CBRE commentary February 2023: PCA Office Vacancy Statistics

To accompany the release of the latest PCA Office Vacancy Statistics, CBRE's Office Leasing experts share their insights into the key trends emerging in Australia's major office markets.

National overview: 

Mark Curtain, CBRE Head of Office Leasing, Pacific

“The national office market has defied the negative sentiment that surrounded the office sector over the past 12 months, delivering exceptionally strong transactional activity in Q4 2022. CBRE recorded a total of 201,000 sqm of transactions over 1,000sqm during this period, a significant increase over the previous year (157,000 sqm). While there is little doubt flexible working will remain a key long-term trend across the globe, corporate occupiers are acutely focused on securing best-in-class office solutions that will deliver a diverse offering of workplace settings and amenities to encourage their employees to return to the office.

“Rental growth returned to the market throughout 2022. Face rental growth supported by a stabilisation in incentives has delivered an average of 5% effective rental growth across Australia’s capital cities.  In Perth and Brisbane, double digit effective rental growth was recorded at 10% and 11% respectively. While incentives are still a factor, face rental growth has been notably strong in many of Australia’s trophy commercial towers with flight-to-quality remaining a key market driver. Development rents are also trending higher as a result of strong demand for new products; increasing tenant requirements around ESG, building services, and amenities; and feasibility input pressures such as construction costs.

“Looking forward to 2023, the Australian CBD vacancy rate is expected to hover around 12.5% for much of the year with new supply dropping by over 40% from the previous year. In Sydney and Brisbane, where new supply will be at significantly lower levels than previous years (-45,000sqm & 0sqm respectively), the vacancy rate is expected to fall modestly. While demand in Melbourne rebounded in the second half of 2022, the vacancy rate will remain elevated as a result of the new supply over the next two years (220,000sqm).

“The Australian office market performed strongly in 2022, however, weaker office conditions in many major global office markets are softening expectations for the year ahead. There is growing evidence that the technology and banking sectors are reducing headcount, and this has the potential to directly impact our market and weigh heavily on broader market confidence.”

Tom Broderick, CBRE Head of Office & Capital Markets Research, Australia

“Leasing activity remained robust across the Australian office market in 2022, despite the negative economic sentiment later in the year. This was partly due to occupiers having more conviction about long-term office space requirements, particularly in the larger markets of Sydney and Melbourne, where lockdowns were most significant a year earlier.

“Tenants appear to be continuing to upgrade their office space in the new environment. CBRE Research has analysed 220 tenant relocations over the past two years and found that 66% moved to a building that commands a higher market rent than their previous premises. Only 24% of these tenants moved to a building that offered a lower market rent. This trend is partly off the back of strong revenue growth in 2022 that gave confidence to the corporate sector in Australia. However, we believe an even more important factor is the desire for many companies to improve occupancy levels throughout the week by offering better amenities to their employees.

“With lower economic growth expected in 2023 and some sectors already reducing headcount, we expect national net absorption to be below long-term averages this year as tenants become more cost conscious. However, we do believe that physical occupancy levels will trend further up in 2023 as a weaker economy and labour market shifts the pendulum towards employers, who may be more decisive about return-to-work policies.

“We expect national vacancy to remain steady in 2023 but increase slightly in 2024, off the back of elevated supply. Our base case is for medium-term net supply to be lower than previously forecast as some projects are delayed due to high construction costs, an inability to achieve pre-commitment levels, and higher financing costs impacting yields. This will help with the medium-term rental outlook of the Australian office market.”

City by city agent commentary: 

Sydney

Tim Courtnall, State Director, Sydney

“The second half of 2022 started slowly for the Sydney CBD with continuing economic headwinds, seeing a softening of enquiry in Q3 which was down by 24% on the same period in 2021. Saying this, enquiry in the sub 500sqm bracket remained robust, accounting for approximately 44% of enquiry across the second half of the year, which has been a theme for the last few years. Broader economic headwinds continued to impact decision making for 1,000sqm+ occupiers during Q3.

