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 based on our experience on the ground.
Sydney CBD's vacancy rate jumped from 10.1% in Q3 to 11.1% in Q4, with vacancy across all grades increasing. This has been caused in part by an injection of new supply including:
Whilst most of this new stock is pre-committed, movements from major tenants, including Deloitte, Salesforce and Corrs Chambers, will see a rise in the amount of backfill space available.
The CBD market's long road to recovery will be somewhat aided by:
However, despite this and Agent reports remaining positive, the Sydney market remains in a tenuous position due to:
For these reasons, there’s every chance the market could get worse before it gets better, particularly for lower-grade assets, which will be left behind in the ‘flight to quality’.
In Sydney, incentives have stabilised at 35% across all grades. We expect incentives to remain elevated for longer then the major agencies anticipate as landlords compete to curb a mounting and sustained wave of vacancy.
Premium, A-grade and B-grade Gross effective rents, on the other hand, rose 3%, 4% and 1%, respectively, due to an increased appetite for quality space, CPI increases and inflationary pressures.
The latest figures show that Sydney currently has approximately 96,900 sqm of available sublease space. About 95% of this stock is Premium or A-grade, with Financial & Insurance (41%), Construction (20%) and Professional & IT (17%) sectors being the big three contributors.
During the pandemic, the volume of sublease space in Sydney's CBD hit a record high of over 150,000 sqm as larger tenants looked to eliminate unoccupied space to help cut costs. Though the figure remains high, total sublease availability has declined since mid-pandemic, and this change can be attributed to:
Melbourne's CBD vacancy rate has increased from 12.9% to around 13.8% due to 185,000 sqm of new stock being injected into the market, including:
There is a limited amount of new supply in the pipeline, with 92,000sqm planned for 2023 and 79,800sqm in 2024. Changing economic conditions have also increased the cost of construction, which may further impact future supply and push out completion dates for new stock.
Many Agent reports predict that this reduction in new supply, coupled with higher demand, will see vacancy rates decline to 9% over the next few years.
However, this could also be optimistic thinking.
Like Sydney, many Melbourne-based companies have embraced hybrid work models. The city's average office occupancy rate currently hovers at 57%. And while this figure does show some recovery, it’s indicative that businesses are paying for excess space that they'll look to offload when their lease expires, or sooner via sublease.
We already see a flight to quality in Melbourne, with many tenants preferring to downsize to upgraded quality space, as the terms offered to relocate rather than renew remain attractive. More and more landlords are undertaking speculative fit-outs and building upgrades to make this flight to quality more attractive. However, this is pushing up the vacancy in lower-grade buildings where owners are unwilling to spend the capital upfront. Moreover, these spec suites generally do not suit tenants with specific requirements and limit how incentives can be taken and the overall deal terms.
Many larger tenants will be on the move in the next 12-24 months which could leave several holes in certain buildings that would need to be refurbished, divided, and filled, further contributing to the vacancy increases across the Melbourne CBD.
Inflation has also pushed outgoings up to an alarming rate which will add to vacancy pressure and force landlords to carve out more concessions to attract quality tenants.
In Melbourne, incentives have largely stabilised across Premium, A-Grade and B-Grade buildings and remain at 38%, 40%, and 40%, respectively. Net effective rents have also remained stable quarter on quarter in line with CPI increases and off the back of inflationary pressures. As long as high vacancy rates persist, we expect incentives and face rents to stay elevated.
Sublease vacancy has increased by 29.6% quarter-on-quarter and now sits at 141,900 sqm, with 90% (108,417 sqm) being A-grade space. The financial sector contributes around 30% of this availability, followed by IT at 15%. The majority of current sublease space (82.5%) comes from larger tenants (2,000sqm+), and we expect this to increase in 2023 as more companies look to reduce their footprint.
Premium vacancy has tightened to 7.2% off the back of the flight-to-quality trend, and from major tenants, including Suncorp, at 80 Ann Street, who have now relocated.
B-grade vacancy has also contracted, now hovering at 11.5%, due to B-grade assets being repositioned to A-Grade standard, higher availability of cost-effective options, more supply in the sub-500 sqm market and landlords leveraging spec fit-outs as a point of difference.
A-grade vacancy, on the other hand, remains the highest of all grades, now sitting at 17.2%. This jump can be attributed to the injection of new stock, the flight-to-quality trend, tenants' downsizing or cost-cutting, and movements from major tenants.
Between now and 2024, there is limited supply coming online, with notable completions in the future to include:
Agent reports predict that this limited supply, coupled with higher demand from smaller tenants, will see vacancy rates dip over the coming months. However, like Sydney and Melbourne, the right-sizing of workspaces and the flight-to-quality trend remains a threat, with Brisbane occupancy rates currently sitting at 67% of post-covid levels.
Gross effective rents have seen y-o-y increases, with Premium rising 8%, A-grade rising 4%, and B-grade rising 3%. Like Sydney and Melbourne, this comes off the back of the flight to quality trend, CPI increases and inflationary pressures. Incentives, on the other hand, remain elevated but have largely stabilised, now sitting between 39-45%, depending on the grade and location.
Where incentives have seen a slight decrease, however, is in spaces with existing fit-outs. This is due to tenants using their incentive to discount their rent instead of using the incentive to construct a new fit-out.
Over the next decade, we anticipate that rents will increase while incentives will decrease as Brisbane reaps the benefits of interstate migration and the Olympics.
Brisbane CBD has approximately 17,700 sqm of sublease stock available. The main contributor to this vacancy is the information media and telecommunications industry, with most sublease stock above 2,000 sqm.
However, this figure is a 16.8% decrease from Q1 2021 and a 32.6% decrease from last year, leaving sublease vacancy at its lowest point since Q2 2020. The dip comes from opportunistic tenants chasing higher-quality direct opportunities and major corporates withdrawing stock in anticipation of their staff returning to the office.
The long and short of it?
It's a great time to be a commercial tenant.
The market continues to depreciate, which means more opportunities. 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 not easy to navigate alone, even in a tenant's 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 our client's interests in commercial negotiations to secure tenant-centric 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.
Contact us today to find out how we can help you with your next lease negotiation or relocation. project.
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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