“Notwithstanding the recent lockdowns in New South Wales and Victoria, and their expected impact on activity in the second half of the year, the national leasing market rebounded strongly through the first six months of 2021.
“Office occupancy rates reached 65%-80% in most major cities across Australia, with 45% in Melbourne due to the April lockdowns, delivering renewed confidence to landlords and tenants in the medium- to long-term recovery of the market.
“CBRE recorded in excess of 300,000sqm of new deals in 1,000sqm-plus assets across Australia through the first six months of the year. That is down on the pre-COVID levels of about 500,000sqm in an average six-month period, but well up on 2020’s activity in the depths of the pandemic.
“Small and medium tenant activity was a feature. Flexible and hybrid working arrangements are less likely to impact smaller office users, which by-in-large are experiencing favourable business conditions and acting with urgency to capitalise on current market incentives. We anticipate this tenant cohort will have an increasingly important role in asset strategies for landlords going forward, seeking less onerous lease conditions than larger occupiers.
“The rapid rise in sublease space in 2020 peaked in the first half of the year, and has now retreated from 429,000sqm to 375,000sqm of available stock. We believe the peak of the cycle has now passed and the total across Australia should gradually trend down over the next few years.
“Sydney was without doubt the star performer of the Australian office market in the first six months of 2021. Leasing enquiry levels rebounded strongly, while leasing enquiry volumes of 238,000sqm exceeded the H1 2019 level.
“As the country’s largest economy, Sydney’s activity has driven growing confidence across the broader Australian office market.
“Given the extent of the ongoing lockdown in NSW, we anticipate H2 2021 enquiry and deal volumes will be impacted, but to what degree is hard to determine at this point. We remain optimistic that the number of unforeseen lockdowns will diminish as vaccination rates reach targeted levels across the population, resulting in more stable conditions in late-2021 and moving into 2022.”
Sameer Chopra, CBRE Head of Research, Pacific & ESG, Asia Pacific
“The recovery in deal activity in the past six months has been demand-led. We had a good set-up leading into H1, with positive readings across all three of our forward looking indicators.
“The SEEK job ads indicator turned positive in November 2020 and went on to reach new highs through April – well above 2019 levels – as companies looked to take advantage of buoyant economic conditions by growing their footprint of marketing, technology and call centre staff.
“The Government sector has also been a positive contributor, while the NAB Business Confidence survey results and ABS Employment data have been tracking above 2019 levels, as recently as June.
“Looking ahead, there are a lot of moving parts including the near-term challenges of Sydney’s lockdown and rising expectation of inflation, but these are offset by still-strong business confidence.
“The most recent ABS data from June highlighted that 45% of large businesses were looking to hire more staff in the next three months, so we remain optimistic about the remainder of 2021.”
CITY BY CITY AGENT COMMENTARY
Sydney CBD Stuart McSorley, Director, Advisory & Transaction Services – Office Leasing
“Enquiry levels rebounded strongly in Sydney in the first half of 2021, with enquiries accounting for 238,000sqm, which is a record high.
“Leasing activity in terms of enquiries and inspections has been most active among sub-500sqm tenants and while cost-cutting and workplace reactivation remain the key focus for larger occupiers, many of the requirements put on hold in 2020 were reactivated in the first half of 2021.
“A flight to quality was a trend across the market, and quality fitted space is the most sought-after by tenants looking to entice staff back into the office. Many landlords are providing speculative fitouts to take advantage of the demand from tenants seeking fitted space.
“Deal terms remain steady with face rents holding as the business environment continues to improve. Rising incentives had slowed but are expected to soften further in the short term due to the current lockdown, and longer term due to high vacancy, large supply pipeline and sublease availability in the CBD.
“Sublease availability has fallen by 45,717sqm to a total of 112,913sqm as of June 2021. This represents a fall of 34% from its previous peak and a quarterly fall of 28%. This reduction was a combination of sublease deals and the withdrawal of stock as occupiers turn towards growth again.
