James Maydew is AMP Capital's Head of Global Listed Real Estate, based in Sydney. Mr Maydew commenced in the real estate industry in 2002, starting his career in the direct markets as a chartered surveyor in London working within the capital transactions division of Cushman & Wakefield advising clients on single asset and portfolio transactions. Mr Maydew joined AMP Capital's Shopping Centres division in 2006 as an analyst before transferring to the listed market by joining the firm's global listed real estate team one year later as an investment analyst/portfolio manager. Mr Maydew has advanced through the business becoming deputy head of the team in 2013 and head of the team in late 2016 covering a whole host of geographic markets on both a primary and secondary basis. Mr Maydew holds a Bachelor of Science in Real Estate Investment and Finance from the University of Reading and is a fully accredited member of the Royal Institution of Chartered Surveyors (MRICS).

As the world tried to make sense of the COVID-19 crisis through the first half of 2020, one of the most striking themes was the way in which the pandemic had accelerated a number of trends across commerce and society.

Two of these – e-commerce and flexible working – were particularly significant for the property sector, in their effect and long-term implications for retail, industrial and office assets, respectively.
Twelve months on, have we really seen a step-change in these dynamics or is a gradual reversion underway?

Office

The balance undoubtedly shifted for office arrangements during the pandemic, with employees unexpectedly enjoying a much greater level of input into when, and especially where, they perform work.

To date, this shift has been relatively resilient – perhaps even more so than many expected. Even through periods of zero community transmission in Australia, many workers have stuck to flexible arrangements and a large number of businesses have moved to formalise these new patterns into permanent structures.

In parallel, however, there has been a concerted effort on the part of others to bring their staff back into the office.

Even if some are successful, on a broader scale the days of ‘nine-to-five’ at the desk are frankly over, and real estate investors, like their tenants, need to evolve. The sector is primed to continue its pivot in demand towards modern, tech-savvy premium grade office space, fit for a post-COVID world. High-spec facilities which incorporate hospital-grade filtered air-conditioning, touchless technology, smart lifts and intelligent space allocation, efficiently manage fluctuating occupancy to maximise the benefits of co-location and provide a safe space for employee talent. We expect that spaces that can’t meet this standard may face softer demand as the tenant base will simply shrink.

Putting aside preference for higher quality, we believe that predicting aggregate demand for space is harder due to competing dynamics. On any given day there will be fewer workers in the office relative to history, but companies will be less receptive to high-density seating plans and will likely need higher floor space ratios. Lower desk demand may also be offset by requirements for more collaboration spaces, as offices could predominantly become a place to work together, building culture and team dynamics, while solo work is conducted remotely. Tenant requirements will ultimately come down to how a corporate wants to manage its employee base and will ultimately become a lever in the competition for talent, especially in the technology sector. Looking at the US, it’s been well documented that Goldman Sachs is getting its work force back into the office1, but contrastingly, Amazon recently announced that tech and corporate employees can continue working from home two days a week and work remotely for four weeks of the year (domestically) once COVID-19 restrictions are lifted in the US2.

Where does this put aggregate office demand? Well on balance, we expect that tenants will continue to require less space into the future than before the pandemic. A look around empty CBD offices in an almost COVID-free Sydney on the barbell of the week (Mondays and Fridays), is a pretty compelling argument for further evolution in the sector; current arrangements in many businesses are anything but efficient. But within that overall reduced demand, we believe there are distinct opportunities for well-crafted, high-spec office space to capture a new generation of demand, as you simply cannot build a corporate identity over Zoom.

Retail and industrial

The trend to e-commerce had been on the march for years before the pandemic, but the closure of physical stores forced millions of Australians to change their shopping habits overnight and move to e-commerce platforms, many for the first time.

Easing the pain is the fact that retail spend across the board, including in physical stores, has surged as pent-up savings3 and consumer demand4 manifest themselves in revenge spending patterns. Within this context, the spike in e-commerce penetration has plateaued but shows no signs of reverting to pre-pandemic levels5.

How sustainable is this retail mall renaissance? To the extent it is living off foregone spending on services, we believe the current boom for discretionary malls may prove transitory as reopening normalises to a post-COVID world, and we might find that for physical stores at least, current sales are simply papering over larger structural issues. On the other hand, full reopening (including international tourism) may be some time away and other contributing factors (such as fiscal and monetary stimulus and the wealth effect of rising property prices) look set to continue at least through the short and medium terms, in our opinion.

However, the longer-term structural shift in demand away from the physical discretionary retail space is likely to continue into the future. This isn’t necessarily a doom-and-gloom scenario for real estate investors, as not all retail is in the cross hairs and given the significant opportunities that have opened up in the logistics space to support e-commerce. However, it does challenge current elevated sales data for the sector and investors should remain cognizant to this, and factor it into their capital allocation.

For e-commerce and industrial, the demographics at play are compelling – and it’s not just new generations of digitally-native spenders filling the ranks of consumers. For a significant number of shoppers in the generations above them – including cashed-up Baby Boomers, 2020 was the year that they had their first real experience with e-commerce. The first bite is critical to developing trust and loyalty, and the large e-commerce platforms – with ultra-fast delivery, enormous product ranges and subscription packages that reward repeat purchasing - were well and truly ready to make lifetime online shoppers out of many who would otherwise have not even considered it. We think it’s safe to say, ecommerce is not going anywhere.

1. https://www.bloomberg.com/news/articles/2021-06-14/wall-street-s-return-to-office-divide-laid-bare-by-goldman-citi
2.https://www.aboutamazon.com/news/workplace/amazon-updates-return-to-office-guidance
3. Australian Bureau of Statistics
4. Westpac-Melbourne Institute Index of Consumer Sentiment
5. Australian Bureau of Statistics