CBD office vacancy rises as supply outstrips demand

The national rate has lifted to 12.5 per cent, from 12 per cent six months ago. Strong demand in Brisbane’s CBD – at more than 40,000sq m, it is four times the historical average – helped mitigate the overall result. Vacancy in Brisbane fell one percentage point to 12.9 per cent, while the Hobart and Darwin CBDs also tightened.

While rising vacancy rates will inevitably challenge rental income, there were also signs of hope in the Property Council of Australia’s latest assay of CBD office markets, according to its chief executive Mike Zorbas. Nationally, demand for office space increased by an average 0.1 per cent, while sub-lease space – the most volatile index of tenant’s need for office accommodation – fell.

It was solid office construction activity – the supply of office space exceeded the historical average in five of the last six half-yearly reports – which was the main determinant of the vacancy rates, according to Mr Zorbas.

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

In a timely example of that, ASX-listed Charter Hall on Wednesday announced it had struck a 10-year pre-commitment deal with Allianz Australia for space at 555 Collins Street, which is part of a new $1.5 twin-tower office development in the Melbourne CBD.

Allianz Australia will occupy the ‘skyrise floors’ on levels 24 to 28, taking up around 6500 square metres. Amazon, Aware Super and Connective have previously pre-committed to the new tower.

The supply-demand equation may yet swing back toward landlords in the coming years, with the PCA figures showing that while net supply is forecast to be higher than average in 2023, it is expected to fall below average in the following two years.

Simon Hunt, Colliers managing director for office leasing, said vacancy would stabilise as less new and refurbished supply came into the Sydney and Melbourne markets.

“Occupiers will reach decisions regarding employment numbers and the employee value proposition of their business, and the permanency of dynamic working styles are determined,” he said.

“While several large occupiers have reduced the amount of office space they inhabit across CBD locations, many have moved to upgraded or newer buildings with higher lease values, indicating the relevance of office space.”

In Melbourne, tenant advocate Holly Bailey, from Kernel Property, said secondary buildings would struggle as premium stock continued to be delivered. ESG and sustainability have emerged as key factors for tenants in premises decision-making, she said.

“We are seeing space contractions flow through, predominately from larger occupiers that were already operating with flexible desk sharing models,” she said.

“There are still so many unknowns for tenants in how they occupy space in the future. Our clients are demanding greater flexibility in terms of expansion and contraction and additional amenities offered by buildings.”

JLL’s head of office leasing for Australia, Tim O’Connor, agreed that ESG issues are riding higher in tenant requirements.

“As we move into 2023, the discussion around carbon emission reduction targets will include a more diverse range of organisations. Real estate owners have to move ahead of current market requirements and show how their asset can evolve to become a net-zero carbon building,” he said.

As vacancy rates tightened marginally in Brisbane and Perth, effective rents have risen in those two CBDs have risen. Effective rents had risen by 11 per cent and 10 per cent respectively in those two cities, according Mark Curtain, CBRE’s head of office leasing for the Pacific. Nevertheless, weaker office conditions in many major global office markets were softening expectations for the year ahead, he said.