Businesses flee secondary office buildings

The flight to quality across the office sector continues to see businesses move towards higher quality spaces in a trend that is likely to continue.

Ray White Commercial Head of Research, Vanessa Rader, said workers around the world were still reluctant to return to office markets on a full-time basis.

She said some businesses look to downsize their spaces and perhaps sub-lease, while others have reconfigured the working environment to provide flexibility and collaboration, or relocated to new premises to lure staff back in. 

“Markets around the world have been impacted, with major cities such as New York recording vacancies eclipsing 20 per cent, and Toronto as much as 15 per cent,” Ms Rader said.

“European cities such as London and Berlin have high vacancies, yet sit below Australian levels, while Asian markets such as Tokyo and Hong Kong are showing signs of improvement.” 

According to Ms Rader, the increase in net absorption does signal a move back to a more normalised market, led by prime stock. 

“Despite high inflationary pressures, effective rents have seen limited positive movement with concessions and incentives to entice tenants commonplace around the globe,” she said.

“The flight-to-quality internationally is real, with prime leasing deals representing as much as three-quarters of all transactions, improving vacancies across the premium and A-grade end of town in some markets.”

Locally, Ms Rader said Queensland continued to be the standout office market, with Brisbane CBD one of the few to post a lower vacancy rate.

She said Brisbane fringe had the greatest non-CBD take up, while the Gold Coast boasts the lowest vacancy rate in the country. 

“Brisbane CBD currently boasts a prime vacancy of 12.5 per cent compared to 10.4 per cent in the secondary market, however, we cannot look at this data in isolation,” she said.

“There has been strong take up recorded in the CBD over the last 12 months of 52,543sq m, which has eclipsed the secondary market. 

“For markets in both Queensland and Western Australia, population growth has spurred on office activity with positive take up recorded across both quality grades, unlike other states. 

“However, the bulk of activity remains in the prime end of town highlighting this flight-to-quality.”

Ms Rader said Sydney CBD had recorded vacancies in both prime and secondary at similar rates of 11.4 per cent and 11.7 per cent respectively, highlighting the clear flight to quality that has emerged. 

“While the absorption of space for Sydney’s markets, such as the CBD and Parramatta, has not had the volume to move the vacancy rate downwards, it is clear new tenants are fleeing older-style stock for shiny, premium and A-grade offerings,” she said.

“Supply of these assets in these markets too have played a role. 

“Continued new supply of high-grade assets is not allowing these markets to reset after the COVID-19 disruption.”

Ms Rader also said Melbourne CBD was the only region to record a decline in occupancy across both prime and secondary spaces.  

“This market has been the worst affected by pandemic lockdowns, and looking ahead its improvement will likely be hampered by high volume of supply additions with only partial precommitments,” she said.

“Over the last 12 months the Melbourne CBD has lost over 90,000sq m of tenancies, with close to 70 per cent of these from secondary assets, raises the question of what will the future hold for secondary office buildings.”

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Rowan Crosby

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