The nation’s major office sectors face a mixed bag of scenarios with some forging ahead while others face far longer roads to recovery. On the upside the sector remains popular with investors and, although vacancy rates remain well above pre-pandemic levels, occupancy is improving more quickly than expected in some areas as we start the journey back to normality.
Research released by Ray White Commercial this week labels Sydney among the hardest hit of the nation’s CBD locations. While the last six months saw vacancies rise sharply across all CBD and non-CBD’s across the country, Sydney in particular is grappling with a recalibrated workforce now more used to working from home and reluctant to commute despite social distancing and mask-wearing rules on public transport.
Space issues
Large increases in new office space coming to market threaten to make high vacancy rates a long-term prospect. Ray White Commercial figures show 130,000sqm of new and refurbished stock has already entered Sydney’s office market in the last 12 months with minimal commitment. Compounding the situation is the low levels of office space withdrawn plus the high volume of stock still under construction – some 280,000sqm of office space set to debut over the next 18 months. This new stock comprises not only five new constructions but also five refurbished properties. About half the space is pre-committed.
These factors will keep Sydney’s vacancy rate “at a prolonged high” Ray White reports, warning landlords need to prepare for ongoing pressure on lease terms and other incentives which are currently running between 29 per cent and 32 per cent. Face rents are holding firm, prime stock averaging $1080sqm and secondary assets, $860sqm Ray White figures show.
Uncertainty prevails across the market: some companies are opting for larger and more open workspaces while others choose to split their workforces between home and part-time office work to minimise capacity and make efforts to increase cleaning and hygiene. The verdict? “Over the coming years we expect a greater focus to be on automation and flexibility of floorplates to cater for less touch points and allow physical distancing however still being able to rationalise cost and reduce wasted space,” Ray White Commercial analysts say.
None of this uncertainty however has stopped investors. Quality investments are still as popular as always especially across Melbourne, Sydney and Brisbane. In addition to several large quality assets that changed hands in Sydney in late 2020 and early 2021, Ray White cites the sale of the South Tower at 39 Martin Place as auguring well for long-term confidence in Sydney’s CBD. The 31,999sqm office building is still under construction and sold in a JV with Investa Group for $800 million.
Going Out West
In contrast to the Sydney CBD, the city’s western hub of Parramatta stands out as an area well placed for a steady recovery in the next few years, according to Ray White Commercial.
Parramatta CBD has one of the better performing office markets in Australia with few major movements sparked by the pandemic said Ray White Commercial Head of Research Vanessa Rader said.
“Office users however are considering their accommodation options with many businesses rationalising space or looking for cost savings while taking advantage of the incentives currently on offer,” Ms Rader said. “Backfill is also a growing issue across this market, with completions over the last year and into 2021 resulting in tenant relocation and consolidation resulting in available backfill spaces including various government departments, Commonwealth Bank, and Telstra.”
Relief however will arrive throughout 2023 after hitting a peak. “With limited white-collar employment growth anticipated across the whole economy as we navigate a post-COVID-19 world, vacancies are anticipated to continue growing, peaking at 16.45 per cent in January 2023 before rapidly moving down as supply and demand levels normalise,” Ms Rader said.
Back to work
As far as the return to physical workplaces is concerned, Melbourne has led the charge according to the The Property Council of Australia’s first Office Occupancy Survey of the year. The survey, which calculates office occupancies on whether a tenant’s employees occupy the space or work from home, not whether a lease is in place, found that by the start of February, Melbourne’s occupancy had more than doubled since the weeks before Christmas when it was running at 13 per cent.
The figures were encouraging but only the start, said Property Council Chief Executive Ken Morrison. “While we have a long way to go to get back to pre-COVID levels, increased CBD occupancy is a godsend for the thousands of businesses that rely on bustling city centres to survive,” Mr Morrison said.
Sydney’s CBD experienced a 45 per cent occupancy rate increase despite the Northern Beaches lockdown, the Property Council survey found. Over half of those surveyed believe there will not be a noticeable increase in occupancy levels for three months at least.
Reluctance to head back to work was driven primarily by perceived risk of commuting on public transport and capacity concerns around buses and trains – while nearly 40 per cent cited changed workplace preferences.