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Office vacancies rise, but COVID's impact 'modest'

Freeway heading towards Sydney CBD
8 min read
Sydney's motorways aren't as full as they were pre-COVID, with corporate tenants needing less space as employees work from home. Photo: Shutterstock

Office vacancies rise, but COVID's impact 'modest'

Vacancies are up across CBD office markets, but the COVID crisis is yet to result in a mass exodus of tenants from the inner city.

Vacancies are up across CBD office markets, but the COVID crisis is yet to result in a mass exodus of tenants from the inner city.

The Property Council of Australia’s latest analysis showed Australian CBD office vacancy rates increased a relatively modest 1.2 per cent over the six months to July 2020.

Given the enormous impact on business wrought by the COVID-19 pandemic, and the fact that many professionals had transitioned to working from home, the increase from 8 per cent to 9.2 per cent was welcomed by the Property Council of Australia.

Historically high levels of occupancy in the months leading into the crisis helped cushion the blow.

“The impact of COVID-19 on our CBDs and office markets is still at an early phase but so far the pandemic has had only a modest impact on vacancy rates," Property Council chief executive Ken Morrison said.

"Vacancy rates have increased over the past six months, but tenant demand has so far been flat, not falling, and overall vacancies are still below the historic average.

"It’s a reminder that office markets have been resilient in the first stage of the pandemic, despite the fact that many office workers have spent months working from home."

Graham Postma, national head of office leasing at Savills Australia, said all office markets across the country were feeling the impacts of the pandemic, with demand declining across all markets.

Perth, Brisbane and Adelaide remained more resilient, he said.

The vacancy rate for the Sydney CBD hit 5.6 per cent, up from 3.9 per cent in January, influenced by 1.2 per cent reduction in tenant demand.

All other CBD markets tracked have double digit vacancy figures, with Canberra sitting at 10.1 per cent, Brisbane 12.9 per cent, Adelaide 14.2 per cent, and Perth 18.4 per cent.

“Where restrictions have further eased in these key states, tenants are now back in their offices in higher proportions and enquiry and inspection levels are returning to more normalised levels,” Mr Postma said.

“Some consistent themes are emerging across the country. 

“Tenant enquiry in each state is focusing heavily on premises with existing quality fit-outs to expedite the relocation process and reduce risk in terms of fit-out delivery.  

“Flexibility is also a must have with tenants leaning towards shorter lease terms to allow for future growth” he said.

Sublease vacancy in the capital cities—a key metric in falling markets—increased by 0.2 percent, but this is still at modest levels compared to previous downturns.

Office vacancies are calculated on whether a lease is in place for office space, not whether the tenant’s employees are occupying the space or working from home.

AROUND THE COUNTRY

Melbourne

With Victoria’s capital resembling a ghost town amid a second lockdown, office vacancy rates have been directly affected with many large corporate tenants moving to give up space and weighing up their long-term strategy.

The Property Council of Australia’s July 2020 Office Market Report revealed Melbourne’s CBD office vacancy rate had hit 5.8 per cent, up from a historically low 3.2 per cent six months ago.

Property Council Victoria executive director, Cressida Wall, said the increased vacancy rate in Melbourne was not a story of falling demand, but instead the result of significant developments opening. 

“The Melbourne CBD recorded its largest supply of new office stock in almost 30 years over the past six months, with a one per cent increase in net demand.

“Sub-lease vacancy increased by around 10,000sqm during the period but remains below its historical average level. 

Melbourne also had the smallest variation between prime and secondary office vacancy rates. 

The city will add more than one-third of the country’s new office space for the remainder of the year, and 82 per cent of this space is already pre-committed to,” Ms Wall said.

Savills Australia state director Mark Rasmussen said those new buildings would result in the Victorian capital overtaking Sydney as Australia’s largest CBD office market.

“Major lease transactions continue, albeit in lower volumes,” he said 

“The delivery of significant new office supply and issues relating to Covid will continue to push up vacancy rates and lease incentives. 

“Increased sub-lease opportunities are providing further attractive options for tenants and fitted tenancies are the most popular.

“Landlords are well advised to identify and address forthcoming vacancy issues, as the market is likely to come under further pressure over the next 12 months.” 

Mr Rasmussen said he expected transaction activity to recover strongly as COVID lockdown restrictions were eased later in the year.

Sydney

The Sydney CBD vacancy increased over the last six months from 3.9 per cent to 5.6 per cent. 

While the Sydney CBD recorded its lowest level of demand in 11 years for the six months to July 2020, vacancy generally remains tight, especially for premium office space. 

“Sydney’s office market has traditionally been very tight and recorded some of its lowest vacancy rates in the past couple of years, which has put us in a better position to navigate the challenges of the COVID-19 pandemic being felt right across the property industry,” Property Council of Australia NSW acting executive director Belinda Ngo said. 

