Our 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 our experience on the ground.
According to the PCA, Sydney's CBD vacancy rate remained stable over the last quarter at 12.2%, up from the 11.3% recorded in Q1 2023. This figure still sits at its highest in a decade; however, could be even higher once subleasing opportunities, backfill spaces and shadow vacancies are considered.
The stabilisation of Sydney’s vacancy rate can be attributed to the:
If demand remains subdued, vacancy rates are expected to increase throughout 2024, as approx. 150,000 sqm comes online, including:
More than half of the space in new developments scheduled for completion between 2024 and 2027 is already precommitted. However, movements from major tenants into these assets will increase the amount of backfill space available, further adding to vacancy pressure.
Gross face rents have seen Y-o-Y increases across all grades, with Premium now sitting at $1,700 from $1,645, A-grade at $1,440 from $1,360 and B-grade at $1,145 from $1,085.
High incentives averaging between 30-39% offset these increases, with additional savings in the form of early access also on offer. We expect incentives to remain elevated through 2024 as office occupancy keeps below pre-COVID levels and demand remains subdued.
Sydney CBD’s sublease availability as a percentage of total stock is sitting at 2.5% (approx. 130,000 sqm). It’s driven primarily by the following listings:
Some of the recent notable commitments shaping the Sydney CBD market include:
Tenant demand is lower than pre-COVID levels, with the latest PCA figures showing an absorption of -64,628 sqm. Between 2021-2023, Premium-grade buildings had the highest net absorption rate (approx. 100,000sqm), while A and B grades sit in the negatives at -50,000 and -110,000sqm, respectfully. This indicates that more A and B grade commercial space was vacated than leased, predominantly due to the flight-to-quality and downsizing.
Overall, B-Grade stock has been the hardest hit, with vacancy jumping from 10.6% in Q4 2022 to 12.4% in Q4 2023. However, the blow was cushioned by the permanent withdrawal of stock (approx. 52,000sqm) for the Hunter Street Metro Station.
Generally speaking, demand has been sluggish. However, not every submarket within the CBD has been hit equally hard. Prime CBD office spaces in sought-after city-core locations, such as Salesforce Tower, have been less affected by vacancy than buildings in less desirable (i.e. non-core) locations. This is reflected in the PCA’s 12-month net absorption figures, where the Core and The Rocks were recorded as having positive absorption, while the Western Corridor and Midtown recorded absorption of -42,020 and -69,018sqm, respectively.
Consequently, incentive levels in Core CBD assets have decreased in comparison to their Western Corridor counterparts, as more businesses prioritise proximity to public transport and superior retail amenity. This indicates that both lower and higher-grade assets are set to suffer as tenants abandon non-core options.
With a growing emphasis on sustainability, more tenants are gravitating towards higher-grade assets that boast strong NABERS Ratings. Beyond ethical considerations, these buildings offer tangible benefits, such as reduced operational cost, attraction of like-minded businesses and alluring or retaining employees who prioritise sustainability.
With high demand for Premium-Grade buildings and a number of upcoming lease expiries, some Premium tenants may face challenges in finding suitable relocation options within the city core. However, vacancy rates are higher outside of the core, meaning more options for those looking to relocate.
Though PCA has stopped publishing official occupancy rates, market reports indicate that occupancy now sits at around 75%. Despite many companies pushing for a return to the office five days a week (providing incentives for being on-site or implementing designated in-office days), this figure suggests that people continue to work from home 1-to-2 times a week.
For this reason, office occupancy poses an ongoing challenge to landlords, and we’re seeing many of our clients giving back excess space on expiry to help reduce their leasing costs.
Office values remain a key talking point, with Prime CBD office towers experiencing a steep decline since mid-2022 due to rising interest rates and the WFH trend. For instance, Mirvac recently sold their stake (50%) in 255 George St for $364 million, which was a 17% discount compared to the asset’s peak value.
The widespread decline in property values is reflected in many landlords adjusting their book values, including Dexus, who recently reduced the value of its office and industrial properties portfolio by approximately 5.2% (equivalent to around $762.4 million). Landlord revenue is also down by an average of 15%.
Despite this, face and effective rents continue to increase, artificially propping up property values. However, this rise is offset by high lease incentives (of 36% and above).
