NATIONAL OVERVIEW

Mark Curtain, CBRE Head of Office Leasing, Pacific.

“Australia’s national office market continued to recover through H2 2021, with strong tenant enquiry and transactional activity recorded in most major cities. Despite Sydney and Melbourne being in lockdown for more than 50% of this period, tenants around the country pressed on, implementing their long-term office accommodation strategies.  

“Net absorption across Australia for the full year improved significantly, recovering all of the ground lost in 2020 and then some. Most markets have now passed the worst of the downturn and we expect the recovery story of the Australian office market to continue in 2022.

“The national recovery has been led by Sydney, where leasing market fundamentals have largely stabilised, and enquiry and deal volumes have increased considerably over 2020 levels. Sydney recorded more than 500,000sqm of new tenant enquiries throughout 2021 – a record high – translating into 200,000 deals for 1,000sqm-plus spaces. Notably, Sydney’s sublease vacancy reduced by more than 44% during the year, a good indication that the worst of the office market downturn is now past us. 

“Melbourne has been slower to recover due to the extended lockdowns of 2020 and 2021, but there was a notable uptick in inspections and enquiry in the second half of H2 2021. This suggests Melbourne may enjoy strong pent-up demand in 2022. Sublease vacancy remains a concern, with approximately 190,000sqm of available supply, but this is expected to trend down quickly over the course of the year as opportunistic tenants compete for competitively-priced space with high-quality fitouts.

“Brisbane’s vacancy remains elevated as a result of backfill stock and additions such as Midtown Centre. However, improving demand and limited new supply going forward will support a fall in the vacancy rate in the medium-term. 

“Perth had the largest contraction in total vacancy of any major market, falling from nearly 20% to the mid-teens over the course of the year as demand continued to recover. 

“Adelaide and Canberra also enjoyed favourable deal activity. Strong public sector activity in both cities underpinned demand in 2021, with 68,123sqm – nearly 50% the total volume across the two cities – leased to State and Federal Government tenants.”

Sameer Chopra, CBRE Head of Research, Pacific & ESG, Asia Pacific

“In 2021 we saw a turnaround in the market, with significant net absorption across Australia’s CBD office markets. The majority of this absorption was in Perth and Canberra, driven by the strong demand from the mining industry and public sector.

“Robust leasing activity and shrinkage of sublease availability through 2021 indicates that vacancy rates in key office markets are likely to have peaked, and that there is scope for low-single-digit rental growth over the next three years.”

CITY BY CITY AGENT COMMENTARY

Sydney

Chris Hanley, Director, Advisory & Transaction Services – Office Leasing  

“2021 was a record year with 634,000sqm of office enquiry, and 2022 has also started well with very strong enquiry despite a slower-than-expected return to the city by many office workers as a result of Omicron. We saw good levels of activity in the sub-500sqm group throughout 2021, and in the second half of the year larger occupiers re-emerged after sitting on the sidelines through the early part of the year.

“Occupiers continue to leverage current market conditions to upgrade the quality of their workplaces. Spaces offering quality fitouts are generating the strongest enquiry, both for direct and sublease space, and there is a good supply of newly-fitted and modern, existing space to meet that demand.

“Attractive commercial terms remain available to occupiers, however deal terms are stabilising and we anticipate that the repopulation of the CBD will begin to improve leasing outcomes for our clients.

“Sublease availability fluctuated over the second half of 2021 but is still well down on its peak, with 98,847sqm available in December 2021. Mergers and acquisitions are the dominant driver of sublease supply among the larger tranches, rather than cost cutting or changing workplace strategies.

“Expansion among the technology sector is an ongoing theme, with some occupiers acquiring space to accommodate headcount growth in the triple digits over two- or three-year timeframes.

“We expect that increasing numbers of people returning to the office and an end to indoor mask mandates will result in a strong uplift in transaction activity. Our forecast for 2022 is for another year of strong enquiry and transaction volumes, as competitive commercial terms and changing workplace practices encourage occupiers to make a move.”

Melbourne

Ashley Buller, Head of Office Leasing, Victoria

“Market demand in Melbourne continued to fluctuate through the second half of 2021, as a direct result of lockdowns. Demand since early-2020 had peaked in early-to-mid-2021, when COVID-19 cases were close to zero and the State Government imposed minimal restrictions. 

“The game, though, changed last June, with a two-week lockdown that progressed to four months halting activity. Following that, companies reflected and observed that their workplaces needed refreshing in order to persuade staff to return to the office. Tenants are now taking the opportunity to step into higher quality buildings and create better workplaces.

“This has resulted in increased enquiry levels and improved leasing conditions. Companies have continued to push a flight to quality pathway, with 38% of 2021 leasing transactions involving businesses moving into higher quality assets and leaving un-refurbished, outdated spaces behind.

