CBRE commentary: Property Council of Australia office vacancy statistics August 2023

To accompany the release of the latest Property Council of Australia Office Market Report, CBRE's Office Leasing experts share their insights into the key trends emerging in Australia's major office markets.

National overview:

Mark Curtain, CBRE Advisory & Transaction Services Senior Managing Director, Pacific

“Office leasing activity across Australia continues to outperform all other commercial sectors as corporate occupiers seek to reinvent their workplace experience and encourage employees to return to the office.

“Undoubtedly, there is significant pressure within the office sector as historic capitalisation rates come under stress and replacement values escalate. While the current market circumstances are weighing on the sector in the short term, it will lead to supply constraints that will enable the markets to recover and absorb the oversupply that resulted from COVID-19.

“Office rents continue to grow both on a face and effective basis in most markets across Australia and we are very confident that the outlook is extremely positive. Australia's economy is a standout globally, driven by incredibly strong international migration and this will continue to drive the demand for high-quality office accommodation that increases collaboration, productivity and workplace culture.

“While it is hard to ignore the significant vacancy rates that headline many of the markets within the US such as New York,Los Angeles and San Francisco, Asia Pacific is in a very different position, and we are confident that the Australian office sector will stabilise and rebound strongly over the next few years. Brisbane, Perth and Sydney will lead the recovery.”

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

“Despite the economic headwinds, leasing volumes remain healthy across the Australian office market.

“There appears to be higher conviction amongst the corporate sector on their longer-term plans, which is driving some of this activity. The smaller end of the market remains buoyant given the typically higher physical occupancy levels of those companies. We continue to observe expansion within this segment of occupiers.

“Larger tenants like the major banks are still attempting to drive higher physical occupancy and have contracted footprint over the past 24 months. We expect better occupancy of office space over the coming 12 months for these organisations, given a likely softening in the labour market, which will provide employers with more leverage to get their staff back to the office.

“Sublease availability has been largely stable over the past 12 months across the country. There has been a gradual decline of professional and financial services companies offering excess space for sublease recently. However, this has been offset by technology, media and telecommunications firms offering more sublease space to the market.

“Rental growth has been strong across the Perth, Sydney and Brisbane markets over the past 12 months, as a result of solid demand, especially in premium buildings. Adelaide and Melbourne have observed slight declines in effective rents, given the supply being delivered to the market and the subsequent backfill space left behind from tenants moving to these new buildings.

“We expect medium-term supply to moderate, with a combination of high construction costs and softening yields causing new developments to become less feasible.”

City by city agent commentary: 

Sydney CBD

Tim Courtnall, State Director, Sydney

“It’s been a positive start to the year with demand and enquiry still very strong, the number of enquiries in 2023 is only down 12% on last year, however, economic clouds are still impacting decision-making times for all tenants.

“On a further positive note, larger occupiers of 2,000sqm plus are driving the enquiry which we haven’t witnessed since pre-covid, with organisations wanting to create better workplace outcomes in better quality and centrally located assets.

“We have seen a number of exciting larger transactions this year supporting these trends with seven relocations of 5,000sqm or more.

“In 2023 thus far, tenants are analysing property costs more than they have in the past two years, which is prolonging decision making. However, landlords are meeting this demand with more curated solutions, providing more turn-key solutions to mitigate the costs of completing new fitouts.

“Although sublease vacancy is on the rise, tenants are looking for security of tenure and this trend is providing opportunities for our clients to work with sub-tenants to reduce property costs and attract new longer-term tenants for their assets

“We anticipate the second half of the year to be positive for our clients, as weekly occupancy continues to improve, and organisations encourage their teams to return to work to improve productivity and collaboration in person.”

Melbourne
Ashley Buller, Head of Office Leasing, Victoria

“While the overall market vacancy rate continues to rise, office sentiment on the ground is cautiously optimistic. The trend of overall deal size increasing has continued as larger tenants gain further confidence in the longer-term needs around office occupancy and subsequently their office size.”