“In Q4, we witnessed enquiries rebound above the 10-year average, which resulted in an increase in inspections and led to very strong transaction volumes in the last two months of the year. Overall, the enquiry for the second half was inconsistent, however, it was very promising to see confidence return late in the year and decisions being made.  

“Flight to quality was again a consistent theme in the second half of 2022 with 82% of tenants seeking high quality fitted space. High quality fitted suites and whole floors continued to be well received by occupiers, removing the risk around fitout costs and time delays in completing a new fitout. The CBD Core outperformed with 82% of tenants preferring this location for improved amenities and accessibility for staff post COVID.

“The sublease market remained steady throughout the second half of the year and finished with a vacancy of 102,000sqm. Although, some are expecting a second wave of sublease space to hit the market, I expect most large organisations have already resolved surplus space and given the costs of subleasing space, I do not expect a significant increase in the quantum of space available. In addition, we expect about 20,000sqm of sublease transactions to be completed in Q1, 2023.

“Overall, the Sydney CBD market finished strongly in 2022 and we have renewed optimism for this year as larger tenants gain confidence and make decisions. More specifically, we expect to see the largest number of large transactions (3,000sqm+) completed in the first half of 2023 for at least three years. From a tenant demand perspective, we have seen some headwinds from the technology sector, however this has been offset with strong demand from the financial and legal sectors.”

Melbourne
Ashley Buller, Head of Office Leasing, Victoria

“The Victorian office market continued to see quarter on quarter improvements in sentiment, demand, and deal activity. Larger tenants progressively returned during 2022, with a big percentage of larger deals concluding or reaching agreed terms in Q4. Additionally, we saw strong activity with single floor tenant (1000sqm+) deals being concluded typically within A to Premium grade stock. Transactions of sub 500sqm remained strong with the majority of deals taking place in fully fitted spec suites with many of these tenants relocatingfrom co-working space. Docklands was a real standout precinct in H2 securing the greatest percentage of the larger transactions against other precincts in Melbourne. This precinct secured strong activity from centralisation tenants and tenants capitalising on attractive deal metrics coupled with good quality existing fitouts.

“Flight to quality over the last couple of years has been focused around Premium and A grade space. This broadened to B & C grade buildings, with tenants stepping up between grades causing more broad-based demand across the market. Spec suites continued to be built across the market throughout the year, however due to inflationary pressures it became more difficult to stack up in H2. We also saw a number of larger spec suites (500sqm +) delivered and secure tenants during H2, a new trend in Melbourne. With the rising costs of fitouts, owners also started retrofitting existing fitouts. Front of house, meeting and breakout spaces were upgraded to compete with newer products as a more cost-effective way to deliver competitive fitted space which has also been well received by the market.

“The return to work in Melbourne has been slower than anticipated, reflecting the impact of COVID lockdowns. Tenant demand for Q4, 2022 was 147,652sqm vs 254,362sqm in 2021. The strong end to 2021 reflected market confidence returning after COVID lockdowns were no longer threatened and with the addition of a number of large requirements. But overall total tenant demand for the year 2022 was similar to 2021 at ~350,000sqm, a good result for the year.  

“Despite global headwinds we anticipate the Victorian office leasing market will continue to improve in 2023 as larger tenants, who have delayed their property decisions over the last couple of years, gain confidence in their size and needs and action their property requirements.”

Brisbane
Chris Butters, Managing Director, Brisbane & Queensland State Director, Office Leasing

“Brisbane office leasing transaction volumes remained strong in the second half of 2022, as many active organisations continued to focus on improving their workplace setting and design by relocating to superior assets than they previously occupied.

The brokerage (100-1,200sqm) market continued to outperform with a clear desire by tenants to reutilise existing and/or newly fitted accommodation where possible to capitalise on favourable effective rental positions.

“The pre-commitment market was also buoyant in the second half of the year with new developments such as 360 Queen Street and Waterfront Brisbane securing new tenants with further negotiations likely to result in a series of new agreements in the first half of 2023.