A tangible fall in valuations and transaction prices could cause landlords to reconsider face rents, potentially triggering a long-anticipated reset. However, we cannot see this knock-on effect happening until valuations of commercial properties fall across the board. Coupled with the flight to quality, we expect B and C-grade assets will be the most impacted.
Some analysts are reporting that Sydney’s office values will reach their lowest by mid-2024 before slowly making a recovery over 24 months (similar to the GFC). However, while we can draw comparisons to the GFC, the COVID lockdowns caused a structural shift in the way the office is viewed and used. So, recovery will take time and may never get back to pre-pandemic levels.
Many tenants are downsizing and signing new leases on significantly shorter terms. Previously, landlords would prefer to wait for a tenant that they could lock in on a longer lease. However, market conditions are forcing office landlords to offer shorter leases, flexible workspaces and high incentives to retain or attract good tenants.
Demand for space in Sydney CBD continues to be driven by the Professional (36%) and Financial Services (26%) industries. This trend is set to continue for the foreseeable future as businesses within these industries strive to increase the number of mandated days that employees need to be in the office.
Prior to 2023, the tech industry was the biggest driver of leasing demand (accounting for up to 60% of activity). However, many Tech companies, including giants like Meta and Twitter, have started adopting a more conservative approach to their real estate expenditure, especially as the nature of their work often does not necessitate a physical presence. As a result, the industry now only accounts for 10% of all leasing activity.
Melbourne CBD's overall vacancy rate stabilised over the last quarter, after climbing from 15% in Q3 2023 to 16.5% in Q4 2023.
The levelling out of vacancy rates is primarily due to:
Across 2024, new stock will include:
Landlords are attempting to maintain their property values with high face rents. However, they are simultaneously increasing incentives despite the decline in returns, with Premium and A-Grade now sitting 43% and above, while B-Grade is sitting at 44% (as compared to the Net rent). Incentives are expected to remain elevated as the market continues to struggle with high vacancy rates of 16.5% ( approx. 705,000sqm).
Net effective rents remained stable q-o-q but are experiencing downward pressure thanks to high incentives and elevated vacancy levels.
Sublease availability as a percentage of total stock is being reported at 2.9% (148,110 sqm). This is primarily driven by two listings totalling 57,000 sqm with 2/3 of sublease space being contained to four buildings. However, we do not believe this figure is a true reflection of total sublease availability, with more and more landlord agents masking the reduced asking rent of sublease space by offering "direct" leases on leased space.
We expect sublease availability to remain high as larger companies look to sublease their excess space, offering large floor plates, high-quality fit-outs, and long lease tails at relatively low rents.
Some of the recent commitments shaping the Melbourne CBD market include:
Some of these relocations will leave a large amount of backfill space in buildings that will require refurbishment and division to be filled, further contributing to vacancy pressure.
While some new stock is set to enter the market over the next few years (such as the projected 68,000 sqm at Melbourne Quarter Tower 1 in 2024), injections won't match the levels seen across 2020-2022. The city has also seen some stock withdrawals, including:
This may bring some stability to Melbourne's rapidly increasing vacancy rate, which has risen by over 400% (from 3.2%) since Q1 2020.
As many developments are funded based on pre commitment rates, low precommitment levels are leading to delays in new stock, with the following projects already affected:
Low pre-commitment levels are also impacting other developments, including the Cbus Property's 435 Bourke St Tower which has a commitment rate of circa 33% (current anchor tenants include CBA, 15,000sqm and Baker Mckenzie, 3,600sqm).
The flight-to-quality trend is especially evident in Melbourne's CBD, given its status as the city with the country's lowest return-to-office rate.
The divide is clearly illustrated in the city's overall vacancy rate, which has climbed to an average of 16.5%, with much of the increase concentrated in the secondary market. B-Grade assets, in particular, have seen a stark rise, from 6.4% in 2020 Q1 to 22.3% in Q1 2024. Premium is also the only grade to record positive net absorption.
Low levels of new stock and space withdrawals will give the overall vacancy rate of Melbourne the perception of a recovery. However, we expect vacancy rates in lower-grade assets to continue to rise as tenants increasingly emphasise amenities, location, and overall workspace quality. To remain relevant and profitable, owners of lower-grade buildings must explore refurbishing or repurposing their assets.