“Fitted space continues to gain strong interest from tenants due to the uncertainty around construction costs and delivery, with many owners now speculatively constructing whole floor fit-outs Additionally, we are seeing a new trend of owners repurposing existing fit-outs, typically refurbishing front of houses and breakout spaces. This provides benefits from both an environmental waste point of view and cost savings, which can then be offered to prospective tenants.

“While flight to quality remains a strong theme, we are seeing a good deal of activity across all grades of space. In addition, we have seen very strong activity within the education sector, with over 15,000sqm of deals concluded in the first half of 2023.

“A big percentage of Melbourne’s largest transactions continue to take place in Docklands, with many of these deals in sublease space. This has been positive given these spaces have, in many instances, attracted tenants that are centralising, resulting in positive absorption for the CBD and slowing the increase in sublease supply.”

“Rents have remained resilient during H1, and we anticipate this will continue in H2. However, due to the increase in supply, incentives have remained strong and will likely increase further. We also saw the Commonwealth Bank commit to a new building, further demonstrating renewed confidence from larger tenants in their long-term property needs. This decision is a strong indicator of the positive sentiment in the Melbourne commercial real estate sector, as it reflects CommBank’s commitment to invest in the city's future and provides a testament to the city's growth and development.”

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

“As Brisbane office vacancy rates continue to compress, particularly in the prime grade sector of the market, gross face rents are growing on a quarter-by-quarter basis.

“Further fueling these dynamics is the limited supply pipeline, with only two net additions due to the enter the market over the next 36 months, and the exponential growth of both the Resource and Government sectors, which are on track to lease more than 50,000sqm of additional ‘A’ grade office space in 2023.

“Looking forward to the second half of the year, we anticipate a further tightening in vacancy rates as active organisations jostle for the remaining contiguous tranches of better-quality accommodation. We also anticipate that the broader vacancy rate will retract to circa 10%, with prime rates likely to come in at 8%-8.5%.”

Gold Coast
Tania Moore, Senior Director, Office Leasing

“The Gold Coast office market has maintained low vacancy over the last six-month period, at 6.3%. The slight increase of 0.3% is related to the addition of a new supply of 6,820sqm at Robina, exclusively for Services Australia’s new Gold Coast headquarters.

“Services Australia exited a number of sites around the Gold Coast, which have already started to be backfilled and will be reflected in the Property Council’s next six-monthly report to 31 December 2023. 

“Low vacancy level is likely to remain a long-term market condition as historically any new office building is no greater than 7,000sqm and with a 10-year average annual net absorption of around 6,000sqm, any new supply will have limited impact, unless a pipeline of new construction is in play. 

“In the period from 2000 to 2010, the Gold Coast office market grew by over 170,000sqm primarily from the emergence of the Robina/Varsity Lakes submarket and since 2010, the overall Gold Coast office market size has reduced by almost 20,000 sqm, as older supply in areas in Southport and Surfers Paradise have been removed. This will see the Gold Coast market sitting as a landlord-driven market for the longer term which typically occurs when vacancy reaches sub 10%.

“The only new supply for H2 2023 being 2,300 sqm in Robina will have negligible impact on overall vacancy as it is focussed on medical occupiers.  No new supply additions are currently planned for construction, and this places any new supply unlikely until at least 2026/2027 although this is reliant on strong rental growth to high $600-mid $700/sqm gross to support construction cost escalations. 

“The Robina/Varsity market has now surpassed the Southport market as the largest office precinct on the Gold Coast at almost 141,000 sqm and it has contributed to 60% of the overall growth of the Gold Coast market since 2000.  The Southport CBD has been reducing in size since 2013 as older-style buildings are removed from the market.”

Adelaide
Andrew Bahr, Director, Office Leasing  

“The Adelaide office leasing market has been relatively stable over the past six months, with the trends of strong demand and limited new supply continuing. CBRE data has shown in the last quarter alone, we tracked over 71,000sqm of tenant enquiry with some 10,100sqm of lease deals completed.

“The limited supply of high quality new office space has continued to push face rentals into the upper end of the market, with incentives holding steady at pre-COVID rates.

“Much activity is now surrounding the race to reposition and refurb some 70,000sqm of backfill space that has been created as a result of the new supply, namely 83 Pirie Street, 60 King William Street and Festival Plaza. This wave of works will only lift the quality of space on offer and most likely see good leasing activity with no other new supply forecast for some years.”

