DESPITE a stall in the return to the office and a move to hybrid working, a rise in CBD vacancies over the past six months was rather the result of 421,000 sqm of new office space coming online, according to the Property Council of Australia.
The Property Council’s latest office vacancy data, released twice a year, showed national office vacancy increased by 0.8% to 12.9% over the six months to July.
CBD vacancy increased from 11.3% to 12%, while non-CBD markets rose from 13.9% to 15.2%.
Rises were seen in both of the major CBDs. Sydney lifted from 9.3% to 10.1%, and Melbourne from 11.9% to 12.9%. Increases were also seen in Canberra, up 6.3% to 8.6%, and in Perth, up 15% to 15.8%.
Brisbane and Adelaide were the only two CBDs in which supply didn’t outstrip demand. Brisbane vacancies came down from 15.4% to 14% while Adelaide firmed from 14.5% to 14.2%.
Demand for office space was strongest in Brisbane, at more than three times the historic average. Sydney, Perth and Adelaide were also above average, while demand lifted marginally in Melbourne, by 0.1%, and dipped by the same figure in Canberra. Net absorption was 55,670 sqm over the six months, below the historic average of 145,790 sqm.
Property Council chief executive Ken Morrison said that new office space is driving the increase in vacancy, not businesses wanting less office space. The supply of office space across Australia’s capitals has been above the historical average in four of the last five reporting periods, and all capitals experienced new supply increases of a combined 1.6%. A total of 421,115 sqm of space was added during the period, well above the average of about 316,500 sqm.
More than 401,500 sqm of stock is due to be added in the second half of 2022, but supply is forecast to taper off in the coming years. About 437,000 sqm is due to come online nationally across the entirety of 2023, and there is a pipeline of nearly 582,500 sqm due to come online from 2024 onwards.
There was 101,700 sqm was withdrawn over the past six months, below the historic average of about 161,000 sqm. Sublease vacancy increased slightly in both the Australian CBD and non-CBD markets, with Melbourne responsible for more than half of all CBD sublease vacancy.
Strong employment buoys demand
Morrison said that while many predicted a crash in demand for office space and a spiking vacancy rate, this has not occurred, underpinned by strong employment – the unemployment rate is at a historic low of 3.5% and the number of employed people has lifted 3.3% over 12 months – and “the recognition that an office in city is fundamental to the success of many businesses”. Sydney and Melbourne vacancies, however, were at sub-4% on the eve of the pandemic.
Morrison said the CBDs “still need attention”.
“While demand for space is increasing, the number of actual office workers in our city centres is well below pre-pandemic levels and threatens the ecosystem of cafes, restaurants and retailers that help make our CBDs such special places.”
“The recovery in our CBDs needs to be top of mind for governments and businesses even as we deal with elevated levels of COVID-19 in the community,” he said.
The most recent Property Council data for office occupancy showed the return to work stalled this winter in the face of strikes, floods, flu and another Omicron wave. Sydney and Melbourne were at just 55% and 49% respectively.
CBRE NSW office leasing director Stuart McSorley said the first half of 2022 generated a record level of enquiry, at 272,000sqm, eclipsing Sydney’s previous high from 2021. The most active tenants, in terms of enquiries and inspections, have been those seeking sub-1,000sqm, with expiry and business growth the key drivers.
“Professional Services firms remained the main driver for deals transacted in the first half of 2022. Deal terms remained steady with face rents holding despite some headwinds from global uncertainty, inflation and interest-rate rises. Incentives have remained stable, however they are expected to come under pressure and creep up in the short term, due to higher vacancy and global uncertainty.
“Sublease availability fell during H1 to 96,900sqm, from 100,200sqm at the start of the year, with the majority of the sublease market over 1,000sqm accounted for by a number of large tranches of space.” McSorley said.
In Melbourne CBRE Victorian head of office leasing Ashley Buller said tenants seeking sub-500sqm opportunities have been the most active, however momentum is growing among those with larger requirements.
