The effects of the Covid-19 pandemic were felt across the globe, prioritisation of health and safety has led the workplace culture shift to a ‘work from home’ model and subsequently the effective use of office space in the commercial districts are affected.
During 2020, the vacancy rate of offices in the MSCI Global Annual Property Index increased 191 basis points to 10.4%, which directly impacted investors’ rental income. While the overall vacancy rate was lower than the previous cycle’s peak, the percentage of fully leased office buildings reached an all-time low. This was the biggest one-year move since the 2008 global financial crisis.
Assets that started 2020 fully leased had similar levels of positive income return but their capital growth progressively deteriorated as vacancy increased. Meanwhile, offices that started 2020 at least half empty all had varying levels of comparatively weak income return. MSCI found that office properties that significantly reduced vacancy produced better returns, even if their year-end vacancy rate was higher.
The uneven impact on the office sector’s vacancy rates and returns suggests that other factors also affected performance. Irrespective of starting vacancy, smaller assets will tend to have fewer tenants and are therefore more likely to be either fully leased or significantly (50% or more) vacant.
These factors combined to deepen and widen the supply of vacant office space, which could indirectly impact capital growth, as investors may need to allow for lower achieved rentals and longer re-leasing periods as they consider their portfolio’s optimal allocation to offices.
Written by: Niel Harmse, MSCI
Editor’s Note: In Australia, the office market performance is dependent on each state and territories’ instructions regarding the accessibility to the workplace in accordance with their Government’s advice at each point in time. In the six months to July 2021, the Australian office market vacancy have remained relatively steady recording only a slight increase in vacancy despite the continued Covid-19 uncertainty.
For more information on Property Council’s Office Market Report July 2021 findings on office vacancy (released on 5 August 2021), Please click here to pre-order and be one of the first to access the data for the nation.