Mark Curtain, CBRE Head of Office Leasing, Pacific – January 2021
While the impacts of COVID continue to weigh on transactional activity and vacancy rates across Australia, we are optimistic that the office sector will witness renewed vitality and activity in 2021.
Some positive signs started to emerge in late 2020 with a series of major pre-commitment transactions completing in Sydney, Melbourne and Adelaide totalling over 40,000sqm to both public and private sector users. These long-term lease commitments are an important sign to the market that office-based working remains the preference for most organisations going forward. CBRE’s most recent Asia Pacific tenant engagement surveys indicated that most corporates will seek to bring the majority of their staff back to their corporate office but offer employees greater locational flexibility and more generous workspace ratios to achieve acceptable social distancing.
Both Sydney and Melbourne will see vacancy rates increase further during the course of 2021, albeit the rate of growth will slow considerably. Sublease space continues to be a major factor in both Sydney and Melbourne markets, at record highs of 350,000sqm and accounting for 80% of Australia’s total sublease space. Rising vacancy is expected to continue pushing incentives up, which will drive further declines in prime effective rents.
In Brisbane, market activity is expected to rebound in 2021 as a result of growth in the resources, health and public sectors. Prime effective rents are expected to remain largely static with sublease space only representing 1.5% of the overall vacancy rate.
Perth enjoyed strong market activity at the close of 2020 and is one of few markets across Australia where the vacancy rate is expected to fall in 2021. Market activity is being driven by the resource sector, fuelled by recorded iron ore prices now trading at $174US a tonne. While there have been early signs of increasing sublease space, it is unlikely to reach rates seen in Sydney and Melbourne, with expectations it will remain below the previous peak of almost 100,000sqm in 2016.
Canberra continues to enjoy strong market demand as a result of Federal Government activity – being the only market where rents and incentives held firmly throughout 2020. The uptick in secondary space enquiries witnessed in 2020 was driven mainly by limited vacancy of contiguous space in prime grade assets. This trend is expected to support improvement in secondary vacancy in 2021.
Adelaide’s office market has remained relatively healthy with prime effective rents declining marginally in 2020. While tenant demand is expected to remain soft across the board; stronger white-collar job growth – driven by the professional services and healthcare sectors – is expected to underpin stronger market performance compared to most other larger markets nationally.
CITY BY CITY AGENT COMMENTARY
Sydney CBD – Tim Courtnall, State Director, Office Leasing
In the final quarter of 2020, transaction flow in the Sydney CBD office market was slower than normal, which placed upward pressure on vacancy rates.
However, in December, the first green shoots of confidence re-emerged with a flurry of inspections. Businesses are beginning to see light at the end of the tunnel, with vaccinations around the corner and fewer cases of COVID-19 in the community. This, coupled with better than expected revenue across most sectors, positive unemployment numbers and increased spending will mean more inspections and deal flow in 2021.
Occupiers are optimistic about 2021, with expectations for some normality as they look to encourage the workforce back into the office. While flexible working arrangements and changes to the work week will remain for some organisations, most occupiers are keen to see their employees back in the office to drive collaboration, talent attraction and innovation.
We expect stability in sublease supply as we see confidence strengthen in financial forecasts and the broader economy. This will be particularly evident across the professional services, information technology and legal sectors, which all experienced minimal impact to 2020 revenue targets.
Highlighting the uptick in activity across the Sydney CBD office market, we have already concluded five transactions in January, ranging from 150sqm to 3,000sqm, which is very positive for this time of year. We expect this activity to continue as more organisations gain management approval to execute their property strategies in 2021.
Melbourne – Ashley Buller, Head of Office Leasing, Victoria
For much of 2020, Victoria endured the strictest lockdown of any state in Australia, with the State Government preventing tenants from occupying their office space, unless employees were considered essential workers. As expected, this significant period of absence from the workplace severely slowed down leasing transactions, resulting in an increase in overall market vacancy.
We have seen a steady increase in sublease space availability, predominately from larger occupiers contracting in size – resulting in excess space hitting the market.
CBRE Research indicates that 90% of sublease space is within the 1000sqm+ size range, however, we anticipate once government subsidies are reduced we will see an increase in smaller tenancies coming back to the market for sublease.