Net absorption across the Melbourne CBD continues to remain in the negatives, with H2 2023 reports -26,879sqm, indicating that more commercial space is being vacated than leased. However this absorption number is up from the -86,325sqm reported in H1 2023.
Like Sydney, ESG ratings are becoming more critical, with more tenants preferring to enter buildings with a high NABERs rating and green initiatives. In fact, a recent survey found that “92% of corporate tenants were more likely to stay in a property if it had strong green credentials”, with nearly 50% “prepared to pay a premium of up to 5 per cent”.
Lower-grade assets are bearing the brunt of this trend, with a noticeable shift in demand for Premium and A-grade spaces over their B, C, and D-grade counterparts.
However, in our experience, overall cost remains a significant consideration for many tenants. Higher-quality, more expensive buildings tend to enjoy better ratings, and, while ESG is gaining importance, it still remains one of several factors that tenants consider (alongside cost, location etc).
Over the past few years, more and more landlords have undertaken speculative fit-outs and building upgrades to make the flight to quality more attractive. However, it's caused a divide between new/refurbished buildings and lower-grade buildings where owners are unwilling to spend the capital upfront.
We're also finding that the construction of spec suites is slowing down as several existing spaces sit vacant, failing to attract tenants. Another contributing factor is that many tenants require further amendments to speculative suites to better suit their operational needs. For this reason, we expect the spec suite market to become even more competitive through 2024, with incentives of 10-20% becoming increasingly available on top.
Economists have issued sombre forecasts for Melbourne's prime CBD office towers, values dropping by an average of 20-25%.
628 Bourke Street, for example, is currently under offer at $120 million, a circa 33% drop from its previous book value. Mirvac's also endeavouring to offload 367 Collins Street (a.k.a the Optus Centre) for $340 million, a 20.7% drop from the reported book value of $427 million in September 2022.
As a result of increased vacancy, landlord revenue is also down across the board. For example, the $7.2 billion Mirvac Wholesale Office Fund suffered a 14.5% decline in total return last year.
Like Sydney, the towers maintaining their value are premium buildings in the CBD core. Many landlords have started strategically bolstering their portfolios with these higher-performing assets, including Mirvac, which has increased the number of premium-grade offices in their portfolio to 46%, up 16% points from 2019.
A widespread drop in property values will pressure landlords to reduce face rents, which, like Sydney, are artificially propped up by high incentives.
In Melbourne's CBD, we're witnessing a notable trend: an increasing number of suburban tenants are making the move downtown. This is primarily fuelled by:
Brisbane's overall CBD vacancy rate has held steady over the last quarter at 11.7%. However, as government tenants relocate to higher quality space (such as Midtown Centre, 123 Albert Street and 275 George Street), we have seen significant y-o-y changes across grades with A-Grade vacancy dropping from 17.9% to 15.8% and B-grade increasing from 9.5% to 14.2%. The withdrawal of Christie Centre (320 Adelaide St, 13,000 sqm) for refurbishment was also a contributing factor.
The supply pipeline for Brisbane CBD is quite spread out, with no major injections until 2025. Vacancy is also expected to receive an additional boost if more buildings are withdrawn, including 41 George Street and 150 Charlotte Street, which are both earmarked for potential conversion.
Given limited supply and strong demand, Gross Face and Effective Rents have increased Q-o-Q across all grades, with Premium increasing from $645 to $695, A-Grade from $480 to $495 and B-Grade from $385 to $405.
Though incentives remain elevated to encourage tenant relocations, they have seen slight decreases Q-o-Q off the back of tightening vacancy rates. They currently average around 39% for prime space and 43% for secondary space.
Incentives have seen more of a decrease in spaces with existing fit-outs or 2nd gen spec spaces where landlords are pushing to achieve incentives of 20-25% (well below the market average). Moving orward, we expect incentives for B-Grade spaces to remain elevated thanks to subdued demand for these assets.
Sublease availability in Brisbane remains the lowest in the country at circa 0.3%. This is due to strong leasing activity and the city's limited exposure to financial and tech companies, the main drivers of subleasing nationwide.
