Australian office rents rise as flight to quality continues

• Office rents increased in Adelaide, Sydney, and Brisbane
• Landlords are required to offer significant incentives to lure tenants
• Melbourne's office market is still sluggish

Office tenants are continuing to demand quality, which is helping push up the price of rents across the country.

However, landlords are being required to offer significant incentives to lure tenants.

According to Cushman and Wakefield’s Office MarketBeat, prime CBD office rents increased in Adelaide, Sydney, and Brisbane in the second quarter, as tenants looked towards higher-quality spaces.

Not all office markets saw an increase with, rents remaining steady in the Perth CBD while Melbourne experienced a moderate decline.

Cushman & Wakefield’s Head of Office Leasing Australia and New Zealand, Tim Molchanoff, said the flight to quality is being seen across the country.

“While major office markets continue to evolve in the post-pandemic era, we are seeing two major trends continue,” said Molchanoff.

“Strong demand for newer, higher-grade stock, and considerable appetite for speculatively fit-out stock.”

Adelaide seeing strong growth

Adelaide landlords were the big winner last quarter with prime net effective rents in the CBD surging almost 9% in the June quarter from $265 to $290 per square metre (sqm) pa, taking the annual increase to 14% – the highest in the country.

Across Adelaide, rising rents continue to be driven by tenant demand amid the wave of new office towers, according to the report. The city saw a high level of precommitments for buildings like 60 King William Street, including Services Australia committing to 28,500 sqm, Telstra taking 6,000 sqm, and NAB securing 3,000 sqm.

Positive net absorption levels recorded across the better-quality stock in Adelaide’s CBD is a testament to the flight to quality of tenants, the report said.

In the Sydney CBD, tenants were also demanding higher quality, while incentives remain elevated at 36% in both prime and B-grade markets.

The report said prime gross effective rents climbed 2% in the quarter to reach $975 per sqm; Q2 saw JustCO securing 3,620 sqm at 135 King Street, while BATA took out 2,457 sqm at 210 George Street.

Prime Effective Rents

Source: Cushman & Wakefield.

Rising rents in Brisbane

Meanwhile, Brisbane CBD prime gross effective rents also continued to rise, increasing 1.2% in Q2 from $485 to $490 per sqm, driven by face rent growth as incentives remained steady. This equates to a 7.5% uplift over the past 12 months.

The report said that a lack of supply and inflationary pressure has pushed an increase in gross face rents across all grades in the past six months in Brisbane.

Leasing activity during the quarter included the 12,000 sqm pre-commitment from Boeing Defence Australia at 123 Albert Street.

Cushman & Wakefield’s Head of Research Australia and New Zealand, Dominic Brown, said:

“Competition among landlords across most CBD office markets remains strong, and that’s keeping incentives at elevated levels.”

Dominic Brown, Cushman & Wakefield’s Head of Research

“However, tenants are looking beyond costs alone, where landlords will need a strategy to differentiate their offerings.”

He said with higher grade supply coming online in many markets, tenants now have more choices as they see to upgrade their office premises.

“While this is pushing up face rents, that growth is still being capped by higher incentives.”

Melbourne still struggling

Despite the fact that face rents in the Melbourne CBD office market have remained steady, the volume of quality vacant stock has led to prime net incentives rising from 39.5% to 42%.

That’s led to a small 3.7% drop in prime net effective rents in Q2 to $395 per sqm.

The report said after 550,000 sqm of stock was added over 2020 and 2021, taking the vacancy rate to almost 12%, 2022 recorded almost a further 110,000 sqm of new and refurbished stock, pushing vacancy to 13.8% as at January 2023.

The outlook for new supply in the CBD is comparatively subdued despite the potential for approved or planned accommodation being quite high. Further supply additions are likely to stall until securing significant precommitment.

Business confidence is cautious but remains above longer-term averages, while larger tenants are slower to commit, with many opting for short term extensions.

Meanwhile, prime net effective rents in the Perth CBD were steady in the second quarter but rose 1.4% in annual rolling terms to $340 per sqm. Incentives remain mostly unchanged, ranging from 45% to 50% and were largely asset specific.

Demand for office space continues to be healthy, with Perth recording the highest worker occupancy in the nation at 80% at the end of 2022.