A modest rise in office vacancy rates around the nation reflect the strong base settings in most CBD markets prior to COVID-19, finds the latest Property Council Office Market Report
Australian office vacancy increased from 8.3 percent to 9.5 percent over the six months to July 2020, with a modest rise reflecting strong base settings in most CBD markets prior to COVID-19.
“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,” says Property Council chief executive Ken Morrison.
The record low rates of vacancy in Melbourne and Sydney – Australia’s largest office markets – has provided a strong buffer against the initial impact of COVID-19, Morrison adds.
The vacancy rate for the Sydney CBD was 5.6 per cent (up from 3.9 per cent in January) and the Melbourne CBD vacancy was 5.8 per cent (up from 3.2 per cent in January).
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.
Melbourne CBD vacancy was most significantly impacted by a 4.6 per cent increase in additional office supply, while the Sydney CBD vacancy was most influenced by 1.2 per cent reduction in tenant demand.
“Office markets started this pandemic in good shape, with incredibly low vacancies in Sydney and Melbourne, and strengthening positions in most other markets.”
“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.”
Morrison says the data refutes the “commentary about the end of the office”.
“While office vacancies increased over the period, aggregate tenant demand was flat across CBD markets with vacancy increases driven by increases in supply. However, tenant demand did vary from market to market, most notably in Sydney where net demand fell 1.2 percent.
“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.”
Morrison says the reactivation of Australia’s CBDs and office buildings “will be an important element of our economic recovery in coming months, and something that all levels of government will need to consider carefully”.
Vacancy in the CBD increased from 3.9 per cent to 5.6 per cent, which is still very low by historic standards. “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,” says Property Council NSW acting executive director Belinda Ngo. “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.”
The Melbourne commercial office market remains tight, with a CBD vacancy rate of 5.8 per cent, up from a historically low 3.2 per cent six months ago. The increased vacancy rate is not a story of falling demand, says Victorian executive director Cressida Wall, as the CBD recorded its largest supply of new office stock in almost 30 years. Melbourne CBD will account for 48 per cent of the almost 400,000 sqm of new office space coming online over the remainder of 2020, with 82 per cent of this is pre-committed.
The ACT has recorded the lowest vacancy rate since 2012, decreasing slightly from 10.3 per cent to 10.1 per cent. More than 50 per cent of the ACT office market is tenanted by the federal government. ACT executive director Adina Cirson says a “dip” in supply over next two years is expected. “But 2022 will see an additional 79,000sqm of space come online which is a good sign of the confidence of investors in the Canberra market.”
Vacancy in Brisbane’s CBD increased from 12.7 to 12.9 per cent, with the Brisbane fringe market recording a 14.2 per cent vacancy, up from 13.6 per cent six months previously. “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,” explains Queensland executive director Chris Mountford.
Perth’s CBD office market has proved “remarkably resilient” says WA executive director Sandra Brewer. The overall vacancy rate sits at 18.4 per cent, in line with a year ago, and only slightly higher than the January 2020 vacancy rate of 17.5 per cent. Perth’s Premium and A-grade office continue to perform “strongly” with vacancy falling to 6.8 per cent. But vacancies rose to 28.7 per cent for B grade and 21.7 per cent for C grade space.
A marginal increase of 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. A-Grade office stock was the most popular asset class, with vacancy dropping from 11.3 to 10.8 per cent. “Occupancy rates in the CBD are strong and increasing, businesses are building momentum and investors are still looking for reliable places to park capital,” says SA executive director Daniel Gannon.
Head over to the Property Council’s Data Room to learn more about the July 2020 Office Market Report.