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 has jumped from 9.3% in Q2 to 10.1% in Q3, with vacancy across 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 market's long road to recovery will be somewhat aided by:
However, despite this and Agent reports remaining positive, we expect the overall vacancy rate to increase further in the coming years.
That's because the reported vacancy is only part of the story. The current figures are already understated if we also consider the amount of subleasing stock available and the high volume of "shadow vacancy" in upcoming lease expiries.
With many companies embracing hybrid work models, Sydney's average office occupancy rate now sits at 52%. And that means there's a lot more empty space in the market today than there was a few years ago.
Most of this excess space is unlikely to be offered for sublease because:
So, it's likely many businesses are riding out their remaining lease tail and paying for excess space they’ll eventually shed. Based on our experience, these companies will be looking to relocate to smaller, high-quality spaces, increasing total vacancy and hampering the demand for lower-grade buildings.
New supply amounting to circa 357,000 sqm is also earmarked for the Sydney CBD in 2024, headlined by 1 Elizabeth Street (72,000sqm of which 83% is already pre-committed), putting further pressure on total vacancy.
In Sydney, incentives have largely stabilised, ranging between 30%-39% depending on grade and location. This has resulted in a year-on-year increase in Premium and A-grade effective rents, which rose 2.6% and 4.8%, respectively, due to an increased appetite for quality space. As landlords compete to retain and attract tenants, B-grade incentives remain higher than the other grades and have not stabilised to the same level resulting in a smaller increase in gross effective rent (0.7%).
We expect incentives to remain elevated for longer than the major agencies anticipate as landlords compete to curb a mounting and sustained wave of vacancy.
Sydney currently has approximately 96,900 sqm of available sublease space, which is 4.1% lower than the previous quarter. 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 substantially y-o-y. And this change can be attributed to an increase in tenants opting for direct deals at attractive rates and companies initiating their return-to-office strategies and withdrawing their sublease space from the market.
Melbourne's CBD vacancy rate has increased from 10.4% to around 13% 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 is probably optimistic thinking.
Like Sydney, many Melbourne-based companies have embraced hybrid work models. The city's average office occupancy rate currently hovers at 41%, meaning many businesses are paying for excess space they'll look to offload when their lease expires.
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 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 the vacancy increases across the Melbourne CBD.
Inflation has also has pushed outgoings up to an alarming rate, which will put further pressure on vacancy rates. And this will 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 are now sitting comfortably at 38%, 40%, and 40%, respectively. Net effective rents have also remained stable quarter on quarter. As long as high vacancy rates persist, we expect incentives to stay elevated and rents to remain lower than pre covid levels.
Sublease vacancy has increased by 29.6% quarter-on-quarter and now sits at 141,900sqm, with 90% (108,417 sqm) being A-grade space. The financial sector contributes around 29% of this availability, followed by IT at 15%. The majority of sublease space (82.5%) comes from larger tenants (2,000sqm+) looking to reduce their footprint, as companies embrace long-term hybrid work models.
With the completion of Heritage Lanes, at 80 Ann Street (60,000sqm), Premium vacancy has seen a 0.5% increase from Q2. A-grade vacancy remains high due to the injection of new stock, the flight-to-quality trend and tenants downsizing as a response to the pandemic.
Total vacancy remains high at 14%. However, between now and 2024, there is limited supply coming online, with notable completions in the future to include:
Total vacancy remained high, sitting at approx. 14%. With limited stock and increasing demand by smaller tenants, vacancy is expected to fall over the coming months.
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 downsizing and flight-to-quality trend remains a threat to long-term recovery, with Brisbane occupancy rates currently sitting at 70%.
Face rents have seen y-o-y increases, with Premium and A-grade rising 5%, and B-grade rising 2.3%. This comes off the back of an increase in gross effective rents. Incentives, on the other hand, remain elevated but have largely stabilised.
However, where incentives have seen a slight decrease is in spaces with existing fit outs. This is due 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 spaces over 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.