CBRE commentary: Property Council of Australia office vacancy statistics August 2024

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:

Tim Courtnall, CBRE Head of Investor Leasing, Pacific

“The Australian office sector continues to recover with strong enquiry and transaction volumes, led by the professional services, mining, and government sectors.

“Despite economic challenges from inflation, labour shortages, and rising construction costs, one of the most pleasing observations is the desire from all occupiers to improve their workplace and relocate to better quality offices. However, for some occupiers, especially SMEs, translating that desire into action has been harder in 2024 given the focus on maintaining costs with favourable renewal terms.

“Transaction volumes have been particularly strong in Perth and Melbourne where some of the country’s largest lease commitments have been completed in the first half. Despite upward pressure on incentives in some markets, it's pleasing to see effective rental growth across nearly all prime grade assets.

“As we head into the second half of 2024, we expect improving conditions in all markets, with sublease vacancy rates decreasing everywhere except Melbourne. Having said this, it will be somewhat of a bumpy ride given the US election, unpredictable interest rates, and record share market levels.”

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

“We have observed a continued improvement in the return to office across Australia, averaging 76% of pre-COVID levels in early 2024 compared to 70% in Q4 2023. All markets observed an improvement over the past 12 months, as corporates continue to encourage staff to attend the office more frequently.

“Every CBD office market in Australia recorded positive quarter-on-quarter effective rental growth in Q2. Brisbane, Perth and the Sydney CBD core remain the strongest markets, given solid occupier demand. Leasing activity has improved in Melbourne with rents starting to respond, although effective rents are about 20% below pre-COVID levels.

“We expect larger corporates and Government will continue to remain active towards the end of the year. Much of the tenant right-sizing appears to be done and tenants are likely to return to expansion mode in the coming years. Medium term supply is being delayed due to construction costs, high economic rents and valuation uncertainty. Therefore, we expect national vacancy to peak in 2024 before a steady decline from 2025 onwards.”

City by city agent commentary:

Sydney
Rachel Vincent, State Director & Head of Office Leasing, New South Wales

“The Sydney leasing market continues to impress across all key precincts – Sydney CBD, North Sydney, Western Sydney, and South Sydney. Across the market, we are seeing flight-to-quality and value. Tenants are prioritising high-quality space that offers excellent value for their investment. This trend reflects a strategic shift towards optimising workplaces for a post-pandemic environment.

“Negotiations for larger spaces (around 1,000sqm) are taking significantly longer, averaging 12-16 months. This extended timeframe is due to several factors including proactive and competitive renewals, increased choice, and supply chain disruptions.

“Tenants are seeking to secure favourable lease terms by initiating renewals earlier than usual. This proactive approach allows them to analyse their space needs thoroughly and leverage current market competition. Renewing a lease has become as strategic as relocating. Reflecting on 2023 data, nearly half of all public sector leases were renewed, highlighting the emphasis on cost stability and minimising disruption caused by moving. Landlords are now further incentivised to retain existing tenants to maintain portfolio value and avoid vacancy spikes. Higher vacancy rates provide tenants with a wider range of options, leading to a more deliberate decision-making process.

“Rising construction costs due to supply chain disruptions are causing developers to re-evaluate projects. This hesitation, combined with the need for higher pre-commitment rates and economically viable rents, is leading to a decrease in new office supply. This in turn, will likely result in lower vacancy rates in the medium term.

“Despite these limiting factors, gross face rents continue to climb. The average gross CBD rental rate currently sits at $1,697/sqm, and we anticipate this upward trend to continue across most markets. It is also worth noting that outgoings are increasing as land tax, electricity, and insurances lead the charge of having higher costs.

“Overall, the Sydney leasing market presents a dynamic environment with strong tenant demand, extended transactions, and rising rents. Landlords and tenants alike are adopting strategic approaches to navigate this competitive landscape.”

Melbourne
Ashley Buller, Head of Office Leasing, Victoria

“The first half of 2024 has commenced on a strong note, highlighted by CBRE Office Leasing’s achievement in closing one of the largest Victorian office leasing transactions in more than five years. From a Victorian perspective, the outlook is increasingly positive, with moderate to strong tenant demand, stabilising vacancy rates, and a steady decline in sublease vacancy, all indicating a welcome shift towards improving conditions for the second half of the year.

“With the sole delivery of Melbourne Quarter Tower this year, the Melbourne CBD market is expected to experience below-average new supply over the next 18-months. The growth of small to medium-sized tenants and increasing centralisation will contribute to positive net absorption, benefiting existing supply. This convergence of factors suggests that we may be nearing or have reached the peak of this vacancy cycle.