With no new supply due to enter the CBD market in 2023 and elevated construction costs impeding future new supply, it is entirely plausible that we see very few if any new developments commence construction this calendar year.

“As a result of improved occupier demand we did witness strong effective rental growth last year with prime grade face rents increasing on average by 10%, a trend we see continuing into the first of 2023.

“Whilst broader market conditions are likely to remain volatile over the next six months, we are hopeful that the rebounding Resource sector and the growth of our local Professional Services/Government sector will help underpin an active period.”

Gold Coast
Tania Moore, Senior Director, Office Leasing
“The Gold Coast has seen above average annual take-up over the last two-year period and this continued through H2 2022 with strong enquiry and transactional activity across the sector and the most demand for sub 250sqm fitted suites.

“The average annual net absorption for the past two years has been over 15,000sqm per annum and overall unoccupied space now totals under 30,000sqm across all building grades.  These market conditions are putting pressure on occupiers with strong rental growth and limited choice resulting in the compromise of location and building grade to increase options for consideration.  The A grade market is especially tightly held due to the long-term flight to quality trend and most of these assets are on the verge of 100% occupancy.

“The only new supply addition for 2023 is 6,820sqm within QIC’s purpose-built headquarters for the Department of Human Services at Robina.  There are no new substantial supply additions being completed within the traditional Gold Coast office submarkets for the foreseeable future as all proposed projects were put on hold due to construction cost concerns.  

“The low vacancy levels have created an environment for the emergence of strong rental growth which will support the feasibility of future projects although most developers are seeking 50% pre-commitment which is challenging to achieve in a market where the average tenant size is 150-250sqm.”

Adelaide
Andrew Bahr, Director, Office Leasing 

“Tenant enquiry throughout 2022 continued to defy the odds, showing a significant increase on what was a record year in 2021. Interestingly Q4 saw strong demand for tenants seeking in excess of 1,000sqm.

“The spec suite market grew during 2022, with many secondary buildings successfully adopting suite strategies that have seen significant space leased at rentals up to 10% higher than previous deals.

The best quality buildings continue to be tightly held with new space scare, other than 108 Wakefield Street.

“The story for 2023 is all about supply with the remaining new buildings at 60 King William Street and Festival Plaza coming on-line, and the backfill spaces being physically vacant, which will see vacancy rates spike.  Most will need major refurbishment to meet the demands of tenants for the best quality products and amenities.”

Perth
Andrew Denny, Senior Director, Office Leasing 

“After a slow start to 2022 the Perth office market recovered strongly in the second half of the year.

“Enquiry levels for Q4 2022 were at record levels, with the CBD enquiry by volume a substantial 25.8% above the previous high. Demand for office space will remain strong in 2023 with Perth’s buoyant mining sector underpinning demand.

“2022 saw rental growth and falling incentive levels at the top end of the market. The flight to quality is an increasing trend which CBRE expects to continue and accelerate moving forward. The drive by employers to provide the best working environment for their staff, and to entice them to work at the office as opposed to at home, is behind this trend.

“With 81,00 sqm of new supply either entering, or about to enter the market in the CBD, representing4.5% of the existing total, vacancies will increase.

“This will not stop rents increasing at the top end of the market, albeit at a lower level than 2022, with pressure continuing to apply to low A grade and B grade CBD assets.

“Suburban markets, with no new supply due to rising construction costs, will see rising rents and falling incentives for high quality office buildings.”

Canberra
Troy Markos, Director, Advisory & Transaction Services – Office Leasing 

“With the new Labor Government settled into power, Canberra experienced healthy leasing activity in the second half of 2022 post the announcement of the Federal budget in October, which saw growth in the public service. The Commonwealth kicked into gear with new briefs hitting the market to accommodate new policy and the machinery of government changes. We also saw the announcement of two major market moving transactions with the Department of Taxation announcing a move out of the CBD in 2025 to Barton into a new 33,021sqm build and the Department of Employment and Workplace Relations announcing in 2026 they will consolidate into a new circa 70,000sqm build in the CBD.

