Omicron, Delta and the office rental market

It is becoming evident that companies employing office staff who during the past eighteen months worked from home are finding it difficult to lure them all back to the office. This is a new phenomenon that emerged out of the pandemic and for a small island with its own problems of commuting it is no surprise that office workers prefer to continue to work online.

Can this factor influence property developers (or possibly the Planning Authority) to reassess their propensity to invest in new commercial buildings. Certainly, the offices of today must have additional amenities which were unheard of previously in order to lure back-office workers.  It goes without saying, that one needs to take a risky bet to invest in massive new office space apart from finishing - those already in the pipeline.

The recent grey listing of the island by FATF makes it even harder to attract multinationals and possibly even to retain existing FDI - attracted in the past decade. The onset of the G20 tax rule which invokes a minimum 15% tax on corporates with a global turnover of €750 million, may see about 20 larger investors to leave the island.  Developers are wary about the potential glut of commercial space which needs hundreds of new jobs to be created (apart from repositioning ofs employees as has recently happened when FIAU plans to move to a 4,000 sqm facility at Trident Park or the move by MBR to a Zejtun rented property).

Highly sought-after areas which offer top-end office space, such as Tigné in Sliema, Balluta Bay, Pender Gardens and Portomaso in St Julian’s, have so far managed to keep their values stable due to high demand and low supply, while offices in different areas did suffer a 20 to 25 per cent reduction in the quoted prices per square metre.

In a recent media article, Zaren Vassallo (chairman of Vassallo group) was cautious about the rental market.  He was quoted saying that half the boutique hotels in Valletta, either failed to open or are up for sale.  In his opinion, the rental market had already seen a decline in 2019 and plummeted in 2020 due to the pandemic, and there were few signs it would grow back.  Add to this, the recent tightening of bank credit towards mega property deals is another brake on the wheels of additional development.

The drop in vacancies for global commercial space will also impair the value of the properties themselves.  The pandemic’s effect on office space is slowly becoming visible on surplus office space.  It comes as no exaggeration that working parents find they manage their family duties and work better by staying at home without the need to commute busy roads to work.  Social distancing has reduced office space as desks had to be moved further apart to abide by social distancing rules so perhaps this has reduced pressure by employers to lure back all employees.

Naturally, in Malta, one wonders why certain State agencies continue to rent large office premises from the market when there is a reduction in demand due to remote working.  The best indicator of the pressure on rentals was given by a recent report issued by Djar Report in conjunction with EY.

The dataset submitted by the Djar report shows a notable drop in average price/sqm rates for hospitality establishments since 2020 Q3 (from c. €6,000/sqm to €5,500/sq.m), and a fall in average prices for offices in 2020 Q2 which was however recovered in subsequent quarters.

It is pertinent to assess the impact of large developments already approved by P.A.  One of the more striking property developments is that by the Trident Group offering the luxury Trident Park project.  Located in the heart of the emergent Central Business District on the site of the historic former Farsons Brewery, it plans to secure an office space at 4,462sq.m out of an available total floor area upon completion of 15,745sq.m.

Trident Group CEO Xuereb said: “Following the pandemic, when many companies opted for a hybrid office-home model, two potential factors seem to be emerging: the need for less office space, matched by the need for better quality office space, both in terms of facilities and environment and a lesser density per capita. Another mega building (still under construction) located close to Trident Park is the Quad Business Towers set on a site with a superficial area of 11,200sq.m.

Moving to the central Sliema district, one meets with a number of commercial developments mainly rented to gaming companies. One cannot but notice the tower designed by Zaha Hadid Architects pioneered by Dr Joseph Portelli to reach a commanding height of 112 metres. Named Mercury Tower, the 31-storey building would be 14.5 metres higher than the nearby Portomaso Business Tower. It is set to deliver over 44,000sq.m of commercial floor space, and when finished next year, it shall include a mix of Grade A office space and a range of retail and amenity outlets.

Last, but not least, is Smart City which is a massive land parcel in the south originally planned to be built by a Gulf Arab consortium which flopped due to the global financial crisis in 2007/9.  The highly politicised project saw its birth in 2006 and in exchange for public land, developers were expected to build and run an ICT office hub creating 5,600 jobs.

In conclusion, the commercial developments listed above are not an exhaustive list of office and retail space in the market, yet it makes one wonder if the pandemic has only partially dented the drive by trigger-happy mega developers to continue in their strategy to bet on the property market as the proverbial milking cow.