To accompany the release of the latest Property Council of Australia Office Vacancy Statistics, CBRE's Office Leasing experts share their insights into the key trends emerging in Australia's major office markets.

NATIONAL OVERVIEW

Mark Curtain, CBRE Head of Office Leasing, Pacific

“With Australia’s unemployment rate falling to record lows and corporate profitability remaining strong, office users are looking beyond the current economic instability and remain focused on securing quality office solutions that will attract and retain staff for the long term. CBRE recorded 203,528sqm of new 1,000sqm-plus transactions across the national market in H1 2022 and activity grew exponentially in the past three months – 146,572sqm in Q2 against 56,956sqm in Q1 – as the market normalised after the COVID restrictions of late-2021 and early-2022.

“Vacancy rates have generally stabilised across the country with the amount of sublease space returning to the market reducing considerably. During the current cycle, sublease availability peaked in September 2020 at 428,600sqm but has since retracted to 268,553sqm, as tenants proactively pursued competitively-priced space with high-quality existing fitouts. While sublease vacancy will continue to fluctuate in the short term, particularly as major users resolve their long-term office accommodation strategies, it is expected to trend back towards long-term averages over the next 12 months, representing about 1% of the total market.

“Face rental growth is emerging as a strong theme in both existing assets and new development stock, albeit with incentives remaining elevated across most Australian markets. Escalating building costs are driving increased economic rents for new office construction, while landlords are repricing existing stock as they seek to minimise the impact of the current inflationary environment. Gross face rents have grown nationally by 2.3% y-o-y to June 2022.

“Tenant interest in new office development projects remains high across the country, as major office users seek to reinvent their workplace experience and provide more comprehensive amenities for their staff and customers. We anticipate a significant number of pre-commitment transactions across the east coast market will be announced in the second half of the year.”

Tom Broderick, Head of Office Research, Australia

“During the first half of 2022, we have continued to see tenants looking to upgrade their office space requirements. Of the tenants that have relocated, our data suggests about 75% have moved to a building that commands the same or higher rent than their previous premises. We feel this is partly a way of organically encouraging staff back to the office, by offering an improved experience in a better-quality building.

“The unknown is whether this trend continues in the current environment. Major corporates have generally posted strong revenue through 2021 and early-2022, which has alleviated cost containment pressures. We are yet to see a major drop in sentiment within the leasing market but there is potential for a moderation towards the end of 2022.”

CITY BY CITY AGENT COMMENTARY

Sydney

Stuart McSorley, Director, Office Leasing  

“The first half of 2022 generated a record level of enquiry, at 272,000sqm, eclipsing Sydney’s previous high from 2021. The most active tenants, in terms of enquiries and inspections, have been those seeking sub-1,000sqm, with expiry and business growth the key drivers.

“Flight to quality was a strong trend across all sectors in the market, with quality fitted space the most sought-after by tenants looking to entice staff back into the office and attract new talent. Many landlords are providing speculative fitouts, from suites to whole floors, to take advantage of this demand, while the broader demand for higher-quality space has resulted in lower vacancies across the Premium-grade market.

“Leasing volumes for the Sydney CBD were lower for H1 2022. However, on the back of record enquiry through the first six months of 2022, we anticipate the deal pipeline to pick up again for the remainder of the year, with the majority of tenants focused on high quality fitted space.

“Professional Services firms remained the main driver for deals transacted in the first half of 2022. Deal terms remained steady with face rents holding despite some headwinds from global uncertainty, inflation and interest-rate rises. Incentives have remained stable, however they are expected to come under pressure and creep up in the short term, due to higher vacancy and global uncertainty.

“Sublease availability fell during H1 to 96,900sqm, from 100,200sqm at the start of the year, with the majority of the sublease market over 1,000sqm accounted for by a number of large tranches of space.”

Melbourne

Ashley Buller, Head of Office Leasing, Victoria

“Through the first half of 2022, we’ve seen strong and consistent occupier demand, with the previous two years’ concerns around lockdowns subsiding. Tenants seeking sub-500sqm opportunities have been the most active, however momentum is growing among those with larger requirements. We’re also seeing the education sector come back to life, with a number of large transactions underway.

“Smaller, more nimble tenants have taken advantage of the high-quality, Prime-grade spec suites that have been available, with a big percentage of the completed suites now leased. Many Prime-grade owners are now hastily constructing the next wave of suites to capitalise on that demand. Equally, some owners with larger vacancies are now speculatively fitting out 1,000sqm-plus spaces to differentiate their offerings from the competition and lure tenants.

“High-rise, Premium-grade rents in Melbourne’s East End have risen strongly, with a number of transactions reflecting 15-25% improvements against pre-COVID levels. Strong demand and reducing availability are driving this, amid a continued trend of flight to quality. Incentives across the market have remained sticky, and with the current market vacancy, we don’t anticipate this changing in the near future.