“High-rise, Premium-grade rents in Melbourne’s East End have risen strongly, with a number of transactions reflecting 15-25% improvements against pre-COVID levels. Strong demand and reducing availability are driving this, amid a continued trend of flight to quality. Incentives across the market have remained sticky, and with the current market vacancy, we don’t anticipate this changing in the near future.
“Available sublease space declined by 42% to around 110,000sqm by the end of April, however it has recently increased again to around 140,000sqm due to a number of large offerings coming to market in Docklands. Suburban tenants taking advantage of favourable market terms have contributed strongly to the decline of sublease space, and we see this trend continuing.” Buller said.
JLL Victorian joint head of office leasing Nick Drake warned rising construction input costs and debt costs are likely to see delays in the delivery of new assets, but high vacancy and the flight to quality is accelerating the need for whole building refurbishment projects.
“Over the next 12 months, four whole building refurbishments will deliver close to 80,000 sqm of repositioned space to the CBD market. Over the last 40 years the annual average is circa 17,000 sqm. With sustainability at the top of the agenda and the challenges presented by embodied carbon, this is good news,” said Drake.
JLL’s ACT head of office leasing Andrew Balzanelli said leasing activity slowed in the lead up to the May federal election as the government went into caretaker mode.
“Now that we are past the election cycle, there has been a rebound in Government briefs and we expect leasing activity to pick up again over the back half of 2022.” said Balzanelli.
CBRE ACT office leasing director Troy Markos concurs and said the change of government will be positive for the Canberra market, with the public sector set to expand and several Machinery of Government Changes underway.
“The Commonwealth is working through these now, which will result in increased leasing activity later in 2022 and early-2023.” Markos said.
Brisbane & Gold Coast
JLL’s QLD head of office leasing James Montague said the first half of 2022 has been very strong for the Brisbane leasing market. The CBD and Near City market both recorded positive net absorption of 27,718 sqm and 2,836 sqm, respectively. Brisbane CBD recorded the highest quarter-on-quarter net absorption (27,718 sqm) across all CBD markets in Australia. The Near City market also recorded 2,836 sqm of net absorption.
CBRE Gold Coast office leasing senior director Tania Moore said the vacancy rate on the Gold Coast fell by 2% to 8.1%.
“The flight to quality has continued, with A-grade vacancy reducing by almost 40% to less than 5,800sqm and B-grade vacancy reducing by 30% with less than 13,000sqm of space available. These market conditions are supporting rental growth and the tightening of incentives.
“We are experiencing occupier frustration about the lack of available quality fitted suites in the 100-200sqm size range and for 1,000sqm-plus options, and with limited new supply additions for the foreseeable future this will continue to be an ongoing issue.” Moore said.
CBRE WA office leasing senior director Andrew Denny said Perth rents are starting to increase, albeit in select buildings, with West Perth and the suburbs likely to have stronger increases than the CBD.
“Looking ahead, the new-build market in the CBD is progressing strongly and will have the biggest impact on the market. One The Esplanade, a 55,000sqm project with Chevron as its major tenant, and the 17,000sqm Capital Square Tower 3 are due for completion in 2023, while the 9,000sqm Westralia Square Tower 2 should be completed in 2022.” Denny said.
JLL’s SA head of office leasing Tom Budarick said enquiry numbers in Adelaide are still positive.
“Enquiry remained strong throughout Q2 2022 with over 85,000 square metres of tenant enquiry recorded. For the most part, that enquiry came from government, banking, construction and professional services businesses, and for tenancies of up to 500 square metres.”
“However, given the current domestic economic headwinds of rising inflation and multiple official cash rate increases, a level of uncertainty is creeping into the occupier market which is likely to elongate leasing negotiations,” Budarick.
CBRE office leasing senior director Michael Pfitzner said going forward, supply will be the big story in Adelaide, namely its impact on the market over the next 12-36 months, with circa 130,000sqm of new development stock coming online.
“While we anticipate the majority of the new stock will be fully-leased by completion, or close to, history shows that new construction increases rental levels on existing building.
“Similarly, there will be an impact on the backfill accommodation, in terms of what refurbishment the respective owners undertake with their assets and, importantly, when they can complete it. In essence it will be a race to refurbish to beat the competition.” Pfitzner said.