absorption has typically declined by at least 3 per cent of stock. Sydney also has about 5 per cent of new stock coming on line by 2023.

This combination could see the vacancy rate increase from 5 per cent last December to about 9 per cent by the end of this year and rise as a high as 11 per cent by 2023.

This will be dependent on net absorption as the economy comes out of COVID-19 and there is normally a strong bounce two to four years.

In prior downturns, a 1 per cent change in vacancy resulted in a 6 per cent change in rents. “As a result, we expect net effective rents to fall about 15-25 per cent, led by rising incentives,” Macquarie said.

The analysts said asset values had historically not fallen as much as rents during downturns.

“We expect asset values to fall 10-15 per cent over this period, with some protection from the lower 10-year bond yield,” Macquarie said.

But the analysts said that given the headwinds facing the Sydney office markets, it had reduced its valuations for Dexus, GPT and Mirvac office portfolios.

Property analysts at UBS expect vacancy to double to about 10 per cent in Sydney. But they noted that a Gartner survey found three-quarters of companies anticipate shifting some employees to remote work permanently.

But they said that the reversal of higher workspace densities would help office markets. Dexus also highlighted that if floor space ratios return to 2012 levels, an additional demand of 800,0000sq m, or about 16 per cent of the current Sydney CBD market, would be required.