“Tenant demand fell by 58,675 sqm over the six months, with most of this occurring in B grade office space, whereas there was slight positive demand for premium space,” Ms Ngo said.

“We saw some new supply enter the Sydney CBD, with more to come over the next two years.

There is 117,161sqm of new stock due to enter the market in the second half of 2020, and a strong pipeline of new office stock planned for 2021and 2022.

“The extra support, leadership and confidence from Government needs to continue, not only in improving the planning system but also in getting people back into our CBDs and into offices to activate city centres and support local businesses, creating vital economic activity for Sydney and our regional areas both directly and indirectly,” Ms Ngo said.

Brisbane

Property Council Queensland executive director Chris Mountford said the impacts in the South East Queensland office markets broadly mirrored the national trends. 

Vacancy in Brisbane CBD increased from 12.7 to 12.9 percent over the past six months. 

It was a very similar story in the Brisbane fringe market with vacancy increasing from 13.6 to 14.2 percent. 

“Importantly, both markets recorded positive tenant demand through this period, with the vacancy increases being driven by supply additions, not a reduction in demand for space,” Mr Mountford said.

“It is a slightly different story on the Gold Coast, where the vacancy rate increased marginally from 12.8 to 13 percent but this was driven by negative demand for space.”

The Brisbane office market continues to be affected by occupiers focusing on navigating their way through challenging economic conditions and health related issues brought on by the global pandemic.

CBRE’s Queensland state director Chris Butters said the Brisbane office market continued to be affected by subdued tenant demand.

“Due to the increased uncertainty around future trading conditions and the percentage of staff occupying traditional office premises, the vast majority of active enquiry is opting for short term/flexible leasing structures, which is increasing the level of leasing renewals in existing premises,” Mr Butters said.

Adelaide

CBD office market vacancies increased marginally in what’s been claimed to be “the country’s most liveable capital city”, from 14.0 to 14.2 per cent mainly due to supply additions, with the full COVID-19 impact yet to play out.

The city saw 11,530sqm of new commercial office space come online over this period. A-Grade office stock was again the most popular asset class, with vacancy dropping from 11.3 to 10.8 per cent in the six months to July 2020. 

Property Council SA executive director Daniel Gannon remained cautiously optimistic. 

“Adelaide has demonstrated over the past six months that it is a comparatively safe, healthy and resilient capital city, with a growing number of competitive national advantages,” he said. 

“When it comes to which capital is Australia’s most liveable city at the moment, Adelaide wins hands down. 

“Occupancy rates in the CBD are strong and increasing, businesses are building momentum and investors are still looking for reliable places to park capital. 

“If COVID is going to exert any upward pressure on vacancy rates, we won’t see that until 2021 and beyond.”

CBRE director of office leasing Andrew Bahr said landlords would need to keep an eye on 2023/24. 

“With the recently announced CBUS development at 83 Pirie Street, there will be a significant amount of new and backfill space available in 2023 that will have an effect,” Mr Bahr said

“This will be further amplified if the 30,000 square metre Commonwealth Government requirement in the market for Department of Human Services gets the green light. 

“Landlords will need to structure expiries to avoid any vacancy during this period and work even harder now on securing tenants for current vacant space,” he said.

Perth

The global pandemic ended a three-year run of falling vacancy rates for the Perth CBD office market, with owners of lower-grade buildings the hardest hit by reduced demand.

Property Council WA executive director Sandra Brewer said Perth’s premium and A-grade office space continued to perform strongly but vacancies rose in the lower grades.

The overall vacancy rate for the six months to July 2020 was 18.4 per cent, in line with a year ago, and only slightly higher than the February 2020 17.5 per cent vacancy.

Perth has the smallest development pipeline of all the capital cities, with no new supply due to enter the market over the next 18 months.

Property Council WA Executive Director Sandra Brewer said Perth was the only capital city in the country to report a reduction in space available for sublease.

“Perth’s CBD market, which was thought to be on the cusp of a turnaround before the pandemic, has so far experienced relatively moderate effects,” Ms Brewer said.

“The industry will be monitoring tenant demand and sublease vacancy over the next six months as the economic impact of the pandemic plays out.”

Canberra

Canberra was the only CBD office market to not to record rising vacancy rates in the first half of the year.

Between February and July, Canberra's office vacancy rate fell marginally, from 10.3 per cent to 10.1 per cent, the lowest vacancy rate since 2012, according to the Property Council figures.

"With more than 50 per cent of the ACT office market tenanted by the Commonwealth, these long-term tenancies are no doubt helping our vacancy rates remain steady, providing a safe and secure employment and tenant base for Canberra,” the Property Council's ACT executive director, Adina Cirson, said.

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