COMMERCIAL PROPERTY, SALES & LEASINGCORONAVIRUS COVID-19 PANDEMIC

Office rents stable but market walking a tightrope

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AUSTRALIA’S major CBD office markets net face rents remain firm against challenging business conditions, however this could be on the precipice of faltering as sublease spaces invade the market.

CBRE’s Q3 Office Market Snapshot shows net face rents have been stable, with only Adelaide showing increases at 0.6% over the quarter, after the addition of Charter Hall’s GPO Exchange project resulting in a 0.9% increase year-to-date in net effective rents.

“Overall tenant demand remains weak and with sublease vacancy exceeding previous peaks we may see face rents start to fall as incentives continue to rise,” said Joyce Tiong, CBRE’s head of office occupier research.

Incentives have risen in every major CBD as only Adelaide and Canberra hold relatively steady at 31.7% to 32.1% and 20% to 21.0% respectively. Sydney reported an almost 10% increase from 2019, rising from 19.4% to 29.0% in the third quarter. While Melbourne shows an increase from 26.8% to 32.5%, Brisbane 35% to 37.8%, Perth 46.2% to 50.0% across the same period.

“Our expectation is that more sublease space will enter the market, predominantly in prime assets and from the IMT (Information media and telecommunication) and finance sectors. Cost-cutting remains the key focus for occupiers with some renewing their leases but for less space and for a shorter period.” Tiong said.

According to Tiong there has also been an increase in tenants seeking a larger upfront incentive rather than having it spread over the lease term.

Source: CBRE

Despite this Mark Curtin, CBRE’s pacific head of office leasing says that while not at pre-COVID figures close to 170,000sqm of new transactions have been recorded in Q2 and Q3.

“Small to medium tenants are starting to plan for more normal operating conditions in 2021” said Curtain, with expectations that larger occupiers are likely to follow in the first half of 2021, as economic realities of a post-COVID new normal becomes less opaque.

Though leasing activity stays reserved in Melbourne, thanks to new additions the Victorian CBD reports the strongest growth in tenant moves. With vacancies rising from 2% in 2019 to 5.7% in the third quarter of 2020 and sublease space tripling over 2020 to its highest rate in seven years.

Brisbane was the only market to report a fall in sublease stock with a 3% decline over the quarter.

With Adelaide outperforming other office markets across the county, with both increased net face rents and incentives remaining comparatively stable, the continuation of governments stimulus package should keep the CBD in relative strength under the new COVID normal.

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