SMEs carry Australian CBD office markets
Strong leasing activity from SMEs holding up CBD office market. Image: Canva.
  • SMEs responsible for around half of total office space leased in H1 2023.
  • Prime grade offices continued to see leasing numbers grow.
  • High profile tenants expected to return in H2 2023.

Small to medium enterprises (SMEs) put in a strong performance across the first half of 2023, according to Colliers. Smaller tenants in the office market were responsible for a larger share of leasing deals, nationally, across H1 2023, the figure: 88%.

Prime grade assets continued to see rental growth and more leases signed, with the second half of this year set to see larger deals announced.

Sustaining the office market during the slowdown

As the economy teeters, the workplace expands, and businesses rush to grab A-Grade office stock at the expense of older buildings, SME activity sustained the office leasing market, amounting to 46% of the 283,000 square metres (sqm) leased over H1 2023 with contracts for offices under 1,000 sqm.

CBD office area leased by size range

CBD office area leased by size range
Source: Colliers.

On the other hand, medium-sized counterparts, leasing spaces of 1,000 sqm to 2,999 sqm, and larger counterparts, leasing spaces above 3,000 sqm, accounted for 26% and 28% of the office space leased.

Colliers’ managing director of office leasing, Cameron Williams, said that steady demand from SMEs allowed for the total area of office space leased, across Australia for the first half of H1 2023, to increase by 11% from the area recorded over the first half of the previous four years, even though office leasing activity from SMEs was already elevated for the past three years.

Cameron Williams
Cameron Williams. Image: Supplied.

“SMEs are also undertaking the heavy lifting for the office market evolution by reshaping cities, increasing their number of deals by 4.4% and gross area leased by 3.7% across all CBDs nationally over H1 2023.” Mr Williams said.

“Demand for offices in top locations and the ‘pull to precincts’, where employees benefit from public transport access and high-quality amenities, is further elevating areas such as the northeastern part of Sydney’s CBD, the Paris end of Collins Street in Melbourne and the River Precinct in Brisbane.”

Flight to quality trend in the CBD

Colliers’ national director of research, Joanne Henderson, noted that high-demand prime assets in Sydney’s CBD core precinct had the most significant rental growth across every precinct and office asset grade, with their net effective rents climbing by 11.4% and outpacing the whole CBD average of 5%.

Sydney CBD average net effective rental growth June 2021 to Jun 2023

Syd CBD Average Net Effective Rental Growth Jun21 to Jun23
Source: Colliers.

“Occupiers seeking quality, amenity and prestige also enhanced the position of prime grade assets in the eastern core of Melbourne’s CBD, which witnessed growth in net effective rents by 7.8% over the past two years, as the average for the whole CBD declined slightly (-2.7%).” Henderson said.

Melbourne CBD average net effective rental growth June 2021 to June 2023

Melb CBD average net effective rental growth
Source: Colliers.

“While the flight to quality is not new to the office sector, prime grade office area leased across CBDs nationally over H1 2023, was up by 4.3%, compared to H1 2022.”

Colliers’ research attributed the robust growth for premium net face rents across every CBD market in Q2 2023 to the demand for top-grade office spaces, especially in Brisbane and Perth.

As the office market vies for active occupiers amidst an economic slowdown, creating upward pressure on incentives, the average prime net effective rent annual growth rate rose by 4.3% by the end of June 2023, despite being set back by 1% over the second quarter of 2023.

Large occupiers expected to return

“Although SMEs buoyed rents and the office leasing market over H1 2023, we expect a large number of deals for high profile tenants requiring over 5,000 sqm of space, to be agreed and announced in H2 2023,” Williams said.

“We are already starting to see green shoots in the uplift of larger deals.”

Across Australia, office leasing deals over the first half of 2023 for spaces over 3000 sqm grew by 22%, contributing to a 74% jump in space for this market segment compared to the first half of 2022 — equivalent to 79,443 sqm of office area leased, the most space leased to large occupiers since H1 2019.

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