Key Findings

Australian CBDs are hives of commerce, progress and innovation. They contributed around 12% of the country’s economic activity in 2019 alone.
Over the course of the pandemic, we’ve seen a growing cultural conversation proclaiming the death of the CBD. But cities still play a formative part in the lives of Australians.
Major city centres including Sydney, Melbourne and Perth employ 3.5 times as many people as the mining and resources sector. Urban centres also double as hubs for recreation, play and leisure. The CBD isn’t dying – it’s just changing form.
As CBD tenants are reducing their floorspace to embrace flexible working, city centres are becoming increasingly attractive to a new wave of businesses. This has the potential to create communities that revitalise the city, sparking new collaborations and fresh energy. This injection of innovation and entrepreneurship is poised to set the stage for future growth.

Through history, central business districts have been the economic powerhouses of Australia

Australia’s central business districts (CBDs) are the hearts of our cities, hubs of commerce, creativity and leisure. They are also powerhouses that help drive the country’s economy. As figure one shows, around 12% of Australia’s economic activity during the 2019 financial year can be attributed to four of the country’s largest CBDs alone.

In Australia, one of the most urbanised countries in the world, CBDs are hotbeds of growth, progress and innovation. Our research shows that Sydney, Melbourne and Perth, taken together, exceed the value generated by the Australian mining and resources industry ($165 billion versus $161 billion). These districts also employ 3.5 times as many people, a statistic which reinforces the vital role cities play to the wellbeing of everyday Australians.

Cities don’t just house the flagship branches of big business. The city’s openness to people from all backgrounds and walks of life can also attract a newer generation of business, from solopreneurs pioneering new ways to remake old industries from fast-growing enterprises that disrupt the way we work, live and connect with each other. The geographical density that’s a hallmark of urban centres also lends itself to collaboration and cross-pollination of bold new ideas.

And in the CBD, recreational spaces – rooftop bars, laneway cafes, restaurants – aren’t just synonymous with leisure. They are the lifeblood of urban centres, giving rise to serendipitous encounters and conversations. This urban ecosystem drives new affinities and initiatives that are often the basis of disruption.

Figure 1 Top 10 gross value add (GVA) regions in FY19

Rank	SA	GVA ($m)	Employees
1	Sydney - Haymarket - The Rocks	87,595	353,215
2	Melbourne	50,340	258,391
3	Perth City	26,997	130,108
4	Roebourne	26,466	5,120
5	Ashburton (WA)	25,231	29,115
6	Brisbane City	24,007	121,150
7	East PIlbara	20,245	13,808
8	Adelaide	16,980	114,307
9	Docklands	16,224	77,142
10	North Sydney - Lavender Bay	13,479	50,450

^{Source: PwC’s Geospatial Economic Model (FY19)}

Figure 2. The capacity of CBD workers to work from home

Industry	% of CBD employment	% of national employment	WFH Capability
Professional, Scientific and Technical Services	21.14%	1.97%	High
Financial and Insurance Services	17.63%	1.64%	Very High
Public Administration and Safety	13.90%	1.30%	Low
Accommodation and Food Services	7.33%	0.68%	Very Low
Education and Training	4.97%	0.46%	Very Low
Retail Trade	4.77%	0.45%	Medium
Administrative and Support Services	4.72%	0.44%	Low
Information Media and Telecommunications	4.17%	0.39%	Medium
Health Care and Social Assistance	4.01%	0.37%	Very Low
Construction	3.31%	0.31%	Low
Rental, Hiring and Real Estate Services	2.46%	0.23%	Medium
Mining	2.45%	0.23%	Low
Transport, Postal and Warehousing	2.26%	0.21%	Low
Other Services	1.81%	0.17%	Very Low
Electricity, Gas, Water and Waste Services	1.67%	0.16%	Low
Arts and Recreation Services	1.52%	0.14%	Very Low
Manufacturing	1.04%	0.10%	Low
Wholesale Trade	0.86%	0.08%	Medium
Agriculture, Forestry and Fishing	0.00%	0.00%	Very Low
Total	100%	9.33%

^{Source: PwC’s Geospatial Economic Model (FY19); IbisWorld (2020)}

But our CBDs have been disproportionately affected by COVID-19

Traditionally speaking, CBDs in Australia have mostly attracted those employed by the professional and financial services industries. In the last year, the governments’ response to COVID-19 – in the form of lockdown restrictions and calls for social distancing – means that CBD workers were likelier than the wider community to work from home. As figure two points out, Australian CBDs mostly attract those employed by the professional (21.14%) and financial services (17.63%) industries. They make up over 39% of the CBD workforce and have a High to Very High capability of being able to work from home.

And as a greater proportion of workers swapped their CBD commute to work from their kitchen tables or their home office, we saw occupancy levels across CBD’s nosedive – figure three paints a compelling picture of this trend with occupancy in Melbourne’s CBD being as low as 4% of pre-COVID-19 levels in October, and 40% in Sydney’s CBD.

