Green shoots in Australian office markets help buoy confidence levels for 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.