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Despite the modest improvements to office metrics, there is strength in the sector. Image: Henry Thai
  • Office demand figures have risen 0.1 per cent.
  • Vacancy rates have fallen across half of Australia's CBDs.
  • Figures are modest due to new stock coming online.

The latest Property Council of Australia (PCA) office market report has found demand for office space has increased by an average of 0.1 per cent across the country’s CBDs over the past six months.

Vacancy rates also fell in half of Australia’s CBDs, with sublease vacancies also reducing nationally, the PCA said it was a healthy sign, as more companies are fully utilising their existing space.

The overall vacancy rate for Australian offices increased, and some decreases were marginal. The Property Council said this came off the back of solid office construction activity, with the supply of office space exceeding the historical average in five of the last six half-yearly reports.

Property Council of Australia Chief Executive Mike Zorbas said the latest Office Market Report figures were encouraging, and demonstrate that large levels of supply, rather than demand, are influencing vacancy results.

“This is the third six-month period of positive demand nationally for office space in our CBDs,” Mr Zorbas said.

“Organisations see that an office presence in our cities is an essential part of doing business.

“While new supply has increased total vacant space in some areas, these latest numbers are a vote of confidence in our CBDs,” he said.

CBD Vacancy Change – Six Months to January 2023

cbd vacancy rate changes last six months property council of australia office market report january 2023
Source: Property Council of Australia Office Market Report January 2023.

Perth vacancy rates drop

The latest figures are down by 0.2 percentage points, with the Property Council’s WA Executive Director Sandra Brewer noting “Both the Perth and West Perth markets are showing strong signs of improvement,” Ms Brewer said.

“Even with businesses adapting to hybrid workforce arrangements, what we are seeing is that the role of the office remains central to the employee experience.

“Contrary to many predictions, flexibility does not appear to be reducing demand for space. Sublease vacancy rates – often an indicator of businesses downsizing space requirements – remain low at 0.6 per cent, well below the historical average of 1.7 per cent, indicating businesses are using their whole of office space.

“We are seeing a shift from desk dominant office space, with tenants increasingly requiring more room for a superior office experience, with additions such as wellness rooms, collaboration spaces, lounges for socialising and sophisticated coffee machines,” she said.

Colliers State Chief Executive for Western Australia Richard Cash said the positive results of the Office Market report would set the tone for a strong start to 2023 in both the Perth CBD and West Perth office markets.

“The high level of business confidence in WA is another positive sign for the broader WA economy in 2023, with national and multinational companies seeing the clear benefits in having their Australian headquarters located in Western Australia,” Mr Cash said.

Flight to quality remains front of mind

The hot topic continues to occupy headlines, with the work-from-home concerns still present, but not as poignant.

“As was visible in 2022, office leasing activity across Australia in 2023 will be marked by transitions. Shifts in ways of working, the economic cycle and financial markets will all play a role in shaping tenant demand,” said Tim Molchanoff, Cushman & Wakefield’s Head of Office Leasing, Australia and New Zealand.

“The big-ticket objectives last year of getting people back to the office and attracting talent in a tight labour market aren’t abating. This is now leading occupiers, particularly smaller organisations, to pursue quality space, albeit in some cases, smaller space, which will help rents stabilise or move higher in 2023. We anticipate national office vacancy will sit between 12-14 per cent this year.”

“The national office market has defied the negative sentiment that surrounded the office sector over the past 12 months, delivering exceptionally strong transactional activity in Q4 2022. While there is little doubt flexible working will remain a key long-term trend across the globe, corporate occupiers are acutely focused on securing best-in-class office solutions that will deliver a diverse offering of workplace settings and amenities to encourage their employees to return to the office,” said Mark Curtain, CBRE Head of Office Leasing, Pacific.

“Looking forward to 2023, the Australian CBD vacancy rate is expected to hover around 12.5 per cent for much of the year with new supply dropping by over 40 per cent from the previous year.

“The Australian office market performed strongly in 2022, however, weaker office conditions in many major global office markets are softening expectations for the year ahead. There is growing evidence that the technology and banking sectors are reducing headcount, and this has the potential to directly impact our market and weigh heavily on broader market confidence.”

Tenants after an upgrade

CBRE Head of Office & Capital Markets Research, Australia, Tom Broderick said:

“Tenants appear to be continuing to upgrade their office space in the new environment. CBRE Research has analysed 220 tenant relocations over the past two years and found that 66% moved to a building that commands a higher market rent than their previous premises. Only 24% of these tenants moved to a building that offered a lower market rent. This trend is partly off the back of strong revenue growth in 2022 that gave confidence to the corporate sector in Australia. However, we believe an even more important factor is the desire for many companies to improve occupancy levels throughout the week by offering better amenities to their employees.

“With lower economic growth expected in 2023 and some sectors already reducing headcount, we expect national net absorption to be below long-term averages this year as tenants become more cost conscious. However, we do believe that physical occupancy levels will trend further up in 2023 as a weaker economy and labour market shifts the pendulum towards employers, who may be more decisive about return-to-work policies.

Good locations still performing

The latest figures seem to be keeping some landlords on their toes, Chas Keogh, Cushman & Wakefield’s National Director, Joint Head of Department, Office Leasing Victoria said “What we are seeing in Melbourne is a divergence in the market. Vacancy is reducing and rents are still performing well in good quality buildings which are well located and owned by landlords willing to invest in them.

“The vacancy rate is forcing landlords to be proactive in what they do to ensure longevity during tough market conditions, and those not proactive will and are suffering off the back of the market’s higher vacancy rate, which will be recorded anywhere between 13-16 per cent in the Melbourne CBD.

“There absolutely is a flight to quality in the Melbourne CBD which is supported by occupiers who are reducing their footprint size in order to deliver a better offering for their staff, from an amenity, building quality and location perspective” he said.

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