Australian CBD Leasing Markets Q3 Office Snapshot

July 21, 2022
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Commercial Real Estate

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Liam Drosinos
Liam Drosinos
Data Analyst

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This latest commercial real estate update provides a snapshot of the Australian CBD office leasing markets. We base our insights on the latest market data and apply our own forecasts to the trajectories of rents, incentives, and vacancy rates in Q4 2022.

National insights

As business confidence returns, the Australian CBD office leasing market is experiencing improved leasing conditions.

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 will likely remain double digits beyond 2023. And while sublease availability has declined across the board, there's still plenty of stock available in Sydney and Melbourne markets, allowing tenants to seek quality fitted out space at competitive rates.

Sydney CBD office market snapshot

Sydney commercial market update figures in a table, includes gross face rents, average gross incentive and vacancy rate for Premium, A-grade and B-grade properties

Vacancy and new supply

Sydney's vacancy rate has remained stable at 9.3% due to significant levels of development and movement. Brookfield place (59,000sqm) has been completed, with an additional 210,000 sqm set for completion by the end of 2022, including:

  • Quay Quarter Tower (88,274sqm)
  • 210 George St (16,500sqm)
  • Circular Quay Tower (55,000sqm)

Meanwhile, approximately 42,000 sqm of office space will 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.

Leasing activity

Reports show that in Q2 2022, there were 437 enquiries for Sydney CBD office space (approx. 366,000sqm). This figure coincides with the vacancy rate stabilising as companies that signed short-term leases during COVID look to reenter the market on a longer lease.

Rents and incentives

Gross effective rents have remained stable in Q2 2022. However, we note a slight increase year-on-year in Premium and A-grade properties, with Premium increasing from $980 to $990 and A-Grade from $835 to $850. On the other hand, gross effective rents for B-Grade premises have remained stable at $670. 

Gross incentives remain high but have also stabilised, sitting around 30-39% depending on grade, lease term and submarket location. These incentives will likely stay elevated in the short term while landlords work to lease or sublease stock and backfill space. However, we anticipate these figures will slowly fall as international borders reopen and workers return to the office. 

Subleasing

Sydney currently has approximately 98,800 sqm of available sublease space. About 94% of this stock is Premium or A-grade, with Financial & Insurance (41%), Professional & IT (17%) and the Construction Sector (16%) the big three contributors. The vacancy rate for subleasing stock is currently down 1.4% from Q4 2021.

Melbourne CBD office market snapshot

Melbourne commercial market update figures in a table, includes gross face rents, average gross incentive and vacancy rate for Premium, A-grade and B-grade properties

Vacancy and new supply

The Melbourne CBD has shown signs of recovery as confidence grows, with agent reports showing office leasing enquiries are increasing. However, though confidence has grown, larger tenants are still slower to commit, with many opting for shorter-term options to see what happens in the market.

Melbourne's CBD vacancy rate has increased from 10.4% to 11.9% since Q4 2021 due to 185,000sqm of new stock being injected into the market. This includes:

  • 405 Bourke Street Development - 66,000sqm
  • 750 Collins Street refurbishment - 38,933sqm

Approximately 110,000sqm is likely to become available throughout 2022, including 140 Lonsdale Street (22,000sqm). However, new supply will slow down over the coming years.

Melbourne's vacancy rate is set to stabilise due to a return of business confidence and easing of restrictions. However, recovery will be slower than the Sydney market. While most tenants aren't opposed to having a larger space to 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.

Rents and incentives

Quarter-on-quarter, Gross effective rent and incentives have remained stable in the Melbourne CBD. However, as business confidence increases, Gross effective rents in Premium, A-Grade and B-Grade space have increased year-on-year from $575 to $600, $485 to $515 and $425 to $435, respectively. 

The Melbourne CBD has several projects in the supply pipeline. However, rent recovery will remain limited. Rents are expected to slowly increase, while incentives will gradually decrease in the foreseeable future as covid restrictions ease, business confidence returns, and new development slows.

Subleasing

Sublease vacancy has declined by approximately 42% off the back of 80,000sqm being withdrawn, sublease vacancy becoming direct and take up of existing stock. However, approximately 111,000sqm of sublease stock is still available, with 86% (79,000sqm) being A-grade space. The financial sector contributes around 33% of this availability but has decreased its availability by 20,500sqm since Q1 2021.

Brisbane CBD office market snapshot

Brisbane commercial market update figures in a table, includes gross face rents, average gross incentive and vacancy rate for Premium, A-grade and B-grade properties

Vacancy and new supply

Premium and B-Grade vacancy has decreased from 6.8% to 6.7% and 16% to 13.3%, respectively. On the other hand, A-grade has seen a spike from 13.2% to 19.7%.

However, even with the sharp increase for A-grade space in Q1 2022, total vacancy remains 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 will likely rise again with the completion of an A-Grade space at 80 Ann St (60,000 sqm).

Rents and incentives

Gross effective rents have increased across all grades since Q1 2022, with Premium, A-Grade and B-Grade gross effective rent increasing from $540 to $560, $410 to $425 and $340 to $345, respectively.

Incentives have remained stable q-o-q since Q4 2021. Now, in Q2 2022, we are seeing some slight increases as business confidence grows, and we anticipate that rents will slowly increase and incentives will drop in the coming years.

Subleasing

Brisbane CBD has approximately 17,800 sqm of sublease stock available. This is a 16.8% decrease from Q1 2021 and a 32.6% decrease from last year, leaving it at its lowest point since Q2 2020. The main contributor to this vacancy is the information media and telecommunications industry, with most sublease spaces over 2,000sqm.

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