COVID carnage still sweeping through CBD office markets

Office vacancies have hit their highest point in 25 years, as commercial landlords continue to grapple with lockdowns and a big rise in the number of people working from home.

The Property Council of Australia’s latest Office Market Report showed vacancies rose to 11.9 per cent at the end of July, a level not reached since 1997.

While acknowledging the quarter-century high, Property Council chief executive Ken Morrison said the overall figure was pleasing, with several cities showing more resilience to the pandemic than others.

“Excluding Melbourne, demand for CBD office space grew by 85,000 square metres over the six months, a result that few would have predicted given the impacts of the pandemic,” Mr Morrison said.

“In contrast, demand for space in the Melbourne CBD dropped by more than twice as much as its previous largest six-monthly fall on record.”

Mr Morrison said while Sydney was the only other market to record an increase in vacancy over the period, significant challenges remained.

“Lockdowns continue and the impacts of the pandemic are still working through the economy, so CBD recovery needs to be a priority for governments at all levels,” he said.

“It’s a CBD’s commercial strength that underpins its role as premier cultural, dining, entertainment, retail and tourism precincts for the broader population.

“It’s a future we all have a stake in.”

Savills national head of office leasing Graham Postma said while the pandemic remained an issue for commercial landlords, the negative impacts were decreasing.

“Occupiers are moving towards making strategic longer term decisions, which will continue to see the office as the dominant and critical workplace,” Mr Postma said.

“All markets are seeing increased activity in the ‘spec fit out’ space, particularly in the small to medium business sectors.

“Likewise, the flight to quality continues across all regions, driving owners to constantly reassess the relevance of their offering and upgrade to compete where appropriate.

“We anticipate post-lockdowns business sentiment will continue to improve and many employees suffering from ‘WFH fatigue’ will actively look and embrace the opportunity to return to the CBDs across the country.”

Also adding to the challenge for commercial office owners in coming months will be new supply, with more than 400,000 square metres of office space to be added to CBD markets in the second half of 2021.

More than half (55 per cent) of that will be in Melbourne, 14 per cent in Perth, 11 per cent in both Canberra and Brisbane and 9 per cent in Sydney.

Sydney

Australia’s biggest city was one of only two mainland CBD markets with a vacancy rate of below 10 per cent.

Acting Property Council NSW executive director Lauren Conceicao said Sydney’s occupancy rates were encouraging, particularly against the backdrop of the lockdowns and other restrictions dealt with over the past 18 months.

“The CBD has been a slow-moving story, but tenant demand has increased by 0.6 per cent from January to July and vacancy overall has increased from additional supply coming online,” Ms Conceicao said.

“Net CBD demand is above historical average, with a notable uptick in the availability of subleasing and demand for premium space is at its highest.”

Savills NSW state director of office leasing Tom Mott said prior to Sydney’s current lockdown, its CBD streets had been as busy as they were pre-pandemic.

“The SME cohort really drove this, as they looked to bring their staff back together to drive culture and productivity,” Mr Mott said.

“Many tenants sought the opportunity to upgrade their office space given the vacancy rate shifted well beyond the landlord/tenant equilibrium point.

“This resulted in a flurry of leasing activity.”

Mr Mott said Savills’ clients continued to invest in buildings under the assumption that there will be a surge in demand once lockdown is lifted.

Melbourne

The Victorian capital was Australia’s worst-performing CBD office market in the first six months of the year, with its vacancy rate hitting its highest point since the turn of the century at 10.4 per cent.

CBD fringe markets St Kilda Road and South Bank also recorded vacancy increases over the period, rising to 16.3 per cent and 15.2 per cent, respectively.

Property Council Victoria executive director Danni Hunter said the increase in vacant space was due to reduced demand, with many tenants shrinking their office footprint.

Melbourne was the only CBD in Australia to record negative demand over the last six months.

“Every lockdown is a step backwards for Melbourne and particularly our CBD, and there is a residual uncertainty about the future with more supply coming online over the next six months,” Ms Hunter said.

“These numbers and declining office occupancy reinforce the urgent need for a plan to revitalise our CBD and ensure Melbourne continues to be a place to live, work and invest.”

Savills Australia Victorian director of office leasing Mark Rasmussen said enquiry levels nonetheless remained steady.

“Various market sectors are responding to the changed conditions to suit their business,” Mr Rasmussen said.

“A significant proportion of the market are catering for work from home models, however, others, including IT and some professional services, are expanding their office requirements.

“Demand is strong for fitted tenancies and well-presented accommodation.

“Tenants are taking advantage of the current conditions and upgrading to higher office grades to attract the best and brightest staff.”

Brisbane

South East Queensland has been Australia’s hottest residential market in 2021, and its commercial office market has shown similar strength, with demand pushing vacancies down slightly to 13.5 per cent.

Property Council Queensland executive director Jen Williams said the figures illustrated Brisbane’s overall resilience throughout the pandemic.

“This decrease in Brisbane office vacancy- despite the ongoing challenges COVID-19 presents- is yet another indication of the positive sentiment in the Queensland market,” Ms Williams said.

“The above historical average demand for small to medium enterprise office spaces in the Brisbane Fringe markets are driving this positive market sentiment.

“Securing the rights to host the 2032 Olympics means that Brisbane’s golden decade of opportunity has begun, and as a result, we can expect this interest in office space to continue. 

“This is our city’s chance to attract new businesses, which will bring along with them new talent and new investment in our commercial assets.”

Perth

Office vacancies in the WA capital fell to their lowest level since 2015, with business and government-led incentive programs luring workers back to the CBD.

The Property Council said Perth’s CBD vacancy rate fell to 16.8 per cent by the end of June, depicting the rising confidence not only in the office market but the state’s broader economy.

Property Council WA executive director Sandra Brewer said there was still a long way to go, however.

“Today’s vacancy rates are an encouraging sign for the Perth office market and the local businesses that rely on office workers to thrive,” Ms Brewer said.

“Commercial office owners and landlords have invested, significantly, in the future of the Perth CBD, keeping offices safe and tenants afloat through lockdowns and downturns.”

“Now is the time for governments to put their foot on the accelerator to get the city into top-gear and maintain the positive economic momentum.”

Savills Australia WA director of office leasing David Evans said transactions had been driven by strong business confidence in the state over the last six months.

“Some owners have started to increase face rents in certain prime stock where vacancy is tightening, however, generally effective rents are offset with incentives,” Mr Evans said.

Competition between owners seeking to attract new tenants versus owners seeking to retain existing tenants provides occupiers favourable terms whether relocating to a higher grade of accommodation or upgrading their existing space.

“Brokerage deals sub 500sqm has again remained steady and is lease expiry lead. Active small to medium size occupiers are concentrating on new speculative fit outs, available in all grades, from 100sqm to full floors of over 1,000sqm.

“Larger active occupiers continue to prefer bespoke fit outs with modern, flexible workplace environments and superior amenity.

“Buildings with large existing or pending vacancies are undertaking refurbishment or upgrades to attract suitable occupiers. Developers are actively seeking pre-commitments to kick off one or two high profile sites."