This latest commercial real estate update provides you with a snapshot of the Australian CBD office leasing markets. We base our insights on the latest available market data and apply our own forecasts to rents, incentives, and vacancy rates for Q3 2022.
The Australian CBD office leasing market is experiencing improved leasing conditions as business confidence returns.
Vacancies, rents, and incentives are stabilising across most CBD markets. However, it will be a slower recovery for some cities, such as Melbourne, where vacancy rates are likely to remain in double digits beyond 2023.
So far, commercial agencies, usually the source of market data, are withholding statistics around subleasing. However, we know that sublease availability remains high across the CBD markets allowing tenants to seek quality fitted out space at competitive rates.
Sydney’s vacancy rate has increased slightly from 9.2% to 9.3% q-o-q, due to significant levels of development and movement.
Developments have provided approximately 160,000 sqm of new stock into the market over 2022, with over 75% pre-committed, including:
Meanwhile, approximately 42,000 sqm of office space is set to be permanently removed to make way for the Hunter Street Metro Station. However, movements from major tenants - including Deloitte, Corrs Chambers and Salesforce - will see a rise in the amount of backfill space available.
Compared to 2020 leasing activity (90,000sqm), 2021 leasing activity was up (approximately 300,000 sqm), with demand driven by tech and financial services accounting for around 60% of all leasing deals.
Rents and incentives have stabilised due to increased business confidence and demand as international borders reopen and employees return to the CBD.
Gross effective rents for Premium, A-Grade and B-Grade space are slightly lower when compared to Q1 2021, dipping 2%, 2.9%, and 3%, respectively.
Gross incentives remain high, hovering at around 30%-39% across all grades, with higher incentives for lower grades. These incentives are expected to stay elevated, at least in the short term, while landlords work to lease sublease stock and backfill space. However, we anticipate these figures to slowly fall as international borders reopen and workers return to the office.
At the end of Q4 2021, Sydney had approximately 98,800 sqm of available sublease space, with Financial Services (46,000sqm) and Professional services (17,000sqm) the two big contributors. And while actual subleasing figures for Q2 2022 are, so far, being withheld, we know sublease availability remains high in Sydney’s CBD.
Melbourne's CBD vacancy rate has increased from 10.4% to 11.9% over Q4 2021 and Q1 2022 due to 185,000sqm of new stock being injected into the market, including:
Approximately 110,000sqm is expected to become available throughout 2022, including 140 Lonsdale Street (22,000sqm). However, the amount of new supply will slow down over the coming years.
Vacancy is expected to stabilise due to a return of business confidence and easing of restrictions; however, recovery will be slower than Sydney’s. While most tenants aren’t opposed to having a space that's 20-40% too large, as it could suit future growth, the flight to new premises at a cheaper rate is too attractive. We are seeing tenants preferring downsizing in upgraded quality space, as the terms offered to relocate rather than renew remain attractive. This, in turn, could lead to companies re-relocating at the end of the next lease term if the return to office continues. Trends will be interesting to watch over the next 36 months in this regard.
Vacancy rates will remain in the double digits through 2022 and into 2023 as this reshuffle occurs. Only beyond 2023 will we see sublease stock be withdrawn from the market (as pre-covid legacy leases expire), reducing the competition placed on traditional leasing opportunities.
Melbourne CBD has seen an increase in Gross face rents and Gross effective rents quarter on quarter, with Premium Effective increasing by 4.3%, A-grade by 4% and B-grade by 1.2%. On the other hand, incentives have seen a slight q-o-q decrease as market conditions improve.
Rents are expected to increase steadily, while incentives will decrease in the foreseeable future as covid restrictions ease, business confidence returns, and new development slows.
As of December 2021, Melbourne CBD recorded a record high 190,000sqm of sublease availability. Docklands was the highest contributor to this market, holding approximately 42% of available stock.
Though Q2 statistics are currently unavailable, this record-high figure is expected to remain throughout 2022, offering tenants the opportunity to secure high quality fitted spaces at low rates.
Vacancy for premium offices in the Brisbane CBD has fallen by 1.4% q-o-q, while vacancy has risen for A-grade, jumping up from 13.2% to 19.7%. Even with the sharp increase for A-grade space, total vacancy remains stable at 13.5% and is expected to stay that way through 2022 with limited new stock becoming available.
Following the completion of Midtown, net supply did increase and is expected to increase again with the completion of an A-Grade space at 80 Ann St (60,000 sqm).
Gross effective rents and incentives are still seeing the effects of Covid, with Premium, A-Grade and B-Grade gross effective rent falling by 4.4%, 7.9% and 5.5%, respectively. Incentives have remained unchanged q-o-q and y-o-y.
However, as business confidence returns, we anticipate that rents will slowly increase, and incentives will drop in the coming years.
In Q4 2021, Brisbane CBD had approximately 26,500sqm of sublease stock available, with the largest contributors being from Financial Services and the IT sectors. Though official figures for Q2 2022 are unavailable, we understand sublease availability remains high.
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