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‘Bleak’ outlook for office assets as workers stay home

Workers are not returning to the office, leading to sustained upward pressure on vacancy rates and a negative outlook for the sector, according to an expert.

Ray White Head of Commercial Research, Vanessa Rader, said most office markets had recorded a reduction in tenant demand, resulting in a continued uptick in total vacancy rates and a “bleak” outlook for the asset class.

“The lack of bums on seats has been exacerbated by the withdrawal of office stock across many CBD and non-CBD markets,” Ms Rader said.

“Generally we see the withdrawal of stock counteract a difficult leasing market keeping vacancies stable, however, the declines in take-up have been historically high, pressuring these occupancy rates. 

“The bigger concern surrounds what this means for the investment market, which will likely see yields increase and capital values decrease across the country.”

Ms Rader said the only CBD to record a reduction in vacancy was Perth, falling from 15.9 per cent in July 2023 to 14.9 per cent in January 2024. 

“While this is a good result for the west, this decline has been achieved due to a reduction in office supply as net demand for office space continued to reduce,” she said.

“Perth’s office market recorded (a drop of) 79,031sq m in office supply during the last six months, a worrying sign for an office market with high levels of supply still to be added.”

This concern echoed across most other major CBD markets, with Sydney continuing to raise vacancy to 12.2 per cent, despite the 30,668sq m withdrawal over the same time frame, and Melbourne facing 15 per cent vacancy despite shedding more than 20,000sq m of stock. 

Ms Rader said Queensland markets continued to be the bright spark in a gloomy office market. 

“Brisbane CBD did well to keep vacancy levels stable at 11.7 per cent due to the cancelling out of stock and tenant reductions,” she said.

“Adelaide was the only CBD region to record positive net absorption, however, high supply additions will ensure vacancy remains elevated in this market over the short to medium term.”

According to Ms Rader, non-CBD markets have shown pockets of better performance, with one-third of all markets recording a reduction in vacancies. 

“The greatest take up came from the Brisbane fringe market, with 45,080sq m of new demand aiding the 30,630sq m of new supply, reducing vacancy from 15.2 per cent to 13.9 per cent over a six-month period,” she said.

“Despite some great leasing deals on offer in the Melbourne CBD market, tenants have flowed into the smaller East Melbourne and Southbank markets over the past six months, improving occupancy to 6.8 per cent and 17 per cent respectively.”

For Sydney, the high-quality Parramatta market saw vacancies eclipse 23 per cent in July 2023, however, stock withdrawals and stable occupancy have seen this slow move down to 22 per cent, Ms Rader said.

“Over the last few years, we saw coastal office markets improve with businesses relocating, and a growing number of small businesses borne out of Covid take the step into office accommodation,” she said.

“In Queensland, these markets continue to be some of the best performing in the country, with the Sunshine Coast recording the second lowest vacancy in the country at 4 per cent, with the Gold Coast not far behind it, sitting stable at just 6.4 per cent. 

“In NSW, Wollongong saw supply additions and growing tenant demand reducing vacancies to 14.7 per cent (from 17.9 per cent), while Newcastle is set to rebound in the short term after some big project completions, growing vacancy to 16.4 per cent.”

Ms Rader said the hope for 2024 was one of recovery for the office markets, and while many CBDs have shown promise of vibrancy in January, with public transport full and parking rates starting to increase, it hasn’t transported into additional absorption of stock. 

“Tenants continue to seek out deals, happy to relocate across the CBDs for high incentives,” she said.

“Last year this resulted in a ‘flight to quality’, with strong gains for the prime markets with vacancies in premium and A-Grade stock improving, however, this current period has seen a turnaround of this trend with both Sydney and Adelaide CBD recording prime vacancies higher than secondary, a concerning indicator for the 5.2 million square metre Sydney office market.”

With occupancy concerns across the country pressuring income levels down, coupled with high financing costs, the outlook for the office investment market remains bleak, Ms Rader said.

“Transaction activity was limited in 2023, however, investment yields for those which did change hands set new benchmarks,” she said.

“Growth in these rates will continue into this year resulting in strong reductions in capital values as the pool of buyers contracts. 

“A difficult 2024 is expected with many owners forced to make tough decisions, expecting to result in billions of dollars in losses across the country.”

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Rowan Crosby

Rowan Crosby is a senior journalist at Elite Agent specialising in finance and real estate.