The office property market is bracing for a potential upheaval as concerns about artificial intelligence (AI) disrupt traditional investment strategies. While the sector has recently navigated the challenges posed by work-from-home policies and rising interest rates, experts warn that AI’s impact could reshape the landscape significantly.
Concerns About AI’s Impact on Office Space
Michael Byrne, chief investment officer at $86 billion property fund manager AEW, has noted a growing apprehension within the property sector regarding the future of office spaces. He expressed these concerns during a recent visit to Australia, stating, “It used to be that there are winners and losers in the world, right? And it feels today like there’s going to be a limited number of major winners in the market, and then there’s going to be lots of marginal losers.”
Byrne highlighted the challenge of underwriting properties when many tenants may be considered marginal losers. As companies adapt to the changing work environment, the need for office space could diminish, raising questions about the future viability of many buildings.
Recent reporting from February indicated that the office sector in Australia has weathered the work-from-home storm, with demand rising across all major markets. However, a significant disparity exists between high-quality properties and those deemed less desirable. For instance, Charter Hall Group CEO David Harrison reported an occupancy rate of 94.7 percent in his portfolio, well above the national average of 83.5 percent. He expressed a clear preference for avoiding older suburban offices, which he referred to as the “old boilers” of the sector.
Vacancy Rates Highlight Market Disparities
Harrison shared a striking statistic illustrating the divide within the office property market: 90 percent of vacancies in Sydney are concentrated in just 8 percent of the city’s buildings. He emphasized that older, less desirable buildings located in challenging areas are primarily responsible for the high vacancy rates.
Byrne noted that similar trends are emerging in the United States, where the shift to remote work has rendered a portion of the office market obsolete. He compared this situation to the retail sector’s struggles, where certain shopping centers became ghost towns. As companies reassess their office needs, the potential for significant disruption looms.
Despite these challenges, Byrne remains cautious about predicting the timeline and extent of AI’s impact. He stated, “The level of uncertainty isn’t just about whether or not a building is leased; it’s about whether or not you’ll be able to sell the building to somebody else in the future.”
A survey conducted by architectural firm Hassell last year found that approximately 60 percent of the space leased by typical office tenants is dedicated to desks. This could change as white-collar jobs evolve, potentially requiring less space for desks and more for shared areas and meeting rooms.
Market Reactions and Future Outlook
Back in Australia, landlords are grappling with the unpredictability of AI’s effect on the office market. Harrison acknowledged the difficulty in forecasting the future, suggesting that anyone claiming to know the outcome must possess exceptional insight. Currently, major corporations, law firms, and investment banks appear confident, as evidenced by their new 10-year lease commitments. Harrison noted, “They’re not so worried about a drop in their workforce.”
Meanwhile, Mirvac CEO Hanan remains optimistic about the potential for job creation alongside job displacement due to AI. He believes that even in a worst-case scenario where remote work becomes prevalent, companies may still seek out high-quality real estate. “One thing we do believe is that if you play out a bit of a doomsday scenario that says that people work from home and AI removes a number of different job types, companies will be able to afford to live in the best quality real estate,” Hanan stated.
As the office property market navigates these challenges, investors and landlords will need to adapt their strategies to align with the evolving landscape. The interplay between traditional office needs and the disruptive potential of AI will continue to shape the future of commercial real estate.