However, over the last year, approximately 29,000sqm of sublease space has come online, including:
Some of the recent commitments shaping the Brisbane CBD include:
Significant activity is being observed in A-Grade assets, with state government tenants transitioning from B-Grade spaces. This has brought A-grade vacancy down to 15.8% and pushed B-grade vacancy up to 14.2%, creating a large volume of backfill space that secondary landlords are struggling to fill. A good example of this is Boeing's recent move to 123 Albert Street, leaving a substantial amount of vacant space at 150 Charlotte Street.
Between 2020 and 2022, tenants in the sub 250 sqm range who could suddenly afford B-grade space in the CBD represented 20+% of leasing activity. However, they now make up less than 10% of the total area leased.
Since the completion of 80 Ann Street in 2022, there has been a lack of new construction in the Brisbane market. Over the next three years, less than 100,000 sqm of office space is expected to come online, with no significant injections until 2025:
Several mooted projects are also in the pipeline, including QIC’s 101 Albert Street (45,000sqm), ISPT’s Regent Tower at 150 Elizabeth Street (53,000sqm) and 135 Eagle Street.
Premium grade vacancy increased q-o-q, from 4.4% to 6.4%, off the back of the KPMG. However, this backfill space is the only 5,000+ sqm premium grade vacancy currently available in the golden triangle (until the completion of 360 Queen Street, which will be A grade), so the rise is likely to be short-lived.
With limited upcoming supply and A-grade vacancy tightening, there’s potential for an under-supply in premium-quality accommodation. For this reason, we expect Brisbane’s Premium vacancy to drop to the low single digits and the overall vacancy rate to fall in 2024.
Owners eager to activate their B-grade assets are increasingly turning to speculative fit-outs to entice tenants. This has created an oversupply problem. Tenant demand for spec-fit-outs in this grade also remains subdued, which poses a dilemma for B-rade owners who have previously relied on them.
We’re seeing more and more landlords offer high incentives on shorter lease terms the longer these spaces remain vacant. In contrast, repurposed existing fit-outs and 2nd gen spec fit-outs are drumming up more interest amongst cost-conscious B-grade tenants, particularly when accompanied by high incentives.
Consistent with the trends across CBD markets nationally, the war for talent and return-to-office are two big-ticket objectives fuelling the ongoing flight-to-quality in Brisbane. We’re seeing an appetite for higher-grade stock in good locations with efficient floorplates, quality spec fit-outs and premium amenities. This trend is reflected in the reported net absorption rates, with Prime Stock (Premium & A-Grade) recorded at 31,900sqm and Secondary Stock at -31,567sqm.
Like other major cities, we’ve seen an uptick in Brisbane tenants seeking buildings with green initiatives. This is further subduing demand for lower-grade assets that are poorly located or positioned. Coupled with rising construction costs and demand for refurbished fit-outs, many secondary landlords are adopting new strategies to attract tenants and reduce their outlay.
Over the next two years, buildings such as 41 George Street, 150 Charlotte Street and 140 Elizabeth Street, may be withdrawn for refurbishment or potential redevelopment, which will place downward pressure on Brisbane's tightening vacancy rate.
It’s a tenant’s market and will be for the foreseeable future. Landlords are competing to secure quality occupants on long leases and are more flexible than they have been in years. Opportunistic tenants are taking advantage of favourable market conditions by renegotiating terms in their existing space or relocating to a better building.
To secure the best terms, tenants need only find the soft spots in the market and develop their strategy around landlord motivators.
But the landscape is challenging to navigate alone. Even in a favourable market, there's more to negotiate, and tenants need access to the whole market to get the best deal.
Tenant CS is an independent tenant advisory firm that exclusively represents tenants in commercial negotiations to secure favourable lease terms and savings. We cater to companies across Australia, Singapore and the greater Asia-Pacific region and have offices at the heart of the Sydney CBD, Melbourne and Singapore.
Book a discovery call to find out how we can help you with your next lease negotiation or relocation project.
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Our 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 our experience on the ground.
According to the PCA, Sydney's CBD vacancy rate remained stable over the last quarter at 12.2%, up from the 11.3% recorded in Q1 2023. This figure still sits at its highest in a decade; however, could be even higher once subleasing opportunities, backfill spaces and shadow vacancies are considered.