Figure 3. Current levels of occupancy in office buildings compared to the pre-COVID-19 period

^{Source: Property Council (2020), Survey Chart Book, available here.}

Understandably, this shift negatively impacted CBD businesses – such as retailers, restaurants, bars and cafes – that have historically relied on a high level of foot traffic or a healthy after-work trade. This comes to light in figure four, which draws on Google mobility data to show how Sydney and Melbourne have seen people’s movement through their CBDs decline.

Figure 4. Movement across Sydney and Melbourne CBDs versus the state as a whole

Sydney

Melbourne

^{Note: Data is drawn from Google (2021), and is then shown as a seven day moving average of the difference between the mobility scores for the CBD local government area versus the state as a whole}

In the wake of the pandemic, Australia, like its global counterparts, has seen reduced foot traffic across its city centres along with a lower rate of CBD activity. This is largely a result of COVID-19 restrictions that have seen employees opt to work from home, taking a break from commuting. Lockdown rules and directives to self-isolate have also changed the way citizens move through the city and use urban space.

Our research suggests, however, that in terms of the June-October lockdown, Sydney and Melbourne CBDs haven’t been affected as dramatically as comparable world cities such as London and New York. Most likely the severity of lockdowns across those cities have created more dramatic shifts.

Figure 5. Workplace mobility in select global CBDs

^{Note: Data is drawn from Google (2020), and is then shown as a seven day moving average of the difference between the mobility scores for the CBD local government area versus the state as a whole}

Experts are proclaiming the death of CBDs

It’s clear that the CBD is changing shape. As citizens move through their cities in different ways, the relationship between city centres and the people who inhabit them has entered a new incarnation. This dramatic fall in CBD occupancy has spurred some commentators in the media and across industry to herald the potential ‘end of the CBD’.¹

The argument that underpins this assumes that we will see fewer people travel to the CBD for work. This line of thought goes; as working from home becomes enshrined in workplace culture offices will be under-occupied. As a result, less people will be compelled to travel to the CBD to shop and fewer still will frequent food and beverage-related businesses.

This is also compounded by the growth of online shopping, a phenomenon that was hurting retailers well before the COVID-19 pandemic. According to data from the Australian Bureau of Statistics, a third (33%) of people prefer online shopping now than before the pandemic². Australia Post research from 2020 same year revealed that, by November 30, online retail in Australia had grown 45% year-on-year.

But we believe this claim is overstated

We believe that this so-called ‘death of the CBD’ has been exaggerated. As the risks of COVID-19 recede, we can expect people to return to work in Australian CBDs.

We’re seeing this desire proven out in surveys across the country, including our own recent PwC study³ where 66% of respondents told us they would prefer to connect with people at a physical workplace. Perhaps not surprisingly, the planned work to be done from home is administrative (75% of respondents) and individual tasks (67%).

This attractive sense of connectivity and dynamism that comes from an office is endemic in the city structure itself. A 2016 report by New South Wales’ Department of Planning and the Environment and the Greater Sydney Commission attributes the existence and economic power of urban CBDs to ‘agglomeration’, a process that refers to the ways in which cities are formed by a dense concentration of markets, knowledge, services, infrastructure and skills. The report argues that the co-location of these assets generates gains in terms of productivity, innovation and economic development.⁴

These benefits are supported by the accessible nature of Australian CBDs, which are effectively served by public transport infrastructure. CBD-based businesses can use this connectivity to their advantage, tapping into a potential pool of potential workers compared to other organisations.

Here, it’s worth revisiting the ways in which CBDs have evolved through history. As the urbanist Richard Florida put it in a February 2021 presentation at a Committee for Sydney event, the arc of urbanisation has continued unabated over the last two centuries. The power of urbanism, symbolised by the ways in which people and businesses cluster together, drawing strength from their proximity to each other, survived the world’s last pandemic. If we consider the past, the negative rhetoric around the death of cities is largely unjustified.

In fact, we’ve already seen a spike in CBD activity. A Property Council survey of 102 members who own or manage the majority of CBD office buildings found that workers were less concerned by public health restrictions and are now deterred from the CBD because of anxieties around public transport and workplace safety.⁵

What will hybrid look like in our CBD offices?

In the future, employees may return to the CBD – but not on a full-time basis. Three-quarters of city workers are reluctant to go back to their workplace full-time, according to a Roy Morgan poll commissioned by the City of Melbourne.⁶ The great news is, the world has now ‘caught up’ with the value working outside the office can bring. Our forced work-from-home ‘experiment’ has shown that people who choose to do so aren’t lagging, they are productive, and that being outside the office should be normalised.

And when workers do come to the office, organisations will need to make their commute worth it. There will be a flight to quality, with offices becoming the ‘mecca’ of a business or place for cultural recharge and sanctuary, a place to connect with ‘my people’.

The CBD isn’t dead, it’s just undergoing a transformation and the full picture is much more nuanced than we thought.

The new innovation wave

As a larger percentage of the workforce embraces flexible working, we can expect to see major CBD tenants reduce their floorspace. This is already in motion, as shown in the increased availability of subleases in figure seven. In fact, availability of subleases is higher than during the GFC.

