Article | Intelligent Investment

Sydney and Melbourne well-positioned to manage office vacancy downturn

August 20, 2020

By Mark Curtain

Intelligent Investment (3)
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 returning 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.