The stabilisation of Sydney’s vacancy rate can be attributed to the:
If demand remains subdued, vacancy rates are expected to increase throughout 2024, as approx. 150,000 sqm comes online, including:
More than half of the space in new developments scheduled for completion between 2024 and 2027 is already precommitted. However, movements from major tenants into these assets will increase the amount of backfill space available, further adding to vacancy pressure.
Gross face rents have seen Y-o-Y increases across all grades, with Premium now sitting at $1,700 from $1,645, A-grade at $1,440 from $1,360 and B-grade at $1,145 from $1,085.
High incentives averaging between 30-39% offset these increases, with additional savings in the form of early access also on offer. We expect incentives to remain elevated through 2024 as office occupancy keeps below pre-COVID levels and demand remains subdued.
Sydney CBD’s sublease availability as a percentage of total stock is sitting at 2.5% (approx. 130,000 sqm). It’s driven primarily by the following listings:
Some of the recent notable commitments shaping the Sydney CBD market include:
Tenant demand is lower than pre-COVID levels, with the latest PCA figures showing an absorption of -64,628 sqm. Between 2021-2023, Premium-grade buildings had the highest net absorption rate (approx. 100,000sqm), while A and B grades sit in the negatives at -50,000 and -110,000sqm, respectfully. This indicates that more A and B grade commercial space was vacated than leased, predominantly due to the flight-to-quality and downsizing.
Overall, B-Grade stock has been the hardest hit, with vacancy jumping from 10.6% in Q4 2022 to 12.4% in Q4 2023. However, the blow was cushioned by the permanent withdrawal of stock (approx. 52,000sqm) for the Hunter Street Metro Station.
Generally speaking, demand has been sluggish. However, not every submarket within the CBD has been hit equally hard. Prime CBD office spaces in sought-after city-core locations, such as Salesforce Tower, have been less affected by vacancy than buildings in less desirable (i.e. non-core) locations. This is reflected in the PCA’s 12-month net absorption figures, where the Core and The Rocks were recorded as having positive absorption, while the Western Corridor and Midtown recorded absorption of -42,020 and -69,018sqm, respectively.
Consequently, incentive levels in Core CBD assets have decreased in comparison to their Western Corridor counterparts, as more businesses prioritise proximity to public transport and superior retail amenity. This indicates that both lower and higher-grade assets are set to suffer as tenants abandon non-core options.
With a growing emphasis on sustainability, more tenants are gravitating towards higher-grade assets that boast strong NABERS Ratings. Beyond ethical considerations, these buildings offer tangible benefits, such as reduced operational cost, attraction of like-minded businesses and alluring or retaining employees who prioritise sustainability.
With high demand for Premium-Grade buildings and a number of upcoming lease expiries, some Premium tenants may face challenges in finding suitable relocation options within the city core. However, vacancy rates are higher outside of the core, meaning more options for those looking to relocate.
Though PCA has stopped publishing official occupancy rates, market reports indicate that occupancy now sits at around 75%. Despite many companies pushing for a return to the office five days a week (providing incentives for being on-site or implementing designated in-office days), this figure suggests that people continue to work from home 1-to-2 times a week.
For this reason, office occupancy poses an ongoing challenge to landlords, and we’re seeing many of our clients giving back excess space on expiry to help reduce their leasing costs.
Office values remain a key talking point, with Prime CBD office towers experiencing a steep decline since mid-2022 due to rising interest rates and the WFH trend. For instance, Mirvac recently sold their stake (50%) in 255 George St for $364 million, which was a 17% discount compared to the asset’s peak value.
The widespread decline in property values is reflected in many landlords adjusting their book values, including Dexus, who recently reduced the value of its office and industrial properties portfolio by approximately 5.2% (equivalent to around $762.4 million). Landlord revenue is also down by an average of 15%.
Despite this, face and effective rents continue to increase, artificially propping up property values. However, this rise is offset by high lease incentives (of 36% and above).
A tangible fall in valuations and transaction prices could cause landlords to reconsider face rents, potentially triggering a long-anticipated reset. However, we cannot see this knock-on effect happening until valuations of commercial properties fall across the board. Coupled with the flight to quality, we expect B and C-grade assets will be the most impacted.
