The national office market is continuing to bounce back from the pandemic faster than anticipated, according to the latest Herron Todd White (HTW) Month in Review.
In the June report, HTW Associate Director Edward Cox said that while markets may look different depending on the extent of lockdowns, there has been a general sense of increased optimism in the office market evidenced by continued yield compression.
“Put simply, successful office property investment will hinge on the ability of businesses to attract workers back to the central workplace,” Mr Cox said.
Mr Cox said the current market has seen a flight to quality with businesses needing high-quality premises to attract talent.
“The high levels of competition for quality tenants for new A grade buildings and the need to attract workers out of their homes are necessitating greater levels of tenant-friendly features including funky fitouts, high quality lobbies, end of-trip facilities and appealing common spaces,” he said.
“Tenants are demanding quality office space and a flight to quality is a very real trend.
“Workplaces must create a workplace experience and older buildings need substantial upgrades if they are to achieve this.”
While yields have compressed over the past 12 months, rising interest rates and falling inquiry levels are adding to the current levels of uncertainty, according to Mr Cox.
“The new economic backdrop of rising interest rates and inflation is likely to have a significant effect on office markets generally and there is now a greater level of uncertainty than there has been for some time,” he said.
HTW Commercial Director Angeline Mann said the Sydney office market remains somewhat subdued but signs of life are emerging.
“It is positive to see strong numbers of workers returning to offices,” Ms Mann said.
“The Sydney CBD seems to be on the verge of thriving once again, even if it is slightly more concentrated from Tuesday to Thursday.
“That said, there is still low demand and high vacancy which is making market participants cautious.”
Ms Mann said the Sydney office market will bounce back.
“The strong investment in infrastructure will mean we are well placed in the future as a global business centre,” she said.
“It will take time to recover from the events of the past three years but the future prospects remain better than ever.”
HTW Director Jason Stevens said the repercussions of the Covid-19 pandemic are being acutely felt within the Melbourne CBD office market.
“According to the Property Council of Australia’s (PCA) Office Market Report, Melbourne’s CBD office overall vacancy rate increased from 10.4 per cent to 11.9 per cent over the six months to 1 January 2022,” Mr Stevens said.
“Leasing conditions appear to be improving, however, as leasing inquiry and positive net absorption have returned in Quarter 1, 2022.
“We expect this will correlate to an improved vacancy rate at some stage in 2022.
“Within the Melbourne CBD, incentives hover around 35 per cent net, however as leasing inquiry strengthens, we expect to see a gradual winding back of these incentive levels and in time, a return to face rental growth.”
HTW Associate Director Edward Cox said the office sector has been hit very hard by the Covid crisis, with the explosion of work from home arrangements and negative demand across all markets.
“This has seen increasing levels of vacancy, sub-leasing, incentives and flat rental markets.
“As the crisis phase of Covid recedes, businesses are now getting on with life and accepting that living with Covid is going to be the new norm,” Mr Cox said.
“It appears that employees (with strong encouragement from employers) are drifting back into the office, and demand for office accommodation will likely improve over the next 12 months, albeit modestly at first.
“The investment market remains strong for well leased properties with increasing rates per square metre due to the tightening of yields over the past three years, however properties with poor lease profiles remain very difficult to sell.”
HTW Commercial director Chris Winter said workers are now returning to CBD offices.
“As per Property Council of Australia (PCA) data, the office vacancy factor within the Adelaide CBD has now dropped to 14.5 per cent, from 15.7 per cent in the previous year, and is close to the immediate pre-Covid vacancy level of 14.2 per cent,” Mr Winter said.
“A-grade space remains at a far lower vacancy factor (as per PCA data) than the total with 10.6 per cent vacancy compared to the total 14.5 per cent.
“Office workers and businesses are continuing their return to the city with renewed confidence, resulting in the drop in vacancy rates.”
HTW Director Greg Lamborn said the level of occupancy, as opposed to vacancy, is proving to be a key statistical distinction in the performance of the Perth office sector.
“There remains a visible vacancy factor in Perth’s traditional office districts, particularly for non-premium grade accommodation, despite new tenant demand from emerging companies in the state’s mining and resources sector,” Mr Lamborn said.
“Perth’s CBD total vacancy rate dropped from 16.8 per cent to 15 per cent in the six months to January 2022 with West Perth recording a total vacancy rate of 18 per cent, down from 19.1 per cent for the same period.
“It is likely the work from home movement is here to stay, however it’s unlikely to be on a full-time basis, with employees retaining a need for collaboration, problem-solving and social interaction in the workplace.
“So whilst the need for office space is almost certain to endure, building owners and landlords will have to be creative to entice employees back to the workplace in greater numbers.”
HTW Director Terry Roth said quality office space continues to be most appealing to businesses.
“The vacancy rate for CBD office space in the Darwin CBD remains one of the highest in the country, however it should be recognised that most of this vacancy is in large floor plates in lower grade buildings and that the vacancy rate in A grade space is quite low,” Mr Roth said.
“In fact, any prospective tenant would have difficulty securing 1000sq m of quality office space in the CBD at the present time.
“Such tenants are few and far between however, with many of them choosing to relocate out of the CBD into areas such as Berrimah which are closer to the demographic centre of Darwin and where parking is less of an issue.
“The laws of supply and demand dictate that a lack of available office space would lead to an increase in supply to satisfy that demand, however it is just not economical based on current rents to construct that new space.”