The nature of the office market is changing to accommodate the evolving needs of workforces according to the latest Herron Todd White (HTW) Month in Review.
In the May report, HTW Director, Greg Mullins, said that in response to the rising popularity of remote and flexible work arrangements, developers are incorporating versatile layouts and amenities that accommodate both in-person and virtual collaboration.
“As businesses adapt to changing work patterns, technological advancements and sustainability imperatives, the construction and refurbishment of office spaces in Australia is undergoing a transformative phase, characterised by innovation, flexibility and environmental consciousness,” Mr Mullins said.
“One of the most notable trends shaping the construction of new office buildings is the emphasis on multifunctional spaces that cater to diverse work styles and collaborative needs.
He said that open-plan designs, modular furniture and adaptable partitions are becoming staples, fostering creativity and interaction among employees while allowing for transitions between individual tasks and group activities.
“As with a number of recent trends, this phenomenon has been strongly influenced by working experiences during the COVID-19 pandemic,” he said.
He said refurbishment projects were also on the rise as property owners seek to revitalise existing office spaces to meet contemporary demands.
“By repurposing existing structures, developers not only reduce construction waste but also contribute to the preservation of cultural heritage while meeting the evolving needs of businesses and communities,” he said.
“However, the significant escalation in construction costs in recent times is undermining the viability of such refurbishments in a number of Australian CBDs.”
Mr Mullins said the future of office construction and refurbishment in Australia was not without its challenges.
“Economic uncertainties, regulatory complexities, persistently high construction costs and evolving market dynamics continue to influence decision-making processes, requiring developers and stakeholders to remain agile and adaptive in their approach,” he said.
Sydney
HTW Commercial Director, Angeline Mann, said the office market in Sydney is in a phase of decline with softening demand from both owner-occupiers and investors.
“Demand in the rental sector is also very subdued with incentives remaining high. This however has not dampened the construction of new office buildings,” Ms Mann said.
“We have seen new construction predominantly in the premium grade space, most of which has been pre-committed.
“In 2023 new supply was limited to a handful of smaller office developments.”
Melbourne
HTW Director, Jason Stevens, said there were a number of elements influencing the construction and refurbishment of office buildings throughout the Melbourne CBD.
“High interest rates, elevated construction costs and lack of tenant pre-commitments are limiting the extent of supply with only 68,000 square metres of new supply due for completion in 2024 as reported by Knight Frank,” Mr Stevens said.
“However new construction appears to be on the rebound post 2024 with 81,500 square metres committed for 2025 and 117,000 square metres committed for 2026 and beyond.
“Developers and landlords must adapt to changing demands and market conditions to remain competitive and attract tenants.”
Brisbane
HTW Associate Director, Edward Cox, said despite some rental growth, the feasibility of new office developments in Brisbane remained difficult given the rapidly escalating construction cost environment, increased debt costs, softer yields, higher land values and the volatility of the construction industry.
“As vacancy rates stabilise, we will continue to see face rental growth for prime, A grade and B grade buildings across the CBD and prime fringe markets,” Mr Cox said.
“Effective rents have also increased as incentive levels stabilise.
“As construction costs and economic issues impact the feasibility of new development, existing office buildings remain attractive simply because they are selling at a level increasingly below replacement cost.
“Hence there is a desire to buy and reposition older office buildings if the fundamentals are there.”
Adelaide
HTW Commercial Director, Chris Winter, said it was no surprise that the Adelaide office market had again recorded a further increase in vacancy rates, to 10.3 per cent.
“This increase is not attributable to a lack of demand but solely based on an influx of office accommodation introduced to the market,” Mr Winter said.
“The Adelaide skyline is experiencing a backlog of dated, less efficient and undesirable offices becoming vacant as flight-to-quality continues to become a prominent trend.
“Landlords are forced to rejuvenate their existing premises, undertaking either partial or full refurbishments, to compete with the new stock being brought to market.”
Perth
HTW Director, Greg Lamborn, said Perth’s CBD total vacancy rate was 14.9 per cent for the six months to January 2024, down from 15.9 per cent in July 2023.
“The West Perth vacancy rate however softened slightly, recording a total vacancy rate of 12.1 per cent, up from 11.1 per cent over the same period,” Mr Lamborn said.
“Both districts recorded additional stock levels above the long-term average.
“Nonetheless there remains a visible vacancy factor in Perth’s traditional office districts, particularly for non-premium grade accommodation.
“While 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.”
Darwin
HTW Director, Terry Roth, said the Darwin CBD office vacancy rate in January 2024 stood at 14.4 per cent.
“It is important to note that the vacancy rate for A grade and Premium space is significantly lower than the overall vacancy rate,” Mr Roth said.
“A prospective tenant would have difficulty locating say 1000 square metres of quality space within the CBD itself.
“Consequently, in recent months, we have seen rents reach rates as high as $750 per square metre per annum (gross) in Darwin’s premier office buildings.”