“Many owners of existing buildings have taken the opportunity to reset their assets for the next 15 years, with significant ground floor and end-of-trip refurbishments, in order to retain tenants with impending lease expiries. There is a strong focus from tenants around common areas and third spaces, green space and additional staff amenities.

“Overall, CBD occupancy levels remain low, expected to improve when Government occupants return in 2022. The sub-500sqm market remains the most-active sector, and prime-grade owners are continuing to construct spec suits across the market in a bid to capitalise on this. 

“As measured by CBRE, Melbourne’s sublease availability sat at approximately 190,000sqm as of December 2021, which is a historical high. 

“The Southern Cross precinct has completed more sublease transactions than any other precinct. Sporadic successes through the CBD and fringe sublease market have tended to follow sub-lessors who were prepared to walk away from their fitout and furniture improvements for nil or minimal return, and extend an additional market incentive. Typically, as time has passed, the incentive has increased from a target to recover full costs to a compromised level or cost recovery.”

Brisbane

Chris Butters, Managing Director, Brisbane & Queensland State Director, Office Leasing

“Brisbane office vacancy rates stabilised in the second half of 2021, as CBD participation rates improved and hovered between 65-75%. The improved level of office usage across the market paved the way for corporate occupiers to contemplate short- and long-term accommodation requirements particularly pertaining to size and workplace usage and patterns.   

“Flight to quality has been a consistent theme across all industry sectors. The vast majority of active enquiry focused on the Prime-grade sector of the market, with a far greater emphasis on lease term flexibility, improved meeting zones and collaboration spaces and the reutilisation of existing fitouts where possible. 

“We anticipate vacancy rates will increase in the first half of 2022 due to the completion of 80 Ann Street – Suncorp’s new HQ – before retracing by early 2023 on the back of stronger business conditions and a lack of new office supply until the completion of 205 North Quay in early 2025.”

Gold Coast

Tania Moore, Senior Director, Office Leasing

“The Gold Coast office market is swinging into a landlord-driven market on the back of a strong 12-month performance, with vacancy falling to 10.1% in 2021, a total reduction of 4.2%. The annual net absorption of 17,216 sqm is a significant uplift against the previous three years, when negative absorption was recorded, and the 10-year average of 5,000sqm per annum.  

“The strong performance of the Gold Coast is in synergy with many Australian regional markets, where SME occupiers – particularly in the fields of real estate, construction and professional services – experienced business growth or relocated to lifestyle locations, as well as contact centre operators de-risking their business operations outside CBD locations.

“The improvement in vacancy across the A-grade sector was primarily driven by the lease of more than 5,500sqm at 35 Robina Town Centre Drive, with B- and C-grade stock benefiting from new and existing SME groups seeking affordable rental levels.  

“The market is experiencing ongoing high demand from the SME sector, along with the education sector following the opening of international borders to students. The main challenges for Gold Coast occupiers in 2022 will be limited stock opportunities under 150sqm and over 750sqm. Managing timelines on fitout construction, due to the lack of supplies and availability of contractors, and forward planning will also be critical.   

“There is currently approximately 21,200sqm of new office space under construction, with precommitments accounting for about 40% of the supply that’s due for completion between mid-2022 and mid-2023. In the core office precincts, 8,800sqm of new supply is being constructed and only 908sqm remains for supply, therefore we do not expect any real impact to the market from these additions.   

“As the market continues to tighten, we anticipate further supply additions to continue along the M1 Corridor, where land values support the feasibility of new office building construction, until rental growth in the core office precincts supports new builds.”

Adelaide

Andrew Bahr, Director, Office Leasing 

“Vacancy levels in Adelaide declined through 2021, across the city’s markets, and there were record levels of enquiry and NLA leased in the CBD. Flight to quality was a major theme, and companies in the health, IT and professional services sectors were particularly active. 

“In 2022, there will be next to zero availability when it comes to large amounts of new Prime-grade space in the city. Strategic repositioning discussions are continuing in relation to various assets, though, which will result in large vacancies in 2023, and all of Adelaide’s new builds are on track for completion as scheduled. 

“Sublease availability continues to decline, falling by 42.7% in Q4 to just 4,900sqm of available supply. That is Adelaide’s lowest figure since June 2020, and comfortably the lowest of any city in Australia, representing only 1% of the national total.

“The impact of 2022’s State and Federal elections is yet to be seen, and this may have an effect on demand and companies’ decision-making until the outcomes of those are known. Historically, though, any impact has been short-lived, and we would expect demand to remain strong throughout the year.”

Perth

Andrew Denny, Senior Director, Office Leasing  

“Perth’s office markets, both the CBD and suburban, are experiencing substantial vacancy falls. The recovery is widespread, not only across locations, but also across all grades of office buildings.

“Strong business conditions, fuelled by the mining and IT sectors, are leading to many businesses expanding strongly and taking larger premises. The flight to quality and to the centre are both still very strong trends, and in 2021 we saw more businesses relocate to the CBD from the suburbs than ever before.