Perth
Andrew Denny, Senior Director, Office Leasing  

“Perth’s office market continues to deliver resilience and some surprising upside given the headwinds facing office markets globally.

“Strong tenant demand, underpinned by Perth’s buoyant mining sector, is ongoing and expected to continue.”

“The CBD had substantial new supply enter the market in the last six months, yet there is still strong rent growth at the top end of the market. This is a trend that will continue for at least the next 12 months. CBRE Research numbers show Perth CBD Premium grade effective rents grew by 11.1% in 2022, the highest increase since 2011, with forecasts of a further 7.8% in 2023. Rent growth in lower grade buildings will be significantly lower.

“The West Perth and suburban office marketshare experiencing even stronger conditions, with only one new office building under construction,

“The negative effect of the work-from-home trend is minimal in the Perth market and is heavily outpaced by the dominant theme of expanding tenants.

“Moving forward, with sharply reduced vacancy rates in the suburban markets, we expect a growing number of tenants, especially larger space users, to relocate to the CBD from the suburbs.”

Canberra
Troy Markos, Director, Office Leasing 

“The first half of 2023 saw a mixed bag of occupier depth across various sectors of the market. The fitted suite SME market of sub 300sqm across the CBD and Parliamentary Precincts was the most active.

“New Commonwealth requirements were subdued however this was supplemented by healthy activity from larger corporates of 1,000sqm+ with the likes of Maddocks, Adecco, Optus and BAE Systems coming to the market. Vacancy is reducing, with occupiers having fewer options than they did 12 months ago, especially in the larger end of the market. We expect this to continue as we conclude H2 with several transactions due to be announced.

“There is genuine appetite from occupiers to relocate to better quality accommodation, creating better working environments for their staff to draw them back to the office.  It is consistently a significant pressure point for occupiers. On the flip side, decision-making has still leant towards renewals or short-term holdovers taking the ‘easy, conservative option’ if there is no immediate physical need to relocate.

“The Commonwealth’s work-from-home policy has caused concern across the market but to date, we have not seen a direct impact on physical occupancy size.

“The time transactions are taking has resulted in lower volumes than in 2022 however we expect a number of dealsto be announced in H2 leading to a strong finish for the market.”

Western Sydney
Mark Martin, Director, Office Leasing

“The first six months of 2023 has been very challenging for Western Sydney with significantly reduced tenant demand and large pending vacancies due to arise as NSW Government departments relocate from generally secondary grade buildings into Walker Corporation’s development at Parramatta Square.

“Most institutional owners have implemented speculative fit out strategies to enhance presentation and to increase the likelihood of securing tenants in the shorter term.”

“What activity there has been has generally been attributable to tenants’ flight to quality and downsizing, as lease expiries have afforded tenants this opportunity. Lessors have had to offer substantial incentives to compete for what little tenant activity there has been.”

“‘Caution’ is the byword at mid-year 2023 as we are seeing an increasing number of tenants deferring decision making as the interest rate environment remains unsteady, and business confidence more broadly is waning.”

North Sydney 

Rachel Vincent, Managing Director North Sydney

“Despite dampened sentiment, companies know that productivity comes from collaboration and creative workspaces. Tenants continue a flight to quality as companies are still looking to attract and retain talent in a tight labour market. Many companies are engaging workplace strategists, and conducting location analysis, to ensure the property committed to is the right size and cultural fit and assists in fulfilling the company’s ESG pledge.

“Companies like Lendlease, Winten and JQZ have built precincts and are seeing more tenant activity as they offer the convenience of shopping, restaurants, libraries, services and more all within the same building.

“North Sydney A grade and premium properties are enjoying high rental growth with rents of circa $1400/sqm net, representing a 34% increase since 2016. However, this growth has been impacted by increased outgoings this year as land tax, energy prices and insurances increase, impacting tenants' occupancy cost.

“Hybrid working is here to stay so, to compete for tenants, landlords need to continue to ensure office premises have earned the commute and are better than home.”