Australia’s major office markets are experiencing the full brunt of 2020’s economic and health crises, with sublease space jumping by more than 30% nationally in the third quarter to reach a new peak of 352,768sqm.
CBRE’s September 2020 Sublease Barometer report highlights how increasing uncertainty from COVID-19 is impacting tenant demand, with sublease volume now representing 2% of the country’s total office stock.
CBRE’s Head of Office Leasing for Pacific, Mark Curtain, said while market activity was slowly improving each month, sublease space was expected to edge even higher in the months ahead.
“The landscape of Australia’s office market has changed significantly in 2020, with occupiers shedding space that was earmarked for growth. As tenants right size their business for the anticipated economic conditions ahead, vacancy in the sublease market has grown to represent 2% of Australia’s office market,” Mr Curtain said.
“When it comes to assessing and making decisions around long-term real estate strategy, occupiers are adopting a more intensive risk assessment amid growing economic uncertainties and the widespread adoption of remote and flexible working.”
The report shows prime grade office stock has been most vulnerable to rises in sublease space, accounting for 80% of volume in the market. Contraction was highlighted as being the biggest driver of new sublease space during the three months to September, with about two thirds of available space a result of occupiers downsizing their office footprints.
Large tenancies spanning more than 2,000sqm make up the bulk of sublease options in the market (accounting for 70%), while financial and insurance services are the biggest sublessors, followed by professional services and information media and technology.
CBRE’s Head of Office Occupier Research, Joyce Tiong, said continued economic headwinds would underpin the need for landlords to provide greater flexibility around leasing terms.
“Continued cost-cutting by businesses and persistent economic headwinds will result in occupiers seeking greater lease flexibility to accommodate a ‘flex up’ or ‘flex down’ workforce – as well as catering to employee expectations for a ‘more than a workspace’ environment,” Ms Tiong said.
“The continued rise in sublease volumes will also provide an influx of attractive tenancy options in the market, including both short-term and longer-term opportunities for quality fitted space in major office locations.”
Q3 sublease activity in Australia’s major office markets is outlined below:
Sydney
Sublease volume in Sydney has hit a new peak, jumping 56% in the third quarter to reach 164,950sqm – its highest level since 1992.
The increase in sublease stock reflects the willingness of large occupiers to readily offload space to meet market requirements. Further to this, financial and insurance services are the biggest contributors of sublease space (38%), followed by professional, scientific and technical services (20%) and rental, hiring and real estate services (13%).
Soft tenant demand is reflected by a rise in prime incentives, reaching 29% in Q3 of 2020 compared to 19% in the corresponding period of 2019. This, however, will continue to provide flight-to-quality and flight-to-centre opportunities for non-CBD tenants taking advantage of attractive incentives and quality space on offer.
Melbourne
Sublease availability in Melbourne lifted 46% over the quarter to 93,257sqm – a new seven-year high - despite Melbourne coming off a historically low vacancy rate of just 3.2% in January 2020.
Melbourne’s office market will come under additional pressure due to the largest increase in new supply in almost three decades over 2020-2021. While around 90% of the upcoming new supply has been pre-leased, resulting backfill could push vacancy upwards.
Financial and insurance services were the biggest contributors of sublease space over the first half of 2020, followed by professional, scientific and technical services and electricity, gas, water and waste.
Brisbane
Brisbane’s office market has bucked national sublease trends, recording a 6% decrease in the amount of space, to 44,600sqm available during the third quarter. This was mainly driven by Virgin Australia’s commitment to lease 8,300sqm in South Brisbane.
As evident in other major office markets, the majority of available sublease space is situated within prime grade buildings, with approximately 7,000sqm in premium grade and 35,400sqm in A-grade.
While sublease availability is expected to rise over the next 12 months due to the weakened economic outlook, Brisbane is less exposed to sublease risk compared with Sydney and Melbourne. This is due to a lower level of expansionary activity by businesses in Brisbane over the past five years.
Perth
Perth’s office market has remained relatively resilient, with just a 2.2% increase in sublease volume in the third quarter.
Perth CBD sublease availability increased from 35,652sqm to 36,453sqm in the three months to September, accounting for 2% of the Perth’s total CBD office market.
Since the beginning of 2020, sublease availability has increased more than 18%, however, the bulk of this space was added in the June quarter – highlighting the pace at which the CBD opened back up and the current strength of the state’s wider office economy.
Sublease space in Perth remains below the five-year average – and significantly lower than the 2015 peak of around 100,000sqm
Sublease space is likely to continue trending upwards over coming 12-18 months, although not at rate seen in Melbourne and Sydney given the different market fundamentals.
Adelaide
Despite Adelaide recording the largest spike in sublease activity during the September quarter, with a 117% increase, the total sublease volume remains negligible with just over 13,000sqm available.
Adelaide has been relatively immune to the sublease market compared to activity in the eastern states, which can be attributed to the lack of head offices situated in Adelaide – as is the case in other cities.
Adelaide’s office market is dominated by SME groups and government – sectors which are unlikely to explore subleasing options.
About CBRE Group, Inc.
CBRE Group, Inc. (NYSE:CBRE), a Fortune 500 and S&P 500 company headquartered in Los Angeles, is the world’s largest commercial real estate services and investment firm (based on 2019 revenue). The company has more than 100,000 employees (excluding affiliates) and serves real estate investors and occupiers through more than 530 offices (excluding affiliates) worldwide. CBRE offers a broad range of integrated services, including facilities, transaction and project management; property management; investment management; appraisal and valuation; property leasing; strategic consulting; property sales; mortgage services and development services. Please visit our website at www.cbre.com.