Whilst there has been a significant increase in available sublease space over the past 12 months, until tenants have the opportunity to fully test the flexible/hybrid working model and its effectiveness for their business, we believe many sub-lessors may re-assess their office needs. This could result in some sublease space being withdrawn from market. Our research shows many businesses will adopt a flexible model, offering employees to work from home between 1– 3 days per week and attend the office between 2 - 4 days per week. A practical challenge which has emerged, is many people wanting to work in the office Tuesday to Thursday, and work from home Monday and Friday. This means the office will likely be at capacity through the middle of the week, reducing the capability for occupiers to relinquish space.
From January 18, 50% of workers were able to return to their office accommodation and face-masks are now only required if people are unable to socially distance. As you would expect, occupancy levels have increased and there has been a noticeable surge in the number of people within the CBD. Victorians have spent nearly a year working from home and it’s likely to take some time before a greater utilisation of office space returns to a new normal.
Brisbane – Chris Butters, Managing Director, Brisbane & Queensland State Director, Office Leasing
The second half of 2020, and particularly the final quarter, resulted in a notable uptick in brokerage transactions in both the Brisbane CBD and Brisbane metropolitan office markets.
The micro-sector of the market (100sqm – 1,500sqm) continued to show buoyancy, with a bias towards ‘A’ grade assets as occupiers continue to focus on improving their quality of premises.
Despite the improvement in the second half of the year, CBRE Research suggests that both transaction volumes and the total quantum of NLA leased in 2020 was 66% down on recorded 2019 levels.
Direct and sub-lease vacancy levels increased throughout the final two quarters of the year, with direct vacancy trending towards 14% and overall sublease volumes encroaching on the 50,000sqm mark.
Accordingly, incentive levels have remained elevated at circa 40% as landlords compete for active enquiry.
The Brisbane office market outlook for 2021 remains challenging, albeit sentiment is forecasted to steadily improve on the back of the upcoming vaccine rollout.
Importantly, we anticipate a series of 5,000sqm+ tenants will announce commitments in the first quarter of the year, which will create a level of occupier momentum that hasn’t been witnessed for 18 months.
Gold Coast – Tania Moore, Senior Director, Office Leasing
The Gold Coast market remained resilient during the second half of 2020, with strong activity from sub-200sqm occupiers, which we expect will continue being the key market driver throughout 2021. The predominant occupier - being locally owned and operated professional service firms - has provided ongoing stability due to grassroot-led decision making rather than a corporate occupier market reliant on capital city headquarter views for future back to work strategies. The Gold Coast has also seen continued interest from the Sydney and Melbourne vocational training sector looking to relocate students into Queensland to stabilise their business models outside of high density capital city populations.
The only new supply addition for 2020 was completed in December at Robina’s Aquity Business Park – being a 100% pre-commitment on 5,900sqm. This pre-commitment was predominantly from existing Robina businesses relocating due to expansion requirements - resulting in some backfill opportunities. The outlook for the precinct remains optimistic given its demonstrated year-on-year take-up due to the range of modern buildings and proximity to the Pacific Motorway, which enables strong connectivity into northern NSW and Brisbane. There are no new office supply additions for completion in 2021, which will further stabilise vacancy levels over the next 12 months.
Rents and incentives across all precincts and building grades have generally held at pre-2020 levels, although 1,000sqm occupiers are being offered higher incentives via the delivery of turn-key fitouts in order for landlords to lock away larger spaces on longer term leases.
Based on current market conditions, we remain optimistic about the Gold Coast’s office market - particularly based on strong exposure to the SME sector as choices of where to live, work and learn continue to widen.
Perth – Andrew Denny, Senior Director, Office Leasing
The Perth office market future remains difficult to predict in 2021.
COVID-19 and subsequent shift to remote working has had a considerable impact on the office leasing market, which will continue to be evident in 2021. Some tenants will require less space, either at lease expiry, or, in an accelerating trend, negotiating extend and blend transactions that involve an immediate partial surrender of their current tenancy to the lessor in return for a longer lease on the remaining space. Subleasing also remains a feature of the market. Although available space for sublease increased by 28.3% during 2020, the total available is just 39,500 sqm, which is still a relatively small absolute number.
We anticipate Perth will be less affected by these trends in 2021 than the major centres of Sydney and Melbourne, due to our tenant mix being heavily weighted away from the large corporate financial and professional service firms, where significant changes are taking place.
Perth’s major office tenants are those that operate in the strongly performing mining and related sectors, which have been minimally affected by COVID-19. Further to this, the sharply improving oil and LNG price will directly impact a large CBD office sector and could be a catalyst for major new project approvals.
Tenants continue to relocate from the suburbs to the CBD, although this trend is expected to slow in 2021 with most major tenants having already relocated.