“Available sublease space declined by 42% to around 110,000sqm by the end of April, however it has recently increased again to around 140,000sqm due to a number of large offerings coming to market in Docklands. Suburban tenants taking advantage of favourable market terms have contributed strongly to the decline of sublease space, and we see this trend continuing.

“With the current low unemployment rate and the challenges of finding and securing staff for large businesses, the CBD provides a central location to capture employee interest from all geographical locations around Melbourne. Equally with the quality of fitouts available in Docklands and the increase in fitout construction costs, we anticipate suburban tenants will continue to be attracted to this precinct.

“From here, we anticipate a continued improvement in larger tenant activity across the whole market, strong demand in Melbourne’s East End and above-average rental growth in this precinct as stock supply reduces. We also expect to see Docklands continue to lure centralising tenants and fitted space across all size ranges, attracting the strongest tenant demand.”

Brisbane

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

“The Brisbane occupier market is now entering the recovery phase of the cycle, with an increasing percentage of active organisations focused on expansionary rather than contractionary requirements.

“Demand remains focused on the Prime-grade sector of the market, as tenants continue to focus on improving their workplace design and overall class of accommodation. This has been most evident in the pre-commitment market with ~35,000sqm of new transactions from Professional Service Firms looking to reposition for future growth and prosperity.  

“This thematic will undoubtedly result in a tightening of the Prime-grade vacancy rate by year’s end and in turn support face rental growth in this sub-sector.

“Looking forward, we anticipate a buoyant second half of 2022 before a potential pull back in demand in 2023 as increasing interest rate rises and inflation impact corporate revenue and headcount growth.”

Gold Coast

Tania Moore, Senior Director, Office Leasing

“The Gold Coast office market has continued to perform strongly over the past six months, with a further 2% reduction in vacancy to 8.1%. Strong interstate migration has been driving the economy, resulting in the growth of the SME sector, as well as the re-emergence of the education sector following the opening of international borders to the student market.

“The flight to quality has continued, with A-grade vacancy reducing by almost 40% to less than 5,800sqm and B-grade vacancy reducing by 30% with less than 13,000sqm of space available. These market conditions are supporting rental growth and the tightening of incentives.

“We are experiencing occupier frustration about the lack of available quality fitted suites in the 100-200sqm size range and for 1,000sqm-plus options, and with limited new supply additions for the foreseeable future this will continue to be an ongoing issue. 

“In the second half of 2022, we will see the first new office building completion within the core Gold Coast office precincts, 26 Lawson Street in Southport, with existing precommitments resulting in 1,200sqm being available to the market. The completion of the M1 Connect project in August will add 5,600sqm of new office space to the northern Gold Coast corridor, supporting population growth outside of the core Gold Coast office precincts.

“There are a number of new developments mooted, however it is unlikely these projects will be completed until 2024 and are they subject to the appetite from developers to build without some level of substantial pre-commitment.”

Adelaide

Michael Pfitzner, Senior Director, Office Leasing

“Deal activity in the market has started to kick along after a subdued start to 2022, given the dual elections and isolation conditions delaying commitments, despite Adelaide’s nation-leading occupancy levels.

“Tenant demand has been strong throughout the first half of 2022, with 87% of enquiries for fitted out space in better quality accommodation, and 75% seeking 500sqm or less.

“We are seeing good demand from the Technology, Professional Services and Health sectors, with Technology particularly strong on the back of Lot 14 and initiatives such as PwC’s Skilled Service Hub, and increased technology entrepreneurship within Adelaide.

“Going forward, supply will be the big story in Adelaide, namely its impact on the market over the next 12-36 months, with circa 130,000sqm of new development stock coming online. While we anticipate the majority of the new stock will be fully-leased by completion, or close to, history shows that new construction increases rental levels on existing building.

“Similarly, there will be an impact on the backfill accommodation, in terms of what refurbishment the respective owners undertake with their assets and, importantly, when they can complete it. In essence it will be a race to refurbish to beat the competition.”

Perth

Andrew Denny, Senior Director, Office Leasing, Western Australia

“The increase in Perth CBD vacancy is all as a result of new stock entering the market in the past six months. This includes the 13,000sqm Dynons refurbishment, the also-refurbished Atrium and the newly-built Capital Square Tower 2. Together these buildings account for over 32,000sqm of new supply.

“Despite Western Australia experiencing its first major COVID outbreak in 2022, underlying tenant demand is still strong. Expanding tenants remain a key and dominant feature of the market, particularly in the mining and engineering sectors. COVID, stock market declines and the Federal election have all failed to impact tenant demand.

“Rents are starting to increase, albeit in select buildings, with West Perth and the suburbs likely to have stronger increases than the CBD. Rent reviews have increased across all markets.