Some analysts are reporting that Sydney’s office values will reach their lowest by mid-2024 before slowly making a recovery over 24 months (similar to the GFC). However, while we can draw comparisons to the GFC, the COVID lockdowns caused a structural shift in the way the office is viewed and used. So, recovery will take time and may never get back to pre-pandemic levels.
Many tenants are downsizing and signing new leases on significantly shorter terms. Previously, landlords would prefer to wait for a tenant that they could lock in on a longer lease. However, market conditions are forcing office landlords to offer shorter leases, flexible workspaces and high incentives to retain or attract good tenants.
Demand for space in Sydney CBD continues to be driven by the Professional (36%) and Financial Services (26%) industries. This trend is set to continue for the foreseeable future as businesses within these industries strive to increase the number of mandated days that employees need to be in the office.
Prior to 2023, the tech industry was the biggest driver of leasing demand (accounting for up to 60% of activity). However, many Tech companies, including giants like Meta and Twitter, have started adopting a more conservative approach to their real estate expenditure, especially as the nature of their work often does not necessitate a physical presence. As a result, the industry now only accounts for 10% of all leasing activity.
Melbourne CBD's overall vacancy rate stabilised over the last quarter, after climbing from 15% in Q3 2023 to 16.5% in Q4 2023.
The levelling out of vacancy rates is primarily due to:
Across 2024, new stock will include:
Landlords are attempting to maintain their property values with high face rents. However, they are simultaneously increasing incentives despite the decline in returns, with Premium and A-Grade now sitting 43% and above, while B-Grade is sitting at 44% (as compared to the Net rent). Incentives are expected to remain elevated as the market continues to struggle with high vacancy rates of 16.5% ( approx. 705,000sqm).
Net effective rents remained stable q-o-q but are experiencing downward pressure thanks to high incentives and elevated vacancy levels.
Sublease availability as a percentage of total stock is being reported at 2.9% (148,110 sqm). This is primarily driven by two listings totalling 57,000 sqm with 2/3 of sublease space being contained to four buildings. However, we do not believe this figure is a true reflection of total sublease availability, with more and more landlord agents masking the reduced asking rent of sublease space by offering "direct" leases on leased space.
We expect sublease availability to remain high as larger companies look to sublease their excess space, offering large floor plates, high-quality fit-outs, and long lease tails at relatively low rents.
Some of the recent commitments shaping the Melbourne CBD market include:
Some of these relocations will leave a large amount of backfill space in buildings that will require refurbishment and division to be filled, further contributing to vacancy pressure.
While some new stock is set to enter the market over the next few years (such as the projected 68,000 sqm at Melbourne Quarter Tower 1 in 2024), injections won't match the levels seen across 2020-2022. The city has also seen some stock withdrawals, including:
This may bring some stability to Melbourne's rapidly increasing vacancy rate, which has risen by over 400% (from 3.2%) since Q1 2020.
As many developments are funded based on pre commitment rates, low precommitment levels are leading to delays in new stock, with the following projects already affected:
Low pre-commitment levels are also impacting other developments, including the Cbus Property's 435 Bourke St Tower which has a commitment rate of circa 33% (current anchor tenants include CBA, 15,000sqm and Baker Mckenzie, 3,600sqm).
The flight-to-quality trend is especially evident in Melbourne's CBD, given its status as the city with the country's lowest return-to-office rate.
The divide is clearly illustrated in the city's overall vacancy rate, which has climbed to an average of 16.5%, with much of the increase concentrated in the secondary market. B-Grade assets, in particular, have seen a stark rise, from 6.4% in 2020 Q1 to 22.3% in Q1 2024. Premium is also the only grade to record positive net absorption.
Low levels of new stock and space withdrawals will give the overall vacancy rate of Melbourne the perception of a recovery. However, we expect vacancy rates in lower-grade assets to continue to rise as tenants increasingly emphasise amenities, location, and overall workspace quality. To remain relevant and profitable, owners of lower-grade buildings must explore refurbishing or repurposing their assets.
