Leasing activity across Australia’s major east coast office markets remains significantly impacted by COVID-19, with a return to normal trading conditions unlikely until late 2021/22. Although key market metrics have not moved dramatically (net absorption, vacancy and effective rents), we anticipate more significant statistical change will flow through in early 2021 as the full economic impacts of the crisis are realised.
Despite the inevitable upward trajectory of vacancy rates across Australia, the country’s two largest markets are well positioned to manage a downturn of this magnitude. After long periods of expansionary activity, both Melbourne and Sydney had recorded vacancy rates of between 3% and 4% leading into the COVID-19 crisis. We believe there is capacity in the system to adequately deal with space retuning to the market via sublease.
While Brisbane and Perth had double digit vacancy rates prior to the crisis, rents and tenant expansion had been quite subdued over the three years prior to COVID-19. Therefore, the impacts on rents and sublease availability are expected to be less severe than Sydney and Melbourne.
Interestingly, Perth is demonstrating a level of resilience, reflecting this market’s exposure to resources and the controlled status of COVID-19 in WA at present. Canberra and Adelaide have also demonstrated some structural strength with good enquiry and deal activity in the public sector.
Undoubtedly, the greatest challenge confronting all Australian office markets is the uncertainty surrounding the working model corporate occupiers will adopt in the medium to long term – working from home versus working from a corporate office, or similar. Assessing the sentiment around this issue will be more important than monitoring the short-term fluctuations that we typically use to benchmark office market performance. While change is inevitable, we expect a balanced response from most corporates, which will deliver employees greater locational flexibility and more generous workspace ratios to achieve acceptable social distancing in the office.
Without doubt, stability, clarity and certainty are the critical ingredients to allow markets to freely trade again, particularly our capital markets, where it is increasingly difficult to price current cash flows and future leasing risk.
The increase in Sydney CBD office vacancy rates is indicative of the economic downturn, lower white-collar employment and uncertainty in the market as a result of COVID-19. Employees are working from home while businesses are cost-cutting and analysing their office space utilisation - and there are more questions than answers as to what the office of the future will look like.
With such uncertainty, several larger office requirements have been put on hold since March. Enquiries fall dramatically in April, however this trend has now started to reverse, with enquiries increasing, especially over the past two months.
Incentives are on the rise to encourage leasing activity in the market, nudging up around the 30% mark. Face rents are holding, however with the increase in incentives, effective rents are likely to record a 20% fall through 2020 and 2021.
Sublease stock is increasing, with CBRE’s latest CBRE Sublease Barometer showing 105,701sqm of space available for sublease at June 30, compared to 82,739sqm at March 31. This is well above the long-term average of 54,864sqm and eclipses the GFC high of around 90,000sqm. But there is also some positivity in the market, with tenant demand removing 18,540sqm of sublease space during the June quarter, helping to offset the 41,502sqm of sublease space that was added during the same period.
We are also seeing some tenants resurface in the market, albeit with reduced size requirements as they reassess their space needs. With 92% of the sublease space having an existing fitout - and incentives on the rise - there are some good opportunities for tenants to make a move.
Despite the current uncertainty, there are nine new buildings completed or under construction in Melbourne with an almost 90% pre-commitment level. Melbourne’s vacancy rate has more than doubled, coming off a historic low of 3.2%, however this increase was anticipated with backfill space hitting the market as tenants move into new office developments.
The return of backfill space to the market will be staggered due to refurbishment works, which will soften the overall impact. Sublease space has also increased, however, the fluid nature of this part of the market means an improvement in economic conditions could quickly see this space removed from the market.
Overall, the vacancy increase brings Melbourne closer to vacancy rates in other states, however, we anticipate the impact of Victoria’s COVID-19 situation to be reflected in office markets more strongly in the second half of 2020.
Brisbane – Chris Butters, Managing Director, Brisbane & Queensland State Director, Office Leasing
The Brisbane office market continues to be impacted by subdued tenant demand, as occupiers focus on navigating their way through challenging economic conditions and health related issues brought on by the global pandemic.
Due to the increased uncertainty around future trading conditions and the percentage of staff occupying traditional office premises, the vast majority of active enquiry is opting for short term/flexible leasing structures, which is increasing the level of leasing renewals in existing premises.
