Bifurcation in the office sector – the data confirm 2021’s anecdote

By Michael Taranto

Mid 2021 saw emerging discussion in property circles about coming bifurcation in the office sector. The story went that encouraging workers back to the office, and for the sake of their health and wellness, would mean premium towers going from strength to strength while lower grade buildings go backwards in value.

We’ve been on the lookout for hard data to confirm this trend, and read with interest a paragraph in last Friday’s The Economist, from a piece entitled Recession fears weigh on commercial property:

"Not all properties will struggle. The highest-quality, most energy-efficient buildings, with modern amenities and on prime sites, typically owned by big institutional investors, are expected to fare relatively well. By contrast, lower-quality assets across Europe lost around a tenth of their value in the second quarter of this year, compared with the previous three months, reckons Green Street, a research firm. That decline follows a poor 2021 for many such buildings: rents for lower-quality offices in London fell by 9% last year, compared with 2020, even as those for prime office space rose by 8%."

There is an imperative for mid-lower grade buildings to invest immediately to retain tenants, hold or increase rents, and not be left behind on capital value. Energy efficiency, electrification and indoor environment quality are all priorities for capital expenditure, as well as security and elevator upgrades.

The place to start on indoor environment quality is to obtain a rating – NABERS Indoor Environment is the leading programme in Australia and cost effective for mid-low grade buildings. This will be an independently certified benchmark to share with tenants and also provide a roadmap for improvement over coming years.

Property Council Australia’s guide to office building quality, published pre-pandemic, recommends 4-star NABERS IE for A-Grade buildings and 3-star for B-Grade buildings