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OtherTed TabetTue 16 Jun 20

Work-From-Home Puts Office Sector Under Pressure

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Credit agency S&P Global Ratings says global office real estate and real estate investment trusts (REITs) could experience a lull in development as a surge in remote working forces a gradual reduction in office space.

“Compared to other property types, office REITs have elevated development risks, as pipelines have outsized funding needs, with this risk only somewhat mitigated by relatively healthy pre-leasing levels,” S&P Ratings primary credit analyst Ana Lai said.

“We expect office REITs to cut back development activities and reduce capital spending needs to limit cash outflows.”

S&P said elevated uncertainty surrounding the office sector will now place REITs under pressure as occupancy and rental rates weaken.

“We expect Covid-19 to accelerate the adoption of remote working and lead to a gradual reduction in the office footprint,” Lai said.

“The sustainability of co-working concepts could also add pressure to the office sector, particularly in gateway markets.”

Lai said low vacancy rates, steady rent growth and long-term leases across Australia’s office market should help mitigate the short-term impact of the recession caused by the coronavirus pandemic.


Average April rent collected by sector

^S&P Global Ratings

S&P said it now expected tenants to look for greater flexibility in leases as they reconsider office space requirements, impacting occupancy and rent growth over the medium term.

“Tenants looking a for shorter-term lease would likely need to pay higher rent per square foot,” Lai said.

“However, post- the SARS epidemic that severely hampered Hong Kong and Singapore’s economy, we did not witness significant changes in office space utilisation.”

“Their office markets continued to have some of the highest cost per area and lowest square footage per person.”

Compared to global markets, Australia remains in good stead with low vacancy rates, speculative development and a conservative approach to financing.

S&P said the federal government’s provision of financial assistance to employees via the “job keeper” would also support the private sector over the short-term.

As part of its latest report, S&P rated 46 office REITs globally, of which 15 per cent had a negative outlook.

The highest proportion with a negative outlooks is in the US at 27 per cent, followed by Europe, the Middle East and Africa with 13 per cent. In the Asia Pacific region it was just 7 per cent.

“We expect negative ratings bias to grow over the next year, although downgrade risks are mitigated by adequate cushion under credit metrics, relatively good balance sheets, and solid liquidity,” Lai said.

“The issuers with negative outlooks generally face heightened development risks and limited cushion on credit metrics to sustain a downturn.

“However, we expect downgrades to be limited to one notch, given our expectations for moderate and gradual pressure on cash flow in the next one to two years.”

AMP Capital Wholesale Office Fund, Dexus, GPT Wholesale Office Fund and Investa Commercial Property Fund were all rated A- with a stable outlook, while Charter Hall Prime Office Fund was rated BBB and stable.

OtherOfficeAustraliaSector
AUTHOR
Ted Tabet
The Urban Developer - Journalist
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Article originally posted at: https://www.theurbandeveloper.com/articles/work-from-home-puts-office-sector-under-pressure