“Despite recent additions to the sublease market, we are observing a gradual reduction in total sublease space, attributed to tenants withdrawing listings, sublease space converting to direct space, and tenants consolidating operations in the CBD taking advantage of attractive lease terms.

“Leasing enquiry volume and average deal size have remained steady compared to the previous year, although they remain below the five-year average. Notably, the overall average deal size has shown a slight increase, indicating a modest upward trend in leasing transaction size.

“We're starting to witness signs of net effective rental growth, driven by robust economic rents in new buildings and enhanced rents in premium-grade properties. While elevated incentives remain prevalent, competitive tension for select buildings is helping to cap or reduce incentives in some cases.

“Overall, our outlook for the second half of 2024 is optimistic, with expectations of a continued decline in direct and sublease vacancy, resilient tenant demand, limited supply coming to market over the short term and strong effective rent growth prospects across Melbourne’s CBD.”

Brisbane
Coen Riddle, Director, Office Leasing

“Brisbane CBD’s vacancy figure continues to trend closer to single digits, a position not experienced in more than a decade. This decreasing vacancy rate has been influenced by a limited supply pipeline. Besides 205 North Quay, 360 Queen Street, and Dexus’s Waterfront Brisbane (North Tower) no new major office towers are expected to be completed before the end of the decade.

“Beyond a falling vacancy rate, the Brisbane market continues to experience significant rental growth (7% year-on-year) across both CBD and inner-city areas. In some premium assets, face rents have increased by over 25% in under three years. Incentives remain high, however are beginning to retreat particularly for tenancies with quality existing fit outs where tenants can reduce their exposure to elevated construction costs.

“Whilst market fundamentals remain strong, demand has slightly softened off the back of reduced business sentiment in the first half of 2024. Since 2022, the CBD market has featured positive net absorption each half year until H2 2023 where the figures were neutral. Whilst public enquiry levels remain strong, decision making continues to be slow and heavily scrutinised. For example, out of all sub-1,000sqm occupier briefs that have come to market in 2024, 80% have either renewed or are yet to make a decision.

“Although slow decision making and reduced sentiment is likely to remain a headwind in 2024, Brisbane is well positioned for continued growth. Beyond traditional expiry-led demand, public investment in infrastructure and renewal energy projects will bolster white collar growth and office demand in the short term. Considering the likely withdrawal of 41 George and 150 Charlotte Street, CBRE anticipate prime CBD vacancy to be sub 10% by the end of the year and the market will continue to experience strong rental growth into 2025.”

Gold Coast
Tania Moore, Senior Director, Office Leasing

“The Gold Coast market continued to maintain low level vacancy throughout the first half of 2024 and tenants have generally shown a preference to upgrade into better quality stock. This has resulted in continued tightening of the A-grade market with less than 2,000 sqm of supply available.

“The tight vacancy environment has caused rents to accelerate across the Gold Coast office market with prime gross rents increasing by 6.9% over the 12 months to 30 June 2024. The difficulties in the construction sector and interest rate impacts have caused economic rents for new developments to rise significantly, which is partly driving higher face rents on the Gold Coast. Incentives have also continued to decline to 16% from 18.9% a year ago on five-year lease terms. Overall, this has caused net effective rents to increase by 12.8% year-on-year. Rental performance in the secondary market is also benefitting from the tight vacancy rate. Gross rents have increased by 6.6% year-on-year, with incentives trending slightly down to 13.4%. As a result, net effective rents grew 8.5% in the past 12 months. 

“With limited supply expected in the coming years, the rental growth story is expected to continue. High economic rents for new developments will drive some of this growth as the existing market catches up to these benchmarks.”

Adelaide
Andrew Bahr, Director, Office Leasing  

“While the impact of cost pressures saw a slight reduction in overall demand for the quarter, good quality fitted out spaces are still leasing well and quickly.

“Availability of new vacant space continues to reduce with only small pockets remaining in the recently completed new towers. Works are continuing to unfold in the three to four buildings currently being repositioned and we would expect the competition to heat up amongst those assets in the coming months.

“Spec suites continue to lease well with a reducing number available in the market.”

Perth
James Phelan, Director, Office Leasing  

“Due to a strong performing economy, Perth’s CBD office market experienced record enquiry and transaction volumes in 2023 driven by a particularly strong H1 2023. Enquiry volumes began to moderate in H2 2023 with the softening in some commodities markets, particularly lithium, and this has flowed through to transaction activity in H1 2024 with the number of new deals over 500sqm down 15% year-on-year. Encouragingly, we have seen enquiry numbers rebound in H1 2024 to be up 20% on H2 2023. This presents a positive outlook for the leasing market as the rebound in enquiry volumes is expected to lead to a pick-up in leasing transaction activity over the next few quarters.