Despite the cautionary nature of demand at present, we have witnessed a series of more active, buoyant industries taking advantage of favourable incentives/terms. These sectors include; Resources/Gas, Federal Government and IT.
Looking forward, we anticipate conditions will remain challenging for the foreseeable future, but, remain hopeful that Brisbane will rebound much faster than our other east coast neighbour states.
We anticipate vacancy levels will be contained in the Gold Coast office sector over the short to medium term. This is largely due to there being only one new supply addition of 5,900sqm in the next three months – the majority of which is already pre-committed.
This is unlike the lead into the GFC, where over 110,000 sqm of speculative new supply dovetailed with the market downturn. Furthermore, during the GFC, between 2008 and 2009, the Gold Coast recorded negative net absorption of around 6,000sqm, which showed the diversity of local SME businesses that adapted and pushed on.
Largely, the vacancy impact was driven by new supply additions, which is not a factor in the current market. The Gold Coast office sector is also supported by one third of its total supply being strata titled with predominant ownership via owner occupiers. This is due to the Gold Coast’s strong SME sector, which provides relative consistent stabilisation to occupancy levels.
We are seeing strong activity in the sub-200sqm market, with local businesses looking at both downsizing and expansion. New business enquiries are being fielded from the education and professional services sectors from the southern states and we have also seen some interest from Brisbane CBD professional service firms contemplating a shift of exposure.
The Gold Coast office sector is dominated by SMEs, with a heavy weighting of occupiers in the sub-200sqm range. The Gold Coast’s SME business operators are nimble and dynamic in their approach and their choice of a Gold Coast base is typically lifestyle driven. We anticipate the value proposition around lifestyle and wellbeing factors will play a critical role in future decision making for office requirements as enforced lockdowns eventually ease around the country.
The inherent nature of the Gold Coast office sector being spread across five distinct precincts spanning 17 kilometres has delivered the low-density live-work communities that is highly sought from those living in capital city markets. We expect the COVID-19 crisis is likely to accelerate existing employee-benefiting trends in the long term and lead to workplaces that are more social and healthier, in addition to offering greater flexibility. The Gold Coast is well placed to leverage off its natural attributes and the diversity of its mixed-use precincts.
The Perth office market has so far been relatively sheltered from the impact of COVID-19.
Since social restrictions eased in June, most businesses have returned to the office and activity is returning to the CBD. The exception has been some of the larger corporates, which have been more reluctant to return to the workplace – with some organisations only announcing returns this month.
Perth CBD vacancy, being the highest nationally pre-COVID-19, is unlikely to see a major increase. By comparison, sublease availability – a key health indicator of the office market - has increased by 17,000sqm, reflecting a 59% increase from the end of March 2020.
Another key factor helping shield Perth’s office market from the COVID-19 crisis, is the city’s low office occupier exposure to the highly impacted education, tourism and hospitality sectors. Perth’s office market is in an advantageous position, being highly exposed to the mining sector, which continues to perform strongly. There are some uncertainties around the oil and gas sector, however, Woodside is expected to proceed with its Scarborough project, which will provide a boost.
The sector’s resilience will also be aided by a minimal supply pipeline, with no new supply due to enter the market over the next 18 months.
Despite this, rents and incentives are expected to come under pressure, with the rental increase and incentive decreases recently seen, expected to reverse.
The situation with COVID-19 remains unpredictable and it still too early to foresee the full impact on our office markets. Specifically, any reversal of WA’s progress in keeping the virus at bay, will lead to deteriorating conditions in the office market.
Adelaide has enjoyed some level of resilience over past months when compared to the other states as we deal with COVID-19. While demand has remained subdued, we haven’t seen the emergence of any real sublease market like many Eastern Seaboard locations.
The SME end of the market has been relatively unchanged, with a steady pipeline of enquiry and deals filtering through. By comparison however, enquiry for office space over 400sqm has been extremely scarce, with State and Commonwealth Government tenants the only real exception.
Interestingly, we have continued to track steady enquiry throughout the COVID-19 period, where enquiry for this period in 2020 matches the same enquiry levels we had during both 2018 and 2019 respectively. We do note however, that a large amount of this enquiry has been for short-term, sub-250sqm tenancies with existing fitouts. Of those enquiries, only 25% resulted in property inspections and only 5% resulted in concluded lease transactions.