Net absorption across the Melbourne CBD continues to remain in the negatives, with H2 2023 reports -26,879sqm, indicating that more commercial space is being vacated than leased. However this absorption number is up from the -86,325sqm reported in H1 2023.
Like Sydney, ESG ratings are becoming more critical, with more tenants preferring to enter buildings with a high NABERs rating and green initiatives. In fact, a recent survey found that “92% of corporate tenants were more likely to stay in a property if it had strong green credentials”, with nearly 50% “prepared to pay a premium of up to 5 per cent”.
Lower-grade assets are bearing the brunt of this trend, with a noticeable shift in demand for Premium and A-grade spaces over their B, C, and D-grade counterparts.
However, in our experience, overall cost remains a significant consideration for many tenants. Higher-quality, more expensive buildings tend to enjoy better ratings, and, while ESG is gaining importance, it still remains one of several factors that tenants consider (alongside cost, location etc).
Over the past few years, more and more landlords have undertaken speculative fit-outs and building upgrades to make the flight to quality more attractive. However, it's caused a divide between new/refurbished buildings and lower-grade buildings where owners are unwilling to spend the capital upfront.
We're also finding that the construction of spec suites is slowing down as several existing spaces sit vacant, failing to attract tenants. Another contributing factor is that many tenants require further amendments to speculative suites to better suit their operational needs. For this reason, we expect the spec suite market to become even more competitive through 2024, with incentives of 10-20% becoming increasingly available on top.
Economists have issued sombre forecasts for Melbourne's prime CBD office towers, values dropping by an average of 20-25%.
628 Bourke Street, for example, is currently under offer at $120 million, a circa 33% drop from its previous book value. Mirvac's also endeavouring to offload 367 Collins Street (a.k.a the Optus Centre) for $340 million, a 20.7% drop from the reported book value of $427 million in September 2022.
As a result of increased vacancy, landlord revenue is also down across the board. For example, the $7.2 billion Mirvac Wholesale Office Fund suffered a 14.5% decline in total return last year.
Like Sydney, the towers maintaining their value are premium buildings in the CBD core. Many landlords have started strategically bolstering their portfolios with these higher-performing assets, including Mirvac, which has increased the number of premium-grade offices in their portfolio to 46%, up 16% points from 2019.
A widespread drop in property values will pressure landlords to reduce face rents, which, like Sydney, are artificially propped up by high incentives.
In Melbourne's CBD, we're witnessing a notable trend: an increasing number of suburban tenants are making the move downtown. This is primarily fuelled by:
Brisbane's overall CBD vacancy rate has held steady over the last quarter at 11.7%. However, as government tenants relocate to higher quality space (such as Midtown Centre, 123 Albert Street and 275 George Street), we have seen significant y-o-y changes across grades with A-Grade vacancy dropping from 17.9% to 15.8% and B-grade increasing from 9.5% to 14.2%. The withdrawal of Christie Centre (320 Adelaide St, 13,000 sqm) for refurbishment was also a contributing factor.
The supply pipeline for Brisbane CBD is quite spread out, with no major injections until 2025. Vacancy is also expected to receive an additional boost if more buildings are withdrawn, including 41 George Street and 150 Charlotte Street, which are both earmarked for potential conversion.
Given limited supply and strong demand, Gross Face and Effective Rents have increased Q-o-Q across all grades, with Premium increasing from $645 to $695, A-Grade from $480 to $495 and B-Grade from $385 to $405.
Though incentives remain elevated to encourage tenant relocations, they have seen slight decreases Q-o-Q off the back of tightening vacancy rates. They currently average around 39% for prime space and 43% for secondary space.
Incentives have seen more of a decrease in spaces with existing fit-outs or 2nd gen spec spaces where landlords are pushing to achieve incentives of 20-25% (well below the market average). Moving orward, we expect incentives for B-Grade spaces to remain elevated thanks to subdued demand for these assets.
Sublease availability in Brisbane remains the lowest in the country at circa 0.3%. This is due to strong leasing activity and the city's limited exposure to financial and tech companies, the main drivers of subleasing nationwide.
