Return to work not yet taking hold in office markets

Office markets across Australia continue to experience COVID symptoms, with the working from home phenomenon and new developments pushing overall vacancies to their highest point in more than two decades.

The Property Council of Australia said Australian office market vacancies increased from 9.6 per cent at the end of June to 11.7 per cent at the start of January, the highest rate since January 1997.

Net absorption, or the amount of space taken up by new tenants, was in the negative, at 158,260 square metres of additional empty office space recorded in the six months to January, the Property Council said.

In CBD markets, Melbourne’s vacancy rate jumped from 5.8 per cent to 8.2 per cent, while in Sydney vacancies rose from 5.6 per cent to 8.6 per cent.

All other markets reported double digit vacancies, with Perth’s vacancy rate rising to 20 per cent.

Property Council executive director Ken Morrison said while COVID-19 had reduced demand for office space, much of the increased vacancy was related to new office buildings coming to market.

“While it was not a surprise to see office vacancies increase in the middle of a pandemic, it is the new supply of office space that is responsible for three quarters of this impact, not reduced tenant demand,” Mr Morrison said.

“COVID-19 has reduced demand for office space as businesses downsize, but this had a much smaller influence on vacancy rates than the new supply coming on stream.

“Our biggest CBD office markets of Sydney and Melbourne were in very strong shape prior to the onset of the economic downturn caused by the pandemic.

“While vacancy rates for the six months to January 2021 are now the highest in some years, there is still strong interest in commercial property as evidenced in recent deals, particularly for premium CBD stock.”

Savills national head of office leasing, Graham Postma, said while office demand and transaction levels had been negatively impacted by the pandemic, it was encouraging to see sentiment and confidence starting to turn positive.

Mr Postma said a consistent theme across markets was a flight to quality and tenants focusing on office space that’s already been fitted out.

“With many tenants delaying long-term real estate conditions or electing to take up short-term solutions in 2020, activity is expected to be strong throughout 2021,” Mr Postma said.

“We have seen a number of transactions concluded already with enquiry and inspections levels increasing in all markets.

“The working from home trend will continue to be a major talking point, however, there is a strong push by federal and state governments, along with private sector employers, to support a return to working from the office albeit with increased acceptance of flexible working arrangements where appropriate.”

Sydney

Sydney’s CBD office vacancy rose to 8.6 per cent over the six months to January, with around 110,000sqm of new supply and negative net absorption of 54,671sqm pushing the vacancy rate to its highest level in seven years.

Property Council NSW executive director Jane Fitzgerald said the Sydney office market continued to be tightly held, which had helped it weather the storm of the pandemic.

Ms Fitzgerald said positive demand for office space was recorded in Sydney markets outside of the CBD, with Paramatta, Crows Nest/St Leonards and Wollongong recording relatively strong demand.

“Sydney has close to 280,000sqm of office space coming online over the next two years, so it is an ideal time to secure prime office space for considered future tenants,” Ms Fitzgerald said.

“We support the statements by the Premier and Treasurer of NSW highlighting that the CBDs are the engine room of the NSW economy and continued support from employers to encourage people back to the cities is more important than ever.”

Savills NSW state director of office leasing Tom Mott said that government push had resulted in a direct positive impact on sentiment in the Sydney office market.

“The leasing market in the early stages of 2021 has begun positively by way of vastly increased inspection volumes, proposal requests and leases in the final stages of being executed that were agreed during December 2020. A more robust assessment of this at the conclusion of the first quarter of 2021 will be interesting,” Mr Mott said.

“Like with previous recoveries there will be and is a flight to quality trend,  our clients are continuing to invest in their buildings to ensure they maintain their relevance in the market.

“95 per cent of all leasing deals during 2020 up to 3,000sqm had an existing or new fit out, we expect that trend to continue throughout 2021 as tenants continue to look for value.”

Melbourne

Increasing office vacancies in Melbourne reflected a significant rise in new supply, as well as COVID-related sub-leasing trends.

The Property Council said Melbourne’s vacancy rose to 8.2 per cent by January, while more than 350,000sqm of new space was added to the market in 2020.

Around 390,000sqm is set to enter the market over the next three years, as development activity continues in the Melbourne CBD.

Property Council Victoria executive director Danni Hunter said the impact of the pandemic and the state’s extended lockdown was illustrated through reduced demand for office space overall.

“Despite the cautious predictions for the Melbourne office market, the Property Council’s Office Market Report shows there’s still significant strength in the commercial office sector in Melbourne,” Ms Hunter said.

“We welcome the Victorian Government’s announcement earlier this week of the next steps on the return to office roadmap, allowing the private and public sector to start to plan a more complete return with greater certainty and confidence. 

“This is crucial to Melbourne’s CBD recovery, and Victoria’s broader economic recovery.”

Savills Victoria state director of office leasing Mark Rasmussen said tenant enquiry had been steady to start the year, with a consensus emerging that business needs to return to the office to drive innovation, service clients and remain competitive.

“Companies shedding space for minimal gain may face unforeseen challenges in the medium term,” Mr Rasmussen said.

