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Office market declines approaching GFC level

The decline in office assets is approaching GFC levels, with the outlook for 2024 looking “rough”, according to an expert.

Ray White Commercial, Head of Research, Vanessa Rader said the CBD office market recorded a 9 per cent decline in September 2023 – the lowest level since 2010.

“The last time we saw such discounting was during the GFC period, with funding difficulty resulting in annual declines of up to 13.9 per cent, albeit after a period of historically high capital appreciation,” Ms Rader said.

“The woes of the office market are widespread, however, some markets are performing better than others.” 

She said looking across CBD and non-CBD markets in Australia, the trends are the same, with the rate of capital decline near the worst periods of GFC.

“Interestingly, however, has been the performance of the non-CBD market during the pandemic period, with returns outstripping those of the CBD, which has historically trended ahead,” Ms Rader said.

“More recently, however, we have seen more activity across CBD markets given the discounting on offer, turning the attention back to CBDs, which is expected to fuel recovery ahead of more suburban locations.”

Ms Rader said Sydney and Melbourne CBDs and suburban hubs have recorded some of the worst returns, while Queensland markets, despite still showing negative returns, have trended at a better rate. 

“A combination of changing attitudes towards working from home and supply dynamics has seen occupancy levels improve in these regions and restore some confidence in the long-term returns of office assets in these locations,” she said.

“While we are in this period of negativity for the office market, unfortunately the outlook for 2024 is expected to show much the same. 

“Vacancy levels across the Australian markets continue to trend upward and are well ahead of long-term averages, moving into early 1990s territory where capital returns fell to as low as 20 per cent during a time of recession, high unemployment, and inflation.”

According to Ms Rader, these high rates of vacancy are trending well ahead of the poor results felt post GFC and their lack of moderation highlights concern regarding the recovery of the asset class in a timely manner. 

“The recovery in office vacancies will vary from city to city, however, the overarching sentiment is poor keeping rates at an elevated rate over the next 12 months,” she said.

“These high rates will result in continued pressure on effective rents, however, the flight to quality trend will maintain, putting a greater spotlight on the future of secondary office assets. ” 

Ms Rader said fundamentally, quality office assets will rebound and will again gain trophy status. 

“The safe haven of Australia will pique foreign buyer interest once again, however, at a price more aligned to market conditions and yield rates which factor in the appropriate risk rate and higher cost of finance,” she said.

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Rowan Crosby

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