Despite the overall vacancy rate rising only slightly, space available in Adelaide’s newest buildings built post-2006 is less than 2%. This isn’t surprising given the leasing activity in the past 18 months and the flight to quality experienced.
While many of the Eastern Seaboard markets have seen a spike in the level of sublease space available, Adelaide is yet to see any real sublease market of note to emerge. This was also evident during the GFC, when Adelaide had the same level of immunity when it came to large corporates handing back space. Given large corporates don’t occupy huge spaces in the Adelaide market, any reduction in staff numbers is likely to see vacant desks absorbed rather than put to the open market as sublease space. Additionally, limited new supply entering the market for the immediate future will support positive rent and incentive fundamentals, with 108 Wakefield Street the only new stock to enter the market over the next three years.
Face rentals in the market have held steady during the COVID-19 crisis, while incentives over the past three – four months have only increased marginally, up to 32% on average.
All this being said, landlords will need to keep an eye on 2023/24. With the recently announced CBUS development at 83 Pirie Street, there will be a significant amount of new and backfill space available in 2023 that will have an effect. This will be further amplified if the 30,000 sqm Commonwealth Government requirement in the market for Department of Human Services gets the green light. Landlords will need to structure expiries to avoid any vacancy during this period and work even harder now on securing tenants for current vacant space.
We continue to experience a steady flow of enquiry across Canberra’s commercial office sector, with a strong focus on spaces that offer existing, usable fitouts. However, that focus is expected to shift in the second half of the year, moving towards sensible cost containment decisions. This is likely to be evident across both private and public sectors, as businesses remain nervous about the future economic landscape due to the ongoing uncertainty of COVID-19.
There remains positive demand for office accommodation across the public sector as the Commonwealth Government remains focused on its Whole of Government Leasing strategy. Over the past six months, there has been more than 60,000sqm of Commonwealth Government lease requirements come to market, with the majority seeking a 2022 occupation date.
Demand for efficient floor plates and good amenity remains high on occupiers’ lists, in addition to accessibility of flexible working spaces within a building that allows businesses to reduce the amount of NLA under head leases.
2020 has brought rapid change to the North Sydney office market. Prior to the COVID-19 crisis, the four-year vacancy average had been circa 7% - underpinned largely by government acquisition of sites and residential conversions.
This year however, there has been an increase in office vacancy levels – both direct and sublease – overlayed with tapered tenant demand and the deferral of many business relocation decisions. Our forecasts for 2020 are that office vacancy will exceed the 20-year average of 8.6% - reaching 12.5%.
Despite rising vacancy levels, face rents have remained stable at pre-COVID-19 levels, albeit, incentives have increased by about 5% - 7% to an average of between 25% - 30%. In addition to lease incentives, owners are now willing to consider delayed lease commencement dates of up to six - nine months.
Amid the changing conditions, there have been several trends to emerge within the market. This includes larger organisations deferring relocation decisions as they struggle to forecast headcount and impact on business. In tandem, many organisations are looking at workplace densities – specifically the flexibility to reconfigure office layouts that accommodate social distancing.
Opportunistic tenants are looking to capitalise on below market rents on offer in the Sydney CBD, as well as fitted solutions where no capital is required.
Western Sydney – Mark Martin, Director, Advisory & Transaction Services – Office Leasing
The streets of Parramatta remain a hive of construction, given the scope and pipeline of projects in the area.
Major projects not only include Walker Corporation, GPT and Charter Hall/WSU’s commercial developments, but also transport infrastructure for the light rail.
In late 2016, NAB announced an agreement to anchor 153 Macquarie Street in Walker Corporation’s 3 Parramatta Square. Mid-2020, completion has been reached on the 43,000sqm development, adding another landmark building to the skyline.
With the high percentage of government workers in the Parramatta CBD – mostly mandated to work from home for the foreseeable future - the expectation is that low occupancy across the precinct will remain more broadly for the balance of the year.
With tenants questioning the need to pay high rents in the Sydney CBD, and organisations wanting their staff to limit use of public transport, and to work closer to home, there is increasing enquiry for office leasing opportunities in Parramatta. Like all other suburbs, demand is almost exclusively for fitted out premises only, on shorter flexible lease terms.
In the medium and longer term, the future is bright for Western Sydney, as corporate organisations better appreciate the considerable benefits offered by the quality stock coming online and the vastly improved lifestyle amenity.
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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.