“There has been a mixture of contraction and expansion leases signed, but expansion deals still contributed a higher proportion. Professional services and technology firms remained the main drivers for office demand and deals transacted in the first half of 2021.
“Notwithstanding the current lockdown, we anticipate the deal pipeline to pick up again for the remainder of 2021, off the back of strong enquiry levels in the first half of the year, with the majority of tenants focused on high quality fitted space.”
Melbourne Ashley Buller, Head of Office Leasing, Victoria
“Across the first half of 2021, we saw a significant increase in Melbourne transactions. We’ve had two lockdowns in Victoria since the start of the year, but very few deals have fallen over as a result, which is positive given the impact 2020’s extended lockdowns had on the market.
“The number of enquiries against H1 2020 has increased by 40%, with 74% of that from tenants seeking less than 1,000sqm. Interestingly, while the proportion of enquiries from parties seeking 1,000sqm-1,999sqm has fallen, those seeking 2,000sqm-plus accounted for the same percentage as in H1 2020.
“More than 140,000sqm of 1,000sqm+ leases have been completed in the CBD since the start of the year. This is a significant improvement on last year, and demonstrates larger tenants are back in the market and finalising lease commitments.
“A pair of major pre-lease transactions in the first half of the year underline the positivity around the market, with Medibank taking ~17,500sqm and Australia Post committing to 34,000sqm in a new Richmond office site on the corner of Burnley and Swan Streets.
“Government and government-associated tenants have been the most active in the market, followed by Information Technology firms. Of the enquiries we’re fielding, tenants with sub-500sqm requirements represent the highest percentage.
“The trend of tenants seeking fitted space continues to increase and many Prime-grade building owners are activating suites strategies, including subdividing floors into smaller tenancies, and installing high-quality spec suites.
“Flight to quality is still the dominant theme, with strong inspection numbers and activity in Premium and A-grade buildings.
“Melbourne still holds the unenviable position of leading the nation on the total amount of sublease space available, but positive signs are emerging.
“There are a number of large pending transactions, along with some sublease withdrawals, including one large 6,000sqm withdrawal in Docklands. We don’t anticipate many further large sublease opportunities coming to market, and we expect further sublease withdrawals, which will translate to an overall reduction in Melbourne’s sublease space.
“On the basis that Melbourne doesn’t suffer another major and prolonged lockdown like 2020, we anticipate an increase in larger tenant transactions. Hybrid working will be a key theme moving forward and tenants will continue to seek lease-term flexibility.
“Face rents have held up relatively well and while we’ve seen an increase in incentives, as deal volumes increase we anticipate incentives will start to level out.”
Brisbane Chris Butters, Managing Director, Brisbane & Queensland State Director, Office Leasing
“Transaction volumes in the Brisbane office market are being underpinned by brokerage activity in the 100-1,000sqm range, which is driving increased participation rates in the CBD and metropolitan office markets.
“Enquiry has increased dramatically in the first half of 2021, as opportunistic occupiers take advantage of favourable market conditions and enter into new leases, with an overweight demand for fully-fitted-out, A-grade office accommodation.
“Complementing the growth from the SME cohort are industries such as resources, local professional service firms and the Federal Government, leasing fitted-out office accommodation to cater for increased staffing numbers as they experience better-than-anticipated business conditions.
“Occupier requirements remain focused on fitted accommodation, cost efficiencies, flexibility, shorter-term leases, flight to quality, right sizing and workplace and building amenity.
“With major corporates largely inactive so far this year, elevated supply levels have resulted in assertive financial offerings from landlords, as they attempt to secure a limited number of active tenants.
“Moving into the second half of 2021, CBRE anticipates commitments from a series of large format users, which will help to pave the way for better trading conditions in 2022 onwards.”
“The Gold Coast market has performed strongly over the past six months, and we remain optimistic about the medium-to-long term outcomes.
“Like most regional markets, the Gold Coast has been underpinned by the resilience of SME occupiers that have been back at work at full capacity for the past 12 months. This back-to-work response resulted in the early reactivation of business centres, supporting overall business confidence, which is reflected in the reduction in vacancy.
