Falling sublease availability has primarily been driven by leasing take-up, and space being withdrawn from the market by occupiers, and in the case of Q2 includes the take-up of 16,776sqm of space in the Financial and Insurance Services subleases.
“Undoubtedly, the rapid rise in sublease space last year was very concerning for the national market, however, we have clearly passed the peak of the cycle and the market should gradually trend down over the next few years,” Mark Curtain, CBRE Head of Office Leasing – Pacific, said.
“While the Melbourne sublease market has been more stubborn that others, given the extent of its lockdown periods, transactions currently in documentation will lead to a lower year-end number. Sublease activity in Adelaide, Brisbane and Perth is present, but is not a major feature of the market.
“The sublease market is not only a good barometer for the health of the property market, but the economy more broadly. To see Sydney’s sublease space drop so sharply over the first half of 2021 is very encouraging.”
The market tightened the most in Sydney, where the available supply fell to 112,913sqm, down 45,717sqm or 28.8% against the Q1 2021 figure.
That is the lowest documented figure in the city since 104,171sqm in June 2020, while it was 167,908sqm at the turn of the year.
Melbourne was the only city to record a rise in availability against Q1 2021, by 10,969sqm to 182,668sqm, which represents 49% of the available national supply.
While that fell marginally towards the end of the quarter, it is still just over double the 89,167sqm documented in June 2020, before the city entered an extended lockdown.
The available sublease space is across 151 tenancies, a total that is down 32% from 220 in Q1 following significant activity in the sub-500sqm and sub-1,000sqm markets.
The most available tenancies are now 2,001sm-plus despite a stable quarter in which only one option from that category entered the market.
Financial and Insurance Services firms continue to have the most available space for sublease nationally, with 131,420sqm of the total following the Q2 take-up of 16,776sqm.
That is followed by Professional, Scientific and Technical Services companies and those in the Information, Media and Technology space.
“Falling sublease availability across most markets more than offset Melbourne’s small rise in sublease space, resulting in a second consecutive quarter of contraction overall,” Joyce Tiong, CBRE Head of Office Occupier Research, said.
“Before the latest lockdown, Sydney had been the bright spot, a 55,000sqm reduction since the start of the year to close the gap to its June 2020 figure.
“Sublease space is likely to remain significant, particularly in larger markets such as Sydney and Melbourne; however, flight to quality and occupiers having better clarity on their space requirement is expected to support further sublease contraction over the near term.”
“When the COVID-19 pandemic hit, our in-house view was that it would generate a significant sublease market in Adelaide.
“The impact, though, was minimal in the early stages. It started to play out in August and September, when the first tranches of sublease space hit the market, which in our view was in line with the usual Adelaide ‘lag’.
“That timeline was also down to companies working out how much space they were going to need moving forward, hidden sublease space not being offered, and the lack of major corporate head office occupiers in Adelaide that could easily carve floors from their footprint.
“When sublease space has hit the market, and as the market has bounced back, it has generated strong interest.
“Tenants have been searching for fitted-out space and, on the whole, good quality options. The sublease space in the market has been meeting both criteria and as a result attracting good levels of interest, as tenants struggle to obtain capital for new fitouts.
“The short-term nature of the majority of the options has been appealing, too, providing flexibility for tenants with their tenure, and the ability to gear up again if required, without committing to a long-term lease.
“From here, we don’t anticipate any significant increases in the sublease market, given the larger users have refined their requirements over the past five years and the general upturn in the local economy.”
“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. Docklands still houses the majority of Melbourne’s sublease space, followed by the western core.
“Sublease opportunities with new or recently-refurbished fitouts have been the first to transact. Tenancies with older-style fitouts or minimal remaining lease terms have attracted less interest, with tenants instead opting for direct deals.
“More than 80% of Melbourne’s sublease tenancies sit above 2,000sqm, and larger tenants are starting to re-enter the market and firming up their space needs. In this regard we expect an improved sublease take-up for the send half of 2021.
“Additionally we don’t anticipate many further large sublease opportunities coming to market, and we expect further sublease withdrawals for an overall reduction in Melbourne’s sublease space.”
“Sydney’s decrease in available sublease space was driven by strengthening occupier demand and withdrawal of stock.
“Business confidence and growing confidence in the market resulted in record numbers of enquiry for the first half of the year, as business bounced back from the uncertainty of 2020. Sydney CBD enquiries recorded by CBRE rose to 295 in H1, accounting for a total volume of 262,277sqm; this represents a y-o-y increase of 64% for briefs and 12% for enquiry volumes.
“This enquiry has translated into deal flow, with 28,966sqm of sublease stock taken up through leasing deals in the second quarter. With 94% of the sublease stock being fitted and 83% of the stock in Premium and A-grade buildings, tenants are seeking a flight to quality, taking advantage of the favourable deal terms on offer, to provide a workplace environment that will encourage staff back into the office.
“The withdrawal of stock was also a major contributor to the reduction in sublease stock, with 32,077sqm taken off the market due to the positive outlook for business, and businesses re-evaluating their office requirements going forward.
“Sydney’s current lockdown is curtailing most inspection activity, although negotiations already at an advanced stage are continuing. That is in contrast to 2020’s lockdown, when nearly all negotiations were shelved. We are predicting a positive Q4 2021, provided the current lockdown doesn’t drag on into October and beyond.”
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