The Recovery Story of the Australian Office Market

09 Mar 2022

Australia’s national office market continued to recover through H2 2021, with solid tenant enquiry and transactional activity recorded in most major cities. Despite Sydney and Melbourne being in lockdown for more than 50% of this period, tenants around the country pressed on, implementing their long-term office accommodation strategies. 

Most markets have now passed the worst of the downturn, and we expect the recovery story of the Australian office market to continue in 2022.

Sydney Leading The National Recovery

Sydney has led the national recovery. Leasing market fundamentals have stabilised, and enquiry and deal volumes have increased considerably compared to 2020. Sydney recorded more than 500,000sqm of new tenant enquiries throughout 2021 – a record high – translating into 200,000 deals for 1,000sqm-plus spaces. Notably, Sydney’s sublease vacancy reduced by more than 44% during the year, a good indication that the worst of the office market downturn is now past us.

Chris Hanley, Director, Advisory & Transaction Services – Office Leasing, said, “Sublease availability fluctuated over the second half of 2021 but is still well down on its peak, with 98,847sqm available in December 2021. Mergers and acquisitions are the dominant driver of sublease supply among the larger tranches, rather than cost-cutting or changing workplace strategies.”

Dominated by the Parramatta CBD, Western Sydney continues its transformative journey with significant new transport infrastructure coming online and new residential and commercial office towers advancing to completion (E.g., Parramatta Square and the 6 Hassall Street Innovation Hub). Mark Martin, Director, Advisory & Transaction Services – Office Leasing, said, “Enquiry has markedly increased for project space requirements, as the Government pours funds into major new roads and tunnelling associated with Sydney’s future second airport in Badgerys Creek.”

Push To Create Better Workplaces In Melbourne

Despite extended lockdowns impeding Melbourne’s recovery, there was a notable uptick in inspections and enquiry in the second half of H2 2021. Suggesting Melbourne may enjoy strong pent-up demand in 2022. However, sublease vacancy remains a concern with approximately 190,000sqm of available supply. But this is expected to trend down quickly over the year as tenants compete for competitively-priced space with high-quality fit-outs. 

The push to create better workplaces has “resulted in increased levels and improved leasing conditions”, said Ashley Buller, Head of Office Leasing, Victoria. “Companies have continued to push a flight to quality pathway, with 38% of 2021 leasing transactions involving businesses moving into higher-quality assets and leaving un-refurbished, outdated spaces behind.”

Many owners have taken the opportunity to reset their assets for the next 15 years, with significant ground floor and end-of-trip refurbishments, to retain tenants with impending lease expires. There is a strong focus from tenants around common areas and third spaces, green space, and additional staff amenities.

Vacancy Rates Squeezed By The Flight To Quality In Brisbane & Gold Coast

Brisbane’s vacancy remains elevated because of backfill stock and additions such as Midtown Centre. However, improving demand and limited new supply going forward will support a fall in the vacancy rate in the medium-term. As in Melbourne, the “flight to quality has been a consistent theme across all industry sectors.” Chris Butters, Managing Director, Brisbane & Queensland State Director, Office Leasing. 

“The vast majority of active enquiry focused on the Prime-grade sector of the market, with a far greater emphasis on lease term flexibility, improved meeting zones and collaboration spaces.” Vacancy rates are expected to increase in the first half of 2022 due to the completion of 80 Ann Street – Suncorp’s new HQ – before retracing by early 2023 on the back of stronger business conditions and a lack of new office supply until the completion of 205 North Quay in early 2025.

The Gold Coast office market is swinging into a landlord-driven market, with vacancy falling to 10.1% in 2021, a total reduction of 4.2%. Tania Moore, Senior Director, Office Leasing, said, “The market is experiencing ongoing high demand from the SME sector - particularly in the fields of real estate, construction and professional services - along with the education sector following the opening of international borders to students.”

Mining & IT Drive Strong Conditions In Perth

Perth had the most significant contraction in total vacancy of any major market, falling from nearly 20% to the mid-teens over the year as demand continued to recover. Strong business conditions, fuelled by the mining and IT sectors, lead to many businesses expanding strongly and taking larger premises.

Headwinds on the horizon could slow the market. “These include significant COVID in WA for the first time, the Federal election, and the stock market correction. However, these are likely to be temporary and relatively minor factors.” Said Andrew Denny, Senior Director, Office Leasing. 

A-Grade Supply Constraints In Adelaide & Canberra

Adelaide and Canberra enjoyed favourable deal activity over the past year. Strong public sector activity in both cities underpinned demand in 2021, with 68,123sqm – nearly 50% the total volume across the two cities – leased to State and Federal Government tenants.

In 2022, there will be next to zero availability when it comes to large amounts of new Prime-grade space in Adelaide. “Sublease availability continues to decline, falling by 42.7% in Q4 to just 4,900sqm of available supply. That is Adelaide’s lowest figure since June 2020, and comfortably the lowest of any city in Australia, representing only 1% of the national total.” Said Andrew Bahr, Director, Office Leasing. 

Similarly, A-Grade supply constraints in Canberra combined with the flight to quality has resulted in an uplift in face rents and kept incentives relatively consistent. On the need for flexibility, Troy Markos, Director, Advisory & Transaction Services – Office Leasing, said, “The impact of working from home and the implementation of hybrid working models moving forward is affecting occupier requirements. There is uncertainty around their actual requirements, and parties are seeking more flexibility from landlords, whether it be shorter terms or break clauses. As organisations work out how this new way of working plays out, we have seen more occupiers choose to renew in their current premises than relocate, out of pure convenience.”

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