“Looking ahead, the new-build market in the CBD is progressing strongly and will have the biggest impact on the market. One The Esplanade, a 55,000sqm project with Chevron as its major tenant, and the 17,000sqm Capital Square Tower 3 are due for completion in 2023, while the 9,000sqm Westralia Square Tower 2 should be completed in 2022.”

Canberra

Troy Markos, Director, Office Leasing, ACT

“The Canberra office market has experienced some of its best market conditions in some time. This has been felt not only by occupiers, who have had less choice than ever before, but also landlords experiencing more favourable commercial outcomes with face rents starting to increase.  

“Vacancy is forecast to increase over the next 12 months with new supply to be added to the market, particularly at the Prime end. Among those additions, Morris Property Group’s One City Hill development is due for completion in 2023 and high-quality A-grade buildings such as ISPT’s Pathway Place and 5 Farrell Place City are being refurbished and brought back online.  

“The office suite market was the subject of the most activity in H1 with 76% of enquiry sitting below 500sqm, and the majority of groups seeking fitted space. The most in-demand locations have been the CBD and Parliamentary precinct and occupiers have most commonly been in the Professional Services, IT, Cybersecurity and Defence sectors, with most contracting to the Commonwealth.

“There has been a noticeable flight to quality with occupiers seeking space that will help them attract staff back to the office or assist in the war for talent, which is their main struggle right now. This has aided the increase in face rents, as we have seen occupiers are happy to pay more for the right space, but they are expecting more from the buildings they are choosing, namely bookable shared meeting rooms and flexible parking arrangements.

“The Commonwealth was less active in H1 due to the Federal election, which included a period of Caretaker Government until an outcome was decided. The change of Government will be positive for the Canberra market, with the public sector set to expand and several Machinery of Government Changes underway. The Commonwealth is working through these now, which will result in increased leasing activity later in 2022 and early-2023.”

North Sydney

Stefan Perkowski, Head of Office Leasing, North Sydney

“North Sydney continues its transformative journey with significant new transport infrastructure coming online, and new residential and commercial office towers advancing to completion.

“Throughout H1 2022 and into 2023, this is headlined by Lendlease’s Victoria Cross Development and 2-4 Blue Street, and LaSalle Investment Management’s project at 88 Walker Street. The opening of the Sydney Metro in 2024 will significantly improve connectivity with both the Sydney CBD and suburbs.

“Throughout H1 2022 we have witnessed demand from larger occupiers for 1,000sqm-plus floorplates, resulting in a number of leases being granted, primarily in flight-to-quality deals. Examples include IWG and Galderma, which leased the last remaining floors at 1 Denison Street, totalling 5,750sqm. We are seeing larger occupiers still considering North Sydney as a preferred location, equating to more than 15,000sqm of potential net absorption. These occupiers include SMEC, Hollard, Nokia, Equifax and WSP.

“While the overall vacancy rate remains stable, all new developments and quality A-grade assets have benefitted from this leasing activity, with assets in this grade enjoying a vacancy rate closer to 8%. Fuelled by the IT sector, a driving factor for this has been strong business conditions, which are leading to many businesses expanding strongly and taking larger premises. Flight to quality has remained a very strong trend, and in H1 2022 we saw more businesses relocate to North Sydney from the suburbs than ever before.

“We anticipate vacancy rates will decrease in the second half of 2022 and into 2023 on the back of stronger business conditions and a lack of new office supply until the completion of the Victoria Cross development.”

Western Sydney

Mark Martin, Director, Office Leasing  

“For the first four or five months of 2022, confidence levels remained generally positive. But with war raging in Ukraine, interest rates steadily climbing and the drumbeat of a new COVID variant kicking off, it is not surprising that tenants are becoming less certain about committing to office space.

“CBRE’s Western Sydney Office Leasing team entered the new year with a swathe of negotiations with solicitors instructed. However, since then, up to 5,000sqm of deals in the pipeline have not gone ahead in three separate transactions, and tenants delaying decisions is becoming more common.

“Despite the winding back in confidence, patterns have emerged and lease deals are concluding in some numbers. Emerging trends include flight to quality, especially from industrial-zoned precincts.

“Recent examples include Australian Agribusiness and Krones Pacific moving from nearby industrial precincts to Institutional-grade office buildings in Rhodes. Elsewhere, two parties are negotiating moves to Parramatta from industrial properties at Huntingwood and Eastern Creek, to occupy in excess of 11,000sqm of office space combined.

“The large volume of vacancy recorded mid-year is due to the number of new buildings recently completing, adding to the market stockpile, primarily at 8 Parramatta Square. Much of this is considered vacant as it is not yet occupied, but in reality that vacancy will fall quickly in future reporting periods as much of this new space is pre-leased.

“A feature of H1 2022 has been the increase in the favourability of terms being granted, in particular net incentives. While 38-42% was the norm at the tail end of 2021, these can now be as much as 45% at mid-2022. The growth is yet to show signs of stopping.”

Contact details for the CBRE agents below.