The early stages of the COVID-19 may have so far delivered only a "modest effect" on office vacancy rates, according to the Property Council of Australia's Office Market Report, but experts believe some markets are proving better at weathering the effects of the pandemic.

Released on Thursday, the report indicates Australian CBD and non-CBD office vacancy increased from 8.3 percent to 9.5 percent over the six months to July 2020 with flat tenant demand overall.

Despite the COVID-19 pandemic, the data shows aggregate Australian vacancy remains below its historic average, with the key Sydney and Melbourne CBDs sitting at less than six percent vacancy, reflecting what the PCA describes as the "strong base settings for most CBD markets at the outset of the pandemic".

Office vacancies are calculated on whether a lease is in place for office space, not whether the tenant’s employees are occupying the space or working from home.

Property Council of Australia's Office Market Report - At a glance:

• Australian office market vacancy increased from 8.3 per cent to 9.5 per cent.
• Net absorption was -60,227sqm over the six months to July 2020. The historic average is 155,035sqm.
• 353,255sqm of space was added over the six months to July 2020 – above the historical average of 311,113sqm.
• A total of 83,910sqm was withdrawn over the period, just over half the historical average of 163,464sqm.
• By net absorption, the best performing markets were Melbourne CBD, Canberra and Macquarie Park.

Speaking about the report, Savills Australia National Head of Office Leasing, Graham Postma, said whilst all office markets across the country were feeling the impacts of the pandemic, Perth, Brisbane and Adelaide remained more resilient.

“Where restrictions have further eased in these key states, tenants are now back in their offices in higher proportions and enquiry and inspection levels are returning to more normalised levels," he said

“Some consistent themes are emerging across the country.

"Tenant enquiry in each state is focussing heavily on premises with existing quality fit-outs to expedite the relocation process and reduce risk in terms of fit-out delivery.

“Flexibility is also a must have with tenants leaning towards shorter lease terms to allow for future growth."

Savills Australia National Head of Office Leasing Graham Postma. Source: Savills Australia

NSW (Sydney - 5.6 per cent vacancy)

The report indicates Sydney's CBD had a vacancy of  5.6 per cent, joining Melbourne as the only CBD market with single figure vacancy

Savills NSW Office Leasing State Director Tom Mott said active tenants who were seeking a flight to quality would be the beneficiaries of the deals on offer across Sydney.

“Owners are prepared to take on the sublease stock because they are well equipped to mobilise fit-out teams to deliver turnkey fit-outs on flexible terms," he said.

“The vast majority of tenants with a lease expiry now or in the short term are seeking a short term hold over.

"The tenants who have confidence in the short to medium term are taking advantage of the sublease and direct stock available and the deals that come with those."

Source: Property Council of Australia

Queensland (Brisbane - 12.9 per cent vacancy)

Savills Queensland Office Leasing Director  David Howson the uncertainty in the market meant tenants were continuing to review their office space requirements with many no clearer as to the longer-term effects on their occupation. 

“Those facing imminent expiries are looking for opportunities to extend/holdover their current Leases or re-set in better quality accommodation at terms similar to current passing rates," he said.

“Current market murmurings foreshadow an influx of fitted space (both Sublease and Backfill) within the Prime and Secondary markets with Prime seen as potentially witnessing the greatest change in vacancy." 

Source: Property Council of Australia

South Australia (Adelaide - 14.2 per cent vacancy)

Savills South Australia Office Leasing State Director Adam Hartley noted Adelaide seemed to have survived the COVID scare much better than some of its eastern state counterparts. 

“Not only was the COVID infection contained much quicker in Adelaide but the impact on our office market appears to have been much less," he said. 

“We have not had significant corporate business failures and there doesn’t appear to be any large scale subleasing in the marketplace. 

“In Adelaide, a downsizing of the workforce generally means there are a few spare workstations in people’s offices rather than whole floors of fitted out space coming onto the market through sublease. 

Mr Hartley added demand in Adelaide remained conservative, while the enquiry rate has been significantly higher than the same time last year, mainly due to the small tenant market.

“What we have found is the SME market has been active in reviewing their options and planning for a variety of outcomes pending any further changes in the market," he said. 

"Whilst is inquiry rate is higher, only time will tell once transactions take place as to the true market performance.

“We do expect some upward pressure on vacancy rates and incentives, but not at a level that will have any long term consequence,” he said.

Melbourne, Australia. Source: Depositphotos

Victoria (Melbourne - 5.8 per cent vacancy)

The PCA notes that Melbourne CBD vacancy was most significantly impacted by a 4.6 per cent increase in additional office supply

Savills Victoria Office Leasing State Director Mark Rasmussen said the southern capital was set to overtake Sydney as Australia’s largest CBD office market.

“Major lease transactions continue albeit in lower volumes," he said.

"The delivery of significant new office supply and issues relating to Covid will continue to push up vacancy rates and lease incentives. 

“Increased Sub lease opportunities are providing further attractive options for tenants. Fitted tenancies are the most popular.

"Landlords are well advised to identify and address forthcoming vacancy issues as the market is likely to come under further pressure over the next 12 months."

Mr Rasmussen believes transaction activity will recover strongly as Covid lockdown restrictions are eased later in 2020.

Western Australia (18.4 per cent vacancy)

Savills Perth Office Leasing Director David Evans said it was "crucial" for the city to look over the immediate horizon and set the foundations for future opportunities. 

“Perth’s enquiry rates have increased over the last few months with occupiers leveraging the conditions to reset rents and improve their workplace environments," he said.

Mr Evans said enquiries during and right before the Covid pandemic began (March – May 2020) were circa 39-40 with a spike in enquires jumping to 52 from June to now. 

“Owners need to ensure any vacancies are positioned to be relevant and competitive in the market and also be prepared to provide flexibility to compete with the emerging sublease market," he said.

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