There will be no new supply entering the market in 2021, although new buildings will be completed in both 2022 and 2023.
These factors combined mean Perth could be the surprise leasing market of 2021.
Adelaide – Andrew Bahr, Director, Office Leasing
The strong finish to 2020 with good levels of demand has flowed into 2021 and we are predicting a good year ahead for activity in the Adelaide CBD.
While the recent announcement of the Services Australia deal at 60 King William Street, and the other new development also under construction at 83 Pirie Street, will see an impact on supply in 2023, as we speak, the best buildings in Adelaide CBD remain tightly held with little to no vacancy. This is not expected to change over the next 12-18 months.
What sublease space we did see arise in 2020 due to COVID-19 was minimal compared to other states, topping 10,000sqm-12,000sqm at its peak. Interestingly, we are already seeing some of this space withdrawn from the market by those organisations.
Throughout 2020, face rents held firm - although we did see a slight rise in incentives for large transactions, edging closer to 40%.
Other than the banking and finance industries, most other sectors are ‘back in the office’ and general sentiment and confidence is improving every day.
Canberra – Zoe Ferrari, Managing Director, ACT
It has been a busy start to 2021 for Canberra’s office leasing market, with a noticeable increase in enquiry continuing from the final quarter of 2020. Most tenant demand is for spaces that offer existing, usable fit-outs. With many occupiers adopting a ‘wait and see’ approach to their office requirements during 2020, we are anticipating pent-up demand to filter through during 2021 and into 2022, particularly across the private sector.
There are currently several large Commonwealth Government briefs in the market, ranging from short term fitted accommodation of 2,000sqm to large long-term office solutions of 60,000 – 70,000sqm. Interestingly, most Commonwealth requirements comprise a reduction of circa 15 – 20% of existing NLA. We believe this reduction is primarily being driven by the ongoing focus from Department of Finance to reduce overall occupancy ratios across the Commonwealth portfolio to a density of 1 person per 14sqm.
The monitoring of shadow vacancy will become critical over the coming months as some of these larger briefs arrive at a decision, with A Grade vacancy in the CBD tipped to spike should certain larger departments choose to pre-commit and relocate to new builds.
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.
North Sydney – Stefan Perkowski, Director, Head of Office Leasing
Throughout 2020, there was an increase in office vacancy levels – both direct and sublease – overlayed with tapered tenant demand and the deferral of many business relocation decisions.
Despite rising vacancy levels, face rents have remained stable at pre-COVID-19 levels, albeit, incentives have increased significantly to an average of between 30% - 35%. In addition to lease incentives, owners are now willing to consider delayed lease commencement dates of up to six to nine months.
North Sydney remains a hive of construction. Major projects not only include Lend Lease’s Victoria Cross development and Billbergia’s 88 Walker Street commercial developments, but also the Sydney Metro development, which is due for completion in 2024.
Winten Property Group’s 1 Denison continued to attract quality tenants throughout 2020, highlighting a trend of occupants being attracted to quality assets as they looked to not only attract and retain talent but also encourage employees back into the office in 2021.
Tempering this trend throughout 2020 was 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.
Western Sydney – Mark Martin, Director, Advisory & Transaction Services – Office Leasing
Pedestrian traffic footfall remains at diminished levels given the large portion of the local workforce that continues to work from home. This is especially noticeable across the NSW and Federal Government tenancies, as well as larger premises occupied by the finance and insurance sectors who have yet to return to work in any meaningful numbers. These groups alone account for approximately 70% of all office space occupied in Parramatta.
Infrastructure projects continue in earnest – in particular the light rail, which is due to open in 2023. Various office buildings are being compulsorily acquired for the light rail project which, in itself, is generating enquiry as tenants relocate from buildings soon to be demolished.
Over the past six months, enquiry has generally been for smaller tenants of 200sqm-400sqm, with demand exclusively for fitted space on shorter terms, typically three - five years. Face rents have generally held firm, with the expectation this will continue for the balance of the year. Lessee incentives will continue to trend more towards lessees, with current levels considered to be in the order of 28% - 30%.
Large commercial projects that will complete in 2021 include Walker Corporations 6PSQ in August 2021, along with GPT’s 32 Smith Street and Charter Hall/WSU’s scheme at 6 Hassall Street.
As at the start of 2021, general enquiry is broadly improving, with anticipation that larger deals will increasingly conclude during the latter part of the year as confidence steadily improves following the vaccine roll-out.
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 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.