“Over the past six months, two sectors have performed strongly; demand in fitted, sub-200sqm options driven by the SME sector, and the above-average transactional volume of 1,000sqm-plus deals, which has predominantly occurred in the Robina precinct within fully-fitted and furnished call-centre-style spaces.
“New supply additions totalling 31,000sqm are currently under construction and due for completion from early-2022 to mid-2023. Of this, 72% is being delivered outside of the traditional office sub-markets and predominantly north of the Southport CBD, which will result in the continued suburbanisation of the Gold Coast office market. The new supply in the traditional office sub-markets, totalling 8,620sqm, is fully pre-committed.”
“The Perth office market has had a positive six months, with significant vacancy falls and genuine tenant demand, with many businesses expanding based on the buoyant mining sector.
“Project space requirements have returned to the market for the first time since 2012. Sublease availability is minimal at 35,000sqm, representing just 1.9% of the total CBD stock, and fell for the first time since March 2020 during Q2.
“Major past trends such as the flight to centre and flight to quality are still evident, with the former contrary to the widespread commentary on the demise of the CBD. However, like most major cities, Perth is experiencing trends of working from home and major corporate hesitancy.
“Moving forward, we expect buoyant economic conditions to continue to drive positive tenant demand. This will enable the market to absorb the modest new supply coming online in the next two years, with vacancy rates expected to fall until 2024, when significant backfill space will enter the market.
“Early signs of improving face rents in some parts of the market are a further positive indicator of better conditions in the next two years.”
“Strong levels of enquiry continued in Q2, with no signs of a slowdown despite the impacts of the Sydney and Melbourne lockdowns. Our data highlights a 32% increase in enquiry levels in Q2 relative to Q1, with the Professional and Technical Services Sector leading the way, accounting for 21% of all enquiry.
“The availability of high quality, new generation office space continues to tighten and, excluding 108 Wakefield Street, this portion of the Prime market is under 1% vacant, with no new space coming online for the foreseeable future.
“The secondary market in the sub-250sqm size range is continuing to perform strongly, particularly when owners are offering speculatively fitted out office suites. Requirements for fitted suites under 250sqm represented some 50% of enquiries in Q2 2021 and this is leading many landlords to increase the number of speculative office suites on offer.
“Despite all of this, and with an eye to 2023/2024, rental and incentive levels have remained steady. One would expect incentives to begin decreasing give the lack of high quality space available but with the pending influx of both new and backfill space in two years’ time, owners are positioning themselves to secure tenants now to avoid a vacancy exposure in coming years.”
“The Canberra office leasing market has been fortunate to avoid the level of impact from COVID-19 experienced in other major cities around Australia.
“So far in 2021 we have not been subject to further lockdowns, meaning direct disruptions to the market have been minimal. As a result, we have seen increased confidence and positive levels of activity, which has been consistent since the beginning of the year.
“The Commonwealth Government has arguably been the most active occupier, underpinning the majority of activity in H1 with a number of larger, longer-term requirements still being considered and running a process. Multiple shorter-term, surge space requirements totalling more than 18,000sqm have absorbed the majority of fitted options across the market, resulting in a significant reduction to Canberra’s overall supply.
“Not only has overall vacancy reached a low not seen in years, A-grade vacancy at present is scarce, with both of the market’s newest A-grade developments being close to full occupancy. The lack of immediate supply in this end of the market will shift occupier focus back to refurbished secondary options.
“We remain cautious about a potential spike in A-grade vacancy in the CBD, with an announcement on the future of the Australian Taxation Office’s longer-term requirement still to be formally made. The next injection of A-grade supply into the CBD market will be ISPT’s 7 London Circuit and 18 Marcus Clarke Street, totalling approximately 37,000sqm, in 2023 when the Department of Agriculture moves to its new HQ at Civic Quarter 2.
“The private sector has been active with a number of SMEs across IT, cybersecurity and consulting securing contracts with the Commonwealth, in particular from the Department of Defence. The Parliamentary Precinct has been a highly-sought-after location as a result, with these groups eager to be close to the major Departments based in this area, and Parliament House itself.
