Office vacancy rates have fallen in half of Australia’s capital city CBDs, with demand for space, particularly high quality offices, on the rise.
According to the Property Council of Australia (PCA) Office Market Report July 2024, the overall office vacancy rate across the country fell from 14.8 per cent to 14.6 per cent over the six months to July this year.
That figure is 4.2 percentage points above the historical average.
Property Council of Australia Chief Executive, Mike Zorbas, said the figures were encouraging, with demand for office space positive in both CBD and non-CBD markets.
It’s the first time both demand markets were in positive territory since January 2023.
“It is pleasing to see vacancy levels fall in half of Australia’s CBDs,” Mr Zorbas said.
“There is room for very cautious optimism in parts of the office market.
“In our CBDs, office supply is continuing to be a driving force for vacancy levels as demand for office space has been positive.
“This demonstrates businesses still see a CBD location as the best place to do business.”
The report revealed while vacancy in all CBDs stayed stable, marginally increasing from 13.5 to 13.6 per cent nationally, non-CBD areas saw a fall from 17.9 to 17.2 per cent.
Brisbane’s vacancy decreased from 11.7 to 9.5 per cent, the first time its vacancy rate has been under 10 per cent since January 2013.
Sydney’s CBD office vacancy rate fell from 12.2 to 11.6 per cent and Adelaide witnessed a drop from 19.3 to 17.5 per cent.
However, three CBD markers saw an increase in vacancy.
Melbourne’s vacancy rate rose from 16.6 to 18 per cent, Canberra’s increased from 8.3 to 9.5 per cent, and Perth’s lifted from 14.7 to 15.5 per cent, all largely driven by new supply of quality office space.
“In the past three years, four of the six reporting periods have recorded positive demand for office spaces in our CBDs. In Adelaide and Brisbane, demand is currently 5.9 and 2.7 times their historical averages, respectively,” Mr Zorbas said.
“We continue to see a preference for high quality office spaces, with Sydney and Adelaide being the only capitals to record higher prime vacancy than secondary vacancy.
“Some of the older, lower-grade office buildings that are in lower demand are now being withdrawn from the market to be repurposed through refurbishments or converted into residential spaces or hotels.”
Mr Zorbas said Melbourne still faced stiff challenges.
“The Victorian Government simply has to get some of its workforce back a few days a week to support what must again be a thriving city,” he said.
Sublease vacancy, a measure of business confidence reflected by businesses renting out parts of their office space, decreased in both the CBD and Non-CBD markets as Adelaide, Sydney and Melbourne all recorded sublease vacancy decreases.
Sublease space decreasing
Knight Frank National Head of Leasing, Andrea Roberts, said it was pleasing to see sublease space decreasing in Sydney and stabilising in Melbourne.
“Premium, well-located, high-quality sublease opportunities move quickly,” she said.
“Poorly located offices with aged fitouts are very challenging to lease at any price point.”
In the past 12 months, Ms Roberts said Knight Frank had seen considerable relative improvement in tenant demand across all markets, with enquiry and inspection levels rising as the major markets of Sydney and Melbourne worked through post pandemic conditions to new norms.
“There is, however, a continuing pattern in leasing performance based on location of an asset,” she said.
“Again, this is most measurable in Sydney and Melbourne with the vacancy and incentive disparity between office buildings located in the Core and East End of these cities respectively.
“It is very much a tale of ‘the best and the rest’, coming back to the fundamentals of real estate – address and amenity is everything.”
Ms Roberts said Brisbane had led the country for the highest rental growth and incentive remaining flat.
She said construction and fitout costs were also rising.
“Queensland has the most pronounced increase in this area, but we are seeing continuing increasing fit out costs impact strategy around spec fitouts across the rest of the country,” Ms Roberts said.
“As building costs continue to increase, incentives are not likely to dramatically decrease as tenants require the funding to construct their fitouts.”
The nation’s capital
In Canberra, Ray White Head of Research, Vanessa Rader, said despite a slight increase in the vacancy rate in the civic region, it remained below the national average at 9.6 per cent.
“This growth in vacancy is attributed to the recently completed refurbishment project at 18 Marcus Clarke Street, which has not yet reached full occupancy,” she said.
“Nevertheless, net absorption for the first half of 2024 remains positive, increasing by 15,358 sq m.
Ms Rader said contrary to the “flight to quality” trend observed in other Australian office markets, Canberra’s A-grade vacancy rate has risen by 160 basis points to 9.5 per cent, while B-grade vacancy has only increased by 30 basis points to 8.3 per cent.
“However, long-term concerns persist for Canberra’s secondary market due to changing government requirements,” she said.
“The new 5.5-star NABERS rating mandate is expected to necessitate substantial capital expenditure for existing building owners, particularly challenging in the current high-cost construction environment.”
A pause in supply
Colliers Office Leasing Australia Managing Director, Cameron Williams, said there were some positive signs emerging across the office market nationally, with vacancy declines more prolific than increases in the first half of the year across the CBD and metro office market.
“A pause in major new supply within some markets, such as Sydney and Brisbane, coupled with resilient leasing activity across markets driven by occupiers pursuing a higher quality of office accommodation, is allowing vacancy to recover,” he said.
“Relocation opportunities across Sydney and Melbourne CBDs have contributed to stronger leasing activity over Q2 within these markets.
“This has resulted in a 10 per cent increase in overall CBD leasing volumes when comparing Q2 2024 to Q2 2023.
“Continued momentum in the recovery of deal activity, year-on-year within the 3000sq m-plus size range (up 37 per cent), alongside consistent growth in SME activity (up 6 per cent) is set to underpin another year of growth in gross leasing activity over 2024.”
What’s next
The PCA report also revealed most of the nation’s additional new supply, which is planned to become available in the second half of 2024, will be in the Sydney market, with close to 300,000 sqm of office supply set to come online through to 2026, with 61.4 per cent of that supply already pre-committed.
Nearly 250,000sq m is forecast to come online in Melbourne by 2026, with 20 per cent of that space already committed to by future tenants.
