Property Australia

The story behind office vacancies

Karen Jamal Karen Jamal February 9, 2021

Australian office vacancies have edged higher as COVID-19 has reduced demand for office space, but the bigger impact is new supply entering the market, according to the Property Council’s latest Office Market Report.

 

  Three key takeaways:

  • Australia’s office market vacancy rate for the six months to January 2021 increased from 9.6% to 11.7% – its highest level since January 1997
  • CBD vacancy increased from 9.2% to 11.1%, the highest level since January 2015. The non-CBD vacancy rate of 13.4% hasn’t been as high since 1995
  • An additional 544,510 sqm of space came online during the period – the most since July 2010 – following 353,255 sqm of extra space added over the previous six months. The historical average is 311,793 sqm.

 

According to Property Council chief executive Ken Morrison, COVID-19 had reduced demand for office space, but new office buildings coming into the market have played a bigger role in current vacancy rates.

“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,” Morrison says.

Net absorption, which reflects the change of occupied space, was -158,26sqm over the six months – the lowest since July 2013. However, this is just below the historic average of 151,447 sqm.

The Office Market Report calculates vacancies based on whether a lease is in place, rather than whether the tenant’s employees are occupying that space. The Property Council’s complementary work to track CBD office occupancy numbers reveals Sydney’s CBD was sitting at 45 per cent occupancy in the last week of January and Melbourne’s at 41 per cent.

“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” Morrison explains.

“Despite talk of a flight from the CBD in response to COVID-19, non-CBD markets also saw notable increases in vacancy indicating that widespread health restrictions across all workplaces and the economic downturn caused by the pandemic were strong prevailing influences, rather than an aversion to CBD offices,” he says.

Morrison says “strong interest” in commercial property is reflected in recent deals for premium stock. The Property Council will continue to champion policies that support the return to office workplaces, Morrison adds.

“Vibrant CBDs drive investment, growth and productivity and must be part of our national recovery planning.”

 

State-by-state roundup

Sydney

The tightly-held Sydney CBD increased from 5.6 per cent to 8.6 percent vacancy. The CBD received almost 110,00sqm of new supply and negative net absorption of -54,671sqm, bumping the vacancy rate up to its highest level in seven years.

Positive demand for space was felt in metropolitan markets outside of the CBD, with Paramatta, Crows Nest/St Leonards and Wollongong all recording relatively strong positive demand.

“Sydney has close to 280,000 sqm of office space coming online over the next two years, so it is an ideal time to secure prime office space,” says NSW executive director Jane Fitzgerald.

 

Melbourne

Melbourne’s office vacancy rate rose to 8.2 per cent, reflecting a significant increase of new office supply and COVID-related subleasing trends. More than 350,000 sqm of office space was added to the Melbourne CBD market in 2020, with nearly 390,000 sqm more to enter the market over the next three years.

Victorian executive director Danni Hunter says the new supply follows a strong record of planning approvals and development activity in Melbourne’s CBD in recent years. “Despite the cautious predictions for the Melbourne office market, there’s still significant strength in the commercial office sector.”

 

Canberra

Canberra’s overall vacancy rate held steady at 10.1 per cent, down from the 13.3 per cent recorded in January 2018. ACT Executive director Adina Cirson says the results reflect “continued tightening in the market”.

Canberra was the only capital city not to post an increase in vacancy “and the only city to record higher than average demand,” Cirson says. “With over 50 per cent of the ACT office market tenanted by the government, ensuring that these offices are full will be essential in supporting the broader economic recovery.”

 

Brisbane

Brisbane’s CBD vacancy rate increased marginally, from 12.9 per cent in July 2020 to 13.6 per cent in January 2021. The vacancy in Brisbane’s fringe market increased from 14.3 per cent to 16.6 per cent over the same period.

Chris Mountford, Queensland executive director, says the figures show the state’s office market has “fared remarkably well”. Additional supply was expected to be added to the Brisbane office market in 2021. “With more than 80,000 sqm of office space due to come online in the CBD next year, it will be crucial for the wider economy that we reverse the current negative trend in demand.”

 

Perth

Perth's office vacancy rate hit 20 per cent, marking a 1.6 per cent increase since July last year. “Perth's CBD office vacancy rate was already at 18.4 per cent in July 2020, and West Perth's at 22.1 per cent – demand in the office market has been a challenge for Perth since 2016,” says Sandra Brewer, WA executive director.

“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.”

 

Adelaide

Significant new supply and softening demand delivered a 16.0 per cent vacancy rate in Adelaide, up from 14.3 per cent six months earlier. However, vacancy in the Adelaide fringe fell to 11.6 per cent, the lowest level since July 2018. SA executive director Daniel Gannon says new supply in the Adelaide CBD “had a much bigger influence on vacancy rates than reduced tenant demand from COVID-19”.

“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.”

 

Darwin

Darwin’s vacancy rate, which is tracked annually, increased from 16.8 per cent to 19.7 per cent. Northern Territory executive director Ruth Palmer says this was due to significant supply additions and negative demand. “The results indicate that we are seeing pockets being filled up in better quality buildings, leaving the C-grade buildings at a concerning 56.4 per cent vacancy.”

With an 12,000 sqm to be launched on the market from the end of 2020, Palmer says government focus must be on population growth. “It is difficult to activate buildings when we have consistently recorded a negative change in population.”

 

Hobart

Hobart has the tightest office market of any capital city, with vacancies at just 5.1 per cent, rising from 4.1 per cent the previous period. Less than a third of the rise in vacancy was due to reduced demand from tenants – the rest was from new office space entering the market.

Tasmanian executive director Rebecca Ellston calls the numbers a positive report card on Hobart’s economy. “It is a clear demonstration of the resilience of Tasmanian businesses and highlights the importance of the CBD to Hobart’s recovering economy,” Ellston says.

 

Head over to the Property Council’s Data Room for more insights into Australia’s office markets.

 

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