THE national CBD office market vacancy rate increased to 12.2% in 3Q 2020 with Sydney and Melbourne CBDs ballooning to double-digit territory as corporate Australia reassessed their space requirements, but Canberra defied the trend, thanks to growth in public sector jobs.
According to JLL research, the COVID-19 pandemic result in negative net absorption of -193,700 sqm over the third quarter, pushing the national vacancy rate up by 2.0% to 12.2%.
Head of research Australia Andrew Ballantyne said the economic crisis has negatively impacted business confidence.
“A number of organisations are assessing headcount expectations for the next 12-18 months and releasing excess office space. Corporate Australia is the new landlord in town with a sharp increase in sublease availability across the Sydney CBD and Melbourne CBD. The observation in Australia is replicated across developed economies with US sublease availability surpassing the levels recorded in the financial crisis and tech wreck,” Ballantyne said.
Head of leasing Australia Tim O’Connor said a number of large organisations are uncertain about their revenue and profitability outlook and are delaying decision-making.
“However, we are starting to see improved enquiry and deal activity across the country in the sub 500 sqm cohort of the market. This is an important first step towards improved activity in the leasing market.
“While larger occupiers are putting on hold their office space decisions based on the short term given the uncertain economic conditions, what we are seeing is decisions being made in relation to pre-commitment given the longer lead times involved. This is consistent with what we are seeing globally with deals being concluded since COVID-19 began by companies including Facebook and AIG in New York, Baker McKenzie in London and PwC in Shanghai,” he added.
Canberra now the tightest office market
Five of the six CBD office markets recorded negative net absorption during the quarter.
Canberra was the only CBD office market to record positive net absorption (+7,000 sqm) and the nation’s capital is also the only market with a single digit vacancy rate of 8.4%.
O’Connor said the federal budget is likely to be positive for the Canberra office market, highlighting an expected increase of 3,666 Australian public service employees (excluding military and reserves) over the 2020/21 financial year.
Former leaders, Sydney and Melbourne expanded into double digits territory.
The Sydney CBD recorded -94,500 sqm of net absorption over the quarter and vacancy increased from 7.5% to 10.2% in 3Q20. Sublease availability increased to ~130,000 sqm or 2.6% of total stock.
O’Connor said in an environment of uncertainty with a focus on cost reduction, a diverse range of organisations have released sublease space to the market in Q3.
“Some of the sublease space will be challenging to lease as it has an older style fitout or is only being offered for a short-term lease of less than three years,” he pointed out.
The Melbourne CBD recorded -70,100 sqm of net absorption over the quarter and vacancy increased from 7.7% to 11.3% in 3Q20. O’Connor said a number of new developments reached practical completion in Q3. However, the extended lockdown in Melbourne has negatively impacted the leasing market with the availability of backfill space and sublease space contributing to the uplift in vacancy.
The Brisbane CBD recorded -21,200 sqm of net absorption in 3Q20 and the vacancy rate increased by 0.8% to 13.6% over the quarter. O’Connor said the majority of leasing enquiry is smaller organisations seeking fitted space whilst the public sector is in a holding pattern ahead of the Queensland state election in late October.
The Perth CBD recorded -4,800 sqm of net absorption over the quarter, pushing the vacancy rate marginally higher to 20.4% in 3Q20. Ballantyne said Chinese steel production has only experienced minimal disruption as a result of COVID-19 and is expected to surpass the 1.0 billion tonne mark for the first time in 2020.
“The iron ore price is intrinsically linked to Chinese steel production and has historically been a strong lead indicator for the Perth CBD office market,” he added.
The Adelaide CBD recorded -10,200 sqm of net absorption in 3Q20 resulting in the vacancy rate rising by 0.6% to 15.4%.
O’Connor said the federal budget makes an important contribution towards Australia’s economic recovery plan. The announcement of new investment incentives will be positive for private sector investment and should flow through to employment growth and renewed leasing enquiry.
“The federal government expects to see a rebound in the Australian economy in 2021. The trajectory of the economic recovery will determine the employment outlook and demand for office space. The most active organisations in 2021 are expected to come from the public sector, technology and healthcare industry sectors,” he concluded.