“Fitted spaces and flexible lease terms in line with Commonwealth contracts are a strong preference for occupiers and are driving demand, especially for sub-500sqm assets.
“Based on these trends, and with vacancy rates forecast to continue to tighten, we expect to see a slight uplift in face rents over the coming 12 months, while incentives are set to remain steady in the 25%-30% range across most grades.”
North Sydney Stefan Perkowski, Director, Head of Office Leasing
“The North Sydney headline vacancy declined by 0.5% to 18.6% in Q1 2021 due to occupier demand for prime grade space and is set to continue to decline through to the end of 2021.
“The overall vacancy remains higher than the 10-year average of 9.7% as a result of the economic shock caused by COVID-19, as well as vacancy in recently-completed developments such as 1 Denison Street and 118 Mount Street. However, these new Prime and A-grade assets have continued to outperform B-grade assets in North Sydney, and it’s predicted that by January 2022 the Prime and A-grade vacancy could be as low as 7.5%.
“The state’s economic recovery drove this downward pressure on vacancy through the first half of 2021, coupled with increased confidence from corporates headquartered overseas. These occupiers are focused on utilising the workplace to encourage employees back into the office, emphasising the benefits relating to culture and collaboration. Prime and A-grade assets in North Sydney have certainly benefited from this trend as the battle for talent continues.
“Another driver of medium-term leasing demand in North Sydney is the cost-effective price point of the North Sydney office market, with prime net face and net effective rents on average 31% and 24% cheaper respectively than the Sydney CBD as at Q1 2021.
“A correction in net effective rental growth of -7.4% occurred in 2020 primarily due to the COVID-19 economic shock and this is expected to continue impacting growth rates over 2021, with CBRE projecting prime net face rental growth of 2.0% per annum between 2021 and 2025, and prime net effective rental growth of 1.0% per annum over the same period.
“This takes into account a projected increase in prime incentives to a peak of 35.0% this year. Looking at the projected post-COVID rental recovery, prime net rents are projected to growth 2.3% per annum between 2022 and 2025, and prime net effective rents at 3.7% per annum over the same period of time.”
Western Sydney Mark Martin, Director, Advisory & Transaction Services – Office Leasing
“Dominated by Commonwealth and NSW Government Departments, along with the back office for much of Australia’s financial services industry, occupancy levels in the Parramatta CBD remained depleted through the first half of 2021, primarily as a result of employer mandates to work from home.
“With the current lockdown conditions, the expectation is that occupancy will remain diminished through the balance of the year. Whether this lasts in to 2022 depends on how quickly the current outbreak can be brought under control, and the time it takes to vaccinate a greater percentage of the population.
“Before the latest outbreak, the expectation was that the market would considerably improve during H2 2021 against H1, especially in terms of the uptake of premises and commitments to new leases.
Incentives for new leases oscillate between 30%-42%, depending on the specific circumstances of the premises and landlord.
“Real demand, from parties genuinely looking to move – rather than general demand, among parties scouring the market to improve a lease renewal outcome – remains predominantly for fitted-out space. As a result, more and more owners are recycling fitouts and installing spec suites.
“The demand for fitout applies to tenants seeking small tenancies, in the 100sqm-200sqm range, as well as those seeking larger tenancies in excess of 1,000sqm. Real demand in the 1,000sqm-plus sector was limited in H1, but entering H2 an increasing number of parties are showing a firm willingness to commit to lease substantial office facilities in Parramatta.
“Over the coming year or so, parties including the ABC, Sydney Water, City of Parramatta Council and Complete Credit Solutions are collectively sourcing in the order of 30,000sqm.”
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About CBRE Group, Inc.
CBRE Group, Inc. (NYSE: CBRE), a Fortune 500 and S&P 500 company headquartered in Dallas, is the world’s largest commercial real estate services and investment firm (based on 2020 revenue). The company has more than 100,000 employees serving clients in more than 100 countries. CBRE serves a diverse range of clients with an integrated suite of 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.