However, over the last year, approximately 29,000sqm of sublease space has come online, including:
Some of the recent commitments shaping the Brisbane CBD include:
Significant activity is being observed in A-Grade assets, with state government tenants transitioning from B-Grade spaces. This has brought A-grade vacancy down to 15.8% and pushed B-grade vacancy up to 14.2%, creating a large volume of backfill space that secondary landlords are struggling to fill. A good example of this is Boeing's recent move to 123 Albert Street, leaving a substantial amount of vacant space at 150 Charlotte Street.
Between 2020 and 2022, tenants in the sub 250 sqm range who could suddenly afford B-grade space in the CBD represented 20+% of leasing activity. However, they now make up less than 10% of the total area leased.
Since the completion of 80 Ann Street in 2022, there has been a lack of new construction in the Brisbane market. Over the next three years, less than 100,000 sqm of office space is expected to come online, with no significant injections until 2025:
Several mooted projects are also in the pipeline, including QIC’s 101 Albert Street (45,000sqm), ISPT’s Regent Tower at 150 Elizabeth Street (53,000sqm) and 135 Eagle Street.
Premium grade vacancy increased q-o-q, from 4.4% to 6.4%, off the back of the KPMG. However, this backfill space is the only 5,000+ sqm premium grade vacancy currently available in the golden triangle (until the completion of 360 Queen Street, which will be A grade), so the rise is likely to be short-lived.
With limited upcoming supply and A-grade vacancy tightening, there’s potential for an under-supply in premium-quality accommodation. For this reason, we expect Brisbane’s Premium vacancy to drop to the low single digits and the overall vacancy rate to fall in 2024.
Owners eager to activate their B-grade assets are increasingly turning to speculative fit-outs to entice tenants. This has created an oversupply problem. Tenant demand for spec-fit-outs in this grade also remains subdued, which poses a dilemma for B-rade owners who have previously relied on them.
We’re seeing more and more landlords offer high incentives on shorter lease terms the longer these spaces remain vacant. In contrast, repurposed existing fit-outs and 2nd gen spec fit-outs are drumming up more interest amongst cost-conscious B-grade tenants, particularly when accompanied by high incentives.
Consistent with the trends across CBD markets nationally, the war for talent and return-to-office are two big-ticket objectives fuelling the ongoing flight-to-quality in Brisbane. We’re seeing an appetite for higher-grade stock in good locations with efficient floorplates, quality spec fit-outs and premium amenities. This trend is reflected in the reported net absorption rates, with Prime Stock (Premium & A-Grade) recorded at 31,900sqm and Secondary Stock at -31,567sqm.
Like other major cities, we’ve seen an uptick in Brisbane tenants seeking buildings with green initiatives. This is further subduing demand for lower-grade assets that are poorly located or positioned. Coupled with rising construction costs and demand for refurbished fit-outs, many secondary landlords are adopting new strategies to attract tenants and reduce their outlay.
Over the next two years, buildings such as 41 George Street, 150 Charlotte Street and 140 Elizabeth Street, may be withdrawn for refurbishment or potential redevelopment, which will place downward pressure on Brisbane's tightening vacancy rate.
It’s a tenant’s market and will be for the foreseeable future. Landlords are competing to secure quality occupants on long leases and are more flexible than they have been in years. Opportunistic tenants are taking advantage of favourable market conditions by renegotiating terms in their existing space or relocating to a better building.
To secure the best terms, tenants need only find the soft spots in the market and develop their strategy around landlord motivators.
But the landscape is challenging to navigate alone. Even in a favourable market, there's more to negotiate, and tenants need access to the whole market to get the best deal.
Tenant CS is an independent tenant advisory firm that exclusively represents tenants in commercial negotiations to secure favourable lease terms and savings. We cater to companies across Australia, Singapore and the greater Asia-Pacific region and have offices at the heart of the Sydney CBD, Melbourne and Singapore.
Book a discovery call to find out how we can help you with your next lease negotiation or relocation project.
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We acknowledge the Traditional Custodians of the lands on which we work. Our offices are located on the land of the Gadigal peoples of the Eora Nation and the Wurundjeri peoples of the Kulin Nation. We acknowledge their continued connection and contribution to land, water and community, and pay our respects to Elders past and present.
We’re proud to be an inclusive workplace, where diversity in all its forms are valued and every member of our team is encouraged to bring their whole self to work.
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