Building owners can expect to see lower rents. But we can also expect organisations – such as start-ups and small businesses – that were previously priced out of CBD location seizing the opportunity to relocate and capitalise on the power of agglomeration. As of December 2020 the sublease availability in Sydney is 170,300m2. That frees up space for around 14,000 new workers⁷ to come into the CBD, equivalent to around 430 dynamic SMBs - replacing departed workers and reinvigorating the city.

This could set the stage for a new wave of CBD innovation. Entrepreneurs could take up residence in co-working spaces and social enterprises and creative professionals who have previously worked out of lounge-rooms and bedrooms could establish offices in disused buildings and corporate foyers.

We see this paving the way for robust start-up ecosystems and sowing the seeds for new communities that imagine progressive ways of working and living. These fresh arrivals will revitalise urban centres, attracting new ventures from fields such as recreation and leisure, culture and hospitality. This could further result in drawing overseas investment and global talent, giving rise to opportunities for growth that have never existed before.

Figure 7. Sublease availability in Sydney

^{Source: CBRE Research (2020), Sublease barometer}

What does this mean for your business?

Over the last few decades, the CBD office has been so central to the way companies imagine themselves, it can be difficult to know precisely how to align your approach to this prized real -estate to your organisation’s long-term evolution.

Starting now, working practices across individual organisations will change and workplaces will become more mobile and transient, tailored to the demands of hybrid working and ‘drop-in’ workers. Organisations will need to provide stimulating and inspiring spaces that are designed intentionally so that employees who choose to come into the office – in favour of alternatives – are equipped to do their best work.

But creating space for change means taking meaningful action.

When we surveyed our people, they said they wanted a hybrid work environment. Although offices aren’t always the best option for deep working, they can be highly conducive to connection and collaboration. But organisations need to understand how their employees intend to use their office space and let these insights guide the redesign. A cleverly imagined office isn’t just about inspiring your workforce and unleashing their potential. It’s also worth thinking about how reconfiguring your physical headquarters can foster better customer and client relationships and improve stakeholder engagement.

Many businesses think about their real estate footprint exclusively in terms of financial overhead. But it’s also essential to consider impact and value as alternative ways of measuring the importance of office space. Savvy companies are starting to explore how they could retain and repurpose office space to incubate and nurture other organisations such as start-ups and not-for-profits that are aligned to their mission.

This could mean releasing space or choosing to sublease, depending on the flexibility of existing lease agreements. But as current data shows that subleasing isn’t an attractive option during times of market uncertainty, this may not be a simple move. However you choose to reduce your footprint, it’s important that you have a firm plan in place for the time your lease is up.

Let’s be honest. One option is to do nothing. Organisations are at a crossroads and one viable option is to continue with the existing property portfolio, floorspace, and workplace configuration. And it is a comfortable option amidst uncertainty, allowing market conditions to stabilise before making any decisions. But in making this choice, it must be done in full awareness that other organisations are pushing ahead, and evolving their employee value proposition in the process.

We may look back at the COVID-19 era as one that adversely impacted the owners of CBD properties. But we can also see this as the dawn of a new era in which the CBD is re-imagining itself and creating exciting opportunities for innovation, collaboration and progress that haven’t existed before. We believe that Australian CBDs will continue their defining role as economic powerhouses – as well as incubators for the changes that are still to come.

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References

^{1 For example: Roger Montgomery (2020), ‘Are we about to see the end of the CBD?’, available at https://rogermontgomery.com/are-we-about-to-see-the-end-of-the-cbd/; Paul J. Maginn & Gary Mortimer (2020), ‘How COVID all but killed the Australian CBD’ available at https://theconversation.com/how-covid-all-but-killed-the-australian-cbd-147848}

^{2 ABS (2020), Household Impacts of COVID-19 Survey: Insights into the prevalence and nature of impacts from COVID-19 on households in Australia, November 2020, available at https://www.abs.gov.au/statistics/people/people-and-communities/household-impacts-covid-19-survey/nov-2020}

^{3 Thinking Beyond: How the Pandemic is rewiring a new world of work}

^{4 Greg Clark & Tim Moonen (2016), Agglomeration, Centres, and District Plans for the Greater Sydney Commission: Lessons from International Experience, available at https://www.planning.nsw.gov.au/en/Plans-for-Your-Area/Sydney/A-Plan-for-Growing-Sydney/~/media/F1B784E2634B47FB864FF95E135268F7.ashx}

^{5 Property Council (2020), Australian CBD Office Workplaces Picking Up Momentum, November 6, available at https://research.propertycouncil.com.au/blog/australian-cbd-office-workplaces-picking-up-momentum}

^{6 The Australian Financial Review (2021), D-Day looms to get reluctant staff back in office, February 2021, available at https://www.afr.com/work-and-careers/workplace/d-day-looms-to-get-reluctant-staff-back-to-office-20210202-p56ys5}

^{7 https://www.commercialrealestate.com.au/advice/how-much-office-space-do-i-need-57459/ (Figure of 10,000 achieved by applying the recommended space per worker of 8-12m2 per worker to the current available space.)}