“Steady leasing activity in the suite market <500sqm represented 68% of all enquiries in 2022 and saw real vacancy reduce to levels Canberra has not experienced in years with occupiers having less choice than in previous years, shifting the pendulum back in the favour of landlords. This has been most evident in the Parliamentary Precinct which has records low levels of space, resulting in a significant increase in face rents with minimal pushback. Occupiers continued to show a strong preference for fitted space, however, due to heightened construction costs new supply has been slow, further reducing supply.  

“Occupier demands are evolving across both the Commonwealth and private sectors driven by a combination of hybrid working, a genuine flight to quality to attract staff back to the office and increased requirements for highly rated ESG buildings. Occupiers are looking for landlords to partner with to help them meet their Net Zero Emission and ESG targets.  This poses a real opportunity and risk for landlords and we expect to see more increased tenant movement as a result.  

“It was an encouraging second half for the Canberra market and we expect to see this flow into the first half of 2023. Whilst there are concerns about global economic pressures coming out of the US and what impact it may have on the market, we are optimistic that due to the nature of the Canberra market being underpinned by the Commonwealth it will be relatively resilient.”

Western Sydney
Mark Martin, Director, Advisory & Transaction Services – Office Leasing

“It was a generally positive end to 2022 with a number of leases signed in the latter half of the year. Late 2022 suggested the annual event of ‘lease rush signing’ before Christmas would likely stall in Western Sydney however this largely did not occur.

“In Western Sydney (especially Parramatta and Rhodes), owners ramped up the provision of speculatively fitted out premises in 2022 from small to large suites. Owners with, say, 30-40% vacancy increasingly ‘parked’ the refurbishment of premises given the multiple options available for lessees. Savvy lessees can often source quality recycled fitouts in good condition plus a full market incentive. Owners offering brand new speculative options cannot financially compete, given the cost/return, as compared against a recycled option.

“In 2023 – in an uncertain time for the world with the war in Ukraine, increasing interest rates, cost of living issues, and overall global debt challenges, corporate occupiers in Western Sydney will remain broadly uncertain in their space forecasting. The one certainty is that most will want a flight to quality, to downsize and seek lease contraction/expansion flexibility with lease terms.

“Amid this flight to quality there are increasing questions arising in regard to how to repurpose older C-grade commercial assets for alternative uses. The standout performers in attracting new tenants in 2022 were the new developments including Parramatta Square, 6 Hassall Street and 32 Walker Street.

“In the medium term, Western Sydney will continue its urban growth as improved infrastructure progressively comes online, with overseas migration largely benefitting the region.”

North Sydney

Stefan Perkowski, Director, Head of Office Leasing

“Leasing momentum is building in the North Sydney office market, with the CBRE North Sydney team completing 91 deals over 38,000sqm of office space in 2022. However as quality options in North Sydney become increasingly limited some occupiers are being forced to now consider the CBD, in particular the Western Corridor. Evidence of this includes the rumoured moves of TPG from 177 Pacific Highway and JHA from 101 Miller Street.

“1 Denison Street, North Sydney is an example of the limited Premium grade options available in North Sydney as it is now 100% occupied. It will not be until the delivery of the Blue & William tower this year and then Victoria Cross in 2025 that North Sydney will once again have new development stock to retain existing North Sydney occupiers and attract new occupiers from the suburban and CBD markets. It is expected that the subdued pre-commitment market in 2022 will improve throughout 2023 as business confidence continues to improve and competing options in the CBD become limited.

“We’ve seen a groundswell of business confidence, with tenants prepared to sign up for longer leases while also capitalising on opportunities to update their office accommodation. There is an imbedded culture with many of these North Sydney occupiers, who like the convenience of being in a lower north shore location which is close to schools and provides a work/life balance.

“In 2023 we expect to a continued interest from major organisations identifying North Sydney as a preferred location to call home, in particular from the suburban occupiers that will be attracted to North Sydney’s improving amenity, connectivity and availability of new office accommodation as they utilise their offices to attract and retain talent into their organisations.”