There is no denying office markets face unprecedented challenges. Hybrid working and a reluctance to return to full time work are causing headaches for businesses and landlords worldwide. Yet while Australia’s most recent office vacancy rates have hit levels not seen since the 1990s the picture is not as gloomy as it may seem.
The latest Property Council of Australia’s bi-annual Office Market Report shows office vacancy rates have risen from 12.6 per cent to 12.8 per cent nationally in the six months to the end of July – Sydney and Brisbane lagging the most. But the figures have been skewed by an especially large volume of new stock becoming available during the same period, rates of fresh supply in capital city CBDs exceeding the historical average recorded in five of the last seven PCA office market reports.
Activity on the up
CBRE office leasing experts also point to the fact that office leasing activity across Australia continues to outperform all other commercial sectors industry. Office rents have been growing at the same time. Furthermore, Australia and the Asia Pacific region’s office markets are tracking far better than many internationals and especially places like San Francisco and New York where parlous vacancy rates have dominated headlines for months.
The were several reasons said CBRE leasing experts, starting with corporate Australia. Larger institutions keen on getting workers back at desks were finding success in offering enticements such as better workplace experiences, modern premises, greater benefits and flexibility. The other end of the spectrum – small business - had also become a major driver of office leasing. Small to medium enterprises accounted for almost half (46 per cent) of the 283,000 square metres of office space leased during the first six months of 2023, the PCA report found. Office leasing data further shows SME leasing activity continuing to increase.
“Despite the economic headwinds leasing volumes remain healthy across the Australian office market,” said Tom Broderick, CBRE’s Head of Office & Capital Markets Research.
“Larger tenants like the major banks are still attempting to drive higher physical occupancy and have contracted footprint over the past 24 months. We expect better occupancy of office space over the coming 12 months for these organisations, given a likely softening in the labour market, which will provide employers with more leverage to get their staff back to the office.”
Subleasing stabilised over the last 12 months Mr Broderick said. “There has been a gradual decline of professional and financial services companies offering excess space for sublease recently,” he said. “However, this has been offset by technology, media and telecommunications firms offering more sublease space to the market.”
Premium and new buildings with the latest interiors, features and environmental criteria continued to prove the hottest property. Demand for A-grade premises drove most of the rental growth across Perth, Sydney and Brisbane markets over the past year 12 months. Colliers’ data shows that in Sydney, the most significant rental growth in the last six months occurred across high-demand prime assets located in the city’s CBD core, net effective rents climbing 11.4 per cent to outpace the 5 per cent average recorded by the entire CBD.
In contrast, Adelaide and Melbourne recorded slight declines in effective rents due to high volumes of new buildings luring tenants from less sophisticated premises and creating subsequent backfill space. This however could ease in coming months according to CBRE. “We expect medium-term supply to moderate as a combination of high construction costs and softening yields cause new developments to become less feasible,” Mr Broderick said.
Location was still factoring highly for many businesses wanting to move. Colliers managing director of office leasing Cameron Williams said offices in top locations or “pull to precincts” typified by good public transport links and chic amenity had worked in the favour of areas like Sydney’s northeastern CBD, the Paris end of Collins St in Melbourne and the River Precinct in Brisbane.
Bigger and better
In Sydney, increasing numbers of large corporations seeking new tenancies was a notably positive sign for the CBD. “Larger occupiers of 2000sqm-plus are driving the enquiry which we haven’t witnessed since pre-covid, ´ said CBRE’s state director Tim Courtnall. “Organisations are wanting to create better workplace outcomes in better quality and centrally located assets. We have seen several exciting larger transactions this year supporting these trends with seven relocations of 5000sqm or more.”
There was no denying that tenants this year were proving far more discerning Mr Courtnall said. “They’re analysing property costs more than they have in the past two years which is prolonging decision making,” he said. “But landlords are meeting this demand with more curated solutions and providing more turn-key solutions to mitigate the costs of completing new fit outs.”