“While the ‘collateral damage’ from COVID will be significant in some sectors, others are strong, and the positive aspects of the market are prevalent. 

“Melbourne’s recent new office supply, restructuring in the large local banking sector, covid factors, and related education market issues will be notably detrimental to the office market. These factors are balanced by a buoyant economy, new business innovations, buy local preferences and the booming brand Australia.”

Mr Rasmussen said Savills’ forecasts were that vacancies in excess of 10 per cent would be a short term phenomenon.

“Tech sector, professional services, government and flexible workspace providers will underpin demand. 

“Transport issues will dissipate with the role out of vaccines. Workplaces will move back to normality before Q3 2021 with a focus on staff health, wellbeing, quality building services and lower densities.

“Strong market activity underpinned by attractive lease incentives and a flight to quality offices will be the hallmarks of the 2021 calendar year.”

Brisbane

Brisbane’s CBD vacancy rate increased marginally over the second half of 2020, from 12.9 per cent in July to 13.6 per cent in January, the Property Council said.

Office vacancies in the city fringe increased from 14.3 per cent to 16.6 per cent.

Property Council Queensland executive director Chris Mountford said the data showed Queensland’s office market had been remarkably resilient through the pandemic.

“Clearly the health restrictions and economic downturn caused by COVID-19 had a significant impact on commercial property in 2020, with many workers hesitant to return to their places of work,” Mr Mountford said.

“This is despite the significant lengths that building owners and managers have gone to ensure workplaces are safe and ready to welcome workers back.

“As our office markets adapt to a ‘COVID-normal’ setting, business and government have a critical role to play in supporting the return to office workplaces and helping more people come back to office precincts.”

Mr Mountford said additional supply of 80,000sqm was expected to be added to Brisbane office markets in 2021, with 44,000sqm to be added to the CBD.

“It will be crucial for the wider economy that we reverse the current negative trend in demand,” he said.

Savills Queensland state director David Howson said positive sentiment was already permeating Brisbane’s office markets.

“Challenges still remain however with continued uncertainty around “return to work” (as opposed to WFH) and the correlating Occupancy rates which underpin significant property decisions,” Mr Howson said.

“As with other States, we have seen positive steps from the state government in encouraging office workers to “return to work” and we hope to see this trend continue. 

“We anticipate a continued stabilisation of the market with fitted office space still a strong focus, largely due to perceived value and a continuation of the flight to quality seen nationally.”

Perth

Perth’s office vacancy remains the most elevated in the country, at 20 per cent, with an increase in the back end of 2020 ending a short-lived positive trend.

Property Council WA executive director Sandra Brewer said office demand, particularly for second-tier stock, had been a challenge in Perth since 2016.

“Clearly health restrictions and economic downturn caused by COVID-19 had a significant additional impact on commercial property in 2020,” Ms Brewer said.

“With more than 42,000 sqm of office space due to come online in the CBD over the next year, it will be crucial for the wider economy that we reverse the current negative trend in demand,” Ms Brewer said.

"We know that COVID-19 will have impacts on the way we work, especially when outbreaks occur, but the pandemic won’t last forever.

“Business and government have a critical role to play in supporting the return to office workplaces and helping more people come back to office precincts.

“The fact remains that offices and the CBD will always remain the lifeblood of our city centres, and drivers of productivity and innovation," Ms Brewer concluded.

Savills WA director of office leasing, David Evans, said there had been an uplift in business confidence in the latter half of 2020, despite the rising vacancies.

“Whilst net face rents will remain stable, competition between attracting new tenants and owners seeking to retain existing tenants should see further pressure on effective rents,” Mr Evans said.

“Vacancies are expected to remain stable with continued CBD centralisation offsetting any increase in the sublease market.

“Demand is mostly lease expiry led with the continuation of the flight to quality trend.”

Adelaide

Significant new supply and softening demand resulted in Adelaide’s CBD vacancy rate rising to 16 per cent over the second half of 2020.

However, it was the new buildings, and not the pandemic, that was the bigger influence on vacancies, according to Property Council SA executive director Daniel Gannon.

“While vacancy rates for the six months to January 2021 are now the highest in some years, there is still strong interest in commercial property as evidenced through recent record-breaking deals and a spike in interest from interstate and overseas investors,” Mr Gannon said.

“Adelaide’s reputation as an investment destination has never been stronger.

“As our office market continues to adapt to a ‘COVID-normal’ setting, business and government have a critical role to play in supporting the return to workplaces and help more people return to office precincts.

Savills SA director of office leasing, Andrew Ingleton, said market sentiment remained positive, with owners with space ready to occupy immediately the best-placed to capitalise.

“Commonly, it is good value B grade stock with re-use of existing fit outs that is being leased, with many of these tenants being local companies, making local decisions,” Mr Ingleton said.

“The new year has seen a shift toward National companies making leasing enquiries. 

“Short term rollovers during 2020 created latent demand and this will underpin enquiries in the first half of 2021 until the COVID vaccine brings confidence back to the long term market.”