“Moving forward there are a number of headwinds, which could slow the market. These include significant COVID in WA for the first time, the Federal election, and the stock market correction. These are, though, likely to be temporary and relatively minor factors.

“Amid the market recovery, the new build market in the CBD is progressing strongly. The 55,000sqm 1 The Esplanade, which has Chevron as its major tenant, is due for completion in 2023, while construction has commenced on Capital Square Tower 3 (8,000sqm-17,000sqm) and Westralia Square Tower 2 (9,000 sqm), with both due to be completed Q1 2023 at the latest.

“The other notable potential projects are Brookfield with 31,000sqm on Lot 6 at Elizabeth Quay and AAIG with 60,000sqm on Lot 4 at Elizabeth Quay. These projects are likely to have the biggest impact on the Perth office market moving forward.”

Canberra

Troy Markos, Director, Advisory & Transaction Services – Office Leasing  

“Despite experiencing its first true lockdown, Canberra had a strong finish to 2021 with vacancy levels continuing to tighten. Occupiers did not have as much choice as they once had, especially in specific locations and in the A-grade market, which is desperately in need of new supply coming online in 2022.  The lack of supply and flight to quality has resulted in an uplift in face rents, and kept incentives relatively consistent.

“Enquiry levels remained strong in the second half of the year. From the enquiries, 71% sought space smaller than 500sqm, and 18% in excess of 1,000sqm, with the Commonwealth Government seeking the majority of the larger requirements. The most obvious trend, especially in the smaller end of the market, was the desire for fitted space, whether existing, spec-fitted or landlord-delivered. This was not only relevant to the private sector but also the Commonwealth for project space and short-term requirements.  More landlords are looking to spec-fit vacancy and subdivide where necessary to reduce letting up times and meet occupier demand.

“The impact of working from home and the implementation of hybrid working models moving forward is affecting occupier requirements. There is uncertainty around their actual requirements and parties are seeking more flexibility from landlords, whether it be shorter terms or break clauses. As organisations work out how this new way of working plays out, we have seen more occupiers choose to renew in their current premises than relocate, out of pure convenience.

“The most sought-after locations have been the CBD and Parliamentary Precinct, with the latter arguably the most in demand. This is largely due to private sector defence contracting or Government consulting groups wanting to be close to their clients situated in these areas. Fringe markets and town centres such as Belconnen and Woden were the subject of lower levels of enquiry in H2.

“The Commonwealth Government remained active despite the looming 2022 election. In H2 2021, numerous long-term requirements came to market, such as for the Australian Maritime Safety Authority, while shorter-term project space requirements slowed compared to H1. There remains a lack of suitable A-grade supply and options suitable to Commonwealth standards. 

“In 2022 and 2023, more supply will be added with buildings such as 5 Farrell Place and 18 Marcus Clarke Street coming online. These are already getting early attention, with the Civil Aviation Safety Authority committing to multiple floors in 18 Marcus Clarke Street, which CBRE concluded before Christmas.   

“We expect the wave of momentum from H2 2021 to continue into the first half of 2022.”

Western Sydney

Mark Martin, Director, Advisory & Transaction Services – Office Leasing  

“Dominated by the Parramatta CBD, Western Sydney continues its transformative journey with significant new transport infrastructure coming online, and new residential and commercial office towers advancing to completion.

“Through H2 2021 and into 2022, this is headlined by Walker Corporation’s Parramatta Square and the collaboration between Charter Hall and Western Sydney University at 6 Hassall Street. The opening of the light rail in 2023, which will significantly improve pedestrian access throughout Parramatta, is also on the horizon.

“Larger lessee demand, for 1,000sqm-plus sites, resulted in a number of leases being granted, primarily in flight-to-quality deals. Examples include NDIA and the National Heavy Vehicles Regulator, which leased a combined 3,300sqm at 32 Smith Street, and 2,700sqm between Complete Credit Solutions and Workplace 365 at 60 Station Street.

“All new developments and quality A-grade assets benefitted from this leasing activity. Along with 32 Smith Street and 60 Station Street – both owned by GPT – there were transactions at Parramatta Square, 6 Hassall Street and ISPT’s 10 Smith Street. The deal matrix varied, but typical market incentives were generally recognised as 36-42%

“Enquiry has markedly increased for project space requirements, as the Government pours funds into major new roads and tunnelling associated with Sydney’s future second airport in Badgerys Creek. Several construction groups are sourcing fitted-out solutions, typically for around three years reflecting the 2026 opening date and 2,000-4,000sqm.

“Elsewhere, smaller, peripheral markets such as Blacktown, Penrith and Norwest have also fielded increased enquiry and leasing activity, as suburban dwellers seek to have an office closer to home.
Despite expectations that vacancy rates will rise during 2022, overall demand remains resilient with the expectation that larger leasing deals will continue to transact during Q1 2022. 

“This will be led by resilient organisations looking longer term, but potentially requiring contraction and expansion flexibility.”