“The flight to quality theme has been evident in the Perth CBD market in recent years as employers continue to value buildings with high amenity to entice staff back into the office. This is notwithstanding that the Perth CBD continues to lead the nation in return to office with average weekly office occupancy at 93% of pre-pandemic levels according to CBRE’s Q1 2024 return to office indicator. According to CBRE’s data for deals over 500 =sqm, 54% of relocating tenants since January 2023 have either upgraded to higher quality buildings within the CBD or relocated into the Perth CBD. The demand for quality stock and tighter vacancy in this part of the market has driven continued rent growth for prime grade buildings. Prime grade net face rents grew by 4.8% year-on-year in Q2 2024 while net face rents in secondary grade buildings grew marginally by 1.2% year-on-year.  

“With the high construction costs in Perth, a supply gap is emerging for the Perth CBD beyond 2025, with no new developments currently committed to. Perth’s CBD market is well placed to see the vacancy rate trend down in the medium term as the supply outlook will be constrained between 2026 to 2029 and new office space demand is expected to grow due to continued population growth tailwinds and WA’s growing economy.”

Canberra
Troy Markos, Director, Office Leasing  

“2024 started with a bang. There were healthy levels of enquiry – nearly double compared to H1 2023 – and positive occupier sentiment carrying over from 2023. This tapered off in Q2 and the time to transact is a pain point for the entire market.

“The small to medium enterprise (SME) market dominated activity comprising 71% of all enquiries. Fitted space is a primary relocation driver with many occupiers having limited or reduced access to capital. Larger tranches of stock are being subdivided and fitted out to tap into the greatest pool of demand to help reduce letting up times. Renewals are still common but the flight-to-quality trend remains prevalent, provided it is financially viable. A noticeable portion of the SME demand has come from serviced office providers, which was the ‘easy choice’ in 2023.

“Town centres are still experiencing the most pressure, carrying a significant portion of the overall vacancy given limited demand and absorption.

“The Commonwealth Government has remained active, consistently driving demand for 1,000sqm+ tenancies, with a greater focus on their net zero strategy. With the cost of construction increasing, we have seen multiple agencies utilising good-quality, functional fitted-space to drive value.

“Face rents have been increasing across all grades, especially in the sub500sqm suite market. The conversation persists around economic rents for upcoming new developments, which are sitting well into the $700/sqm range, and this is expected to set a new ceiling for the market when a current deals conclude.”

Western Sydney
Mark Martin, Director, Office Leasing

“H1 2024 has seen the end of the new supply cycle, which started in 2020, adding seven new buildings to the skyline and a little under 300,000sqm to overall market stock.

“Vacancy has remained above 20% and this will continue for the foreseeable future given that leasing activity remains muted. Vacancy is imbalanced between building grades, with approximately 10% in prime grade and closer to 38% in secondary grade. Of the 10% in prime grade, this is predominantly split across five main buildings, where most leasing activity has been concentrated in the past one to two years.

“Our expectation is that the vacancy rate will peak in the latter part of 2024 then tighten in 2025 due to no new supply being added during the next few years.

“Tenant demand has been challenging in H1 with many tenants either downsizing, renewing, or generally delaying decisions to move. Overall enquiry has reduced, especially during Q2.

“Of great excitement is the soon to open Light Rail stage 1 running between Westmead and Carlingford, through the heart of the Parramatta CBD. Funding has also been approved for stage 2, which will see an extension to the network eastwards through Rydalmere and onwards to Sydney Olympic Park. This is a significant transport infrastructure project which will add to the overall appeal of Parramatta for commercial tenants.

“We expect prime effective rents to start showing greater signs of stabilising as we move towards 2025.”

North Sydney
Michael Darcy, Director, Office Leasing

“The first half of 2024 has seen a high volume of transactions, with approximately 35,000sqm of space leased by our CBRE team.

“The consistent theme of suburban shift, flight-to-quality, and consolidation of footprint has continued with occupiers having a key focus on the attraction and retention of talent. Fitted out spaces are more attractive to tenants who are trying to keep costs down and we are generally seeing longer decision-making times for tenants. Ahead of the Victoria Cross station, which is set to open mid-2024, we are forecasting strong demand from suburban occupiers in North Sydney.”