In this latest commercial real estate update, we provide you with a snapshot of the Australian CBD office leasing markets. Our insights are based on the latest market data available from Q2 2021, and we forecast net rents, incentives and vacancy rates for Q4 2021.
We have some rare good news for Australian business! No CBD office market has bottomed out yet. As 2021 draws to a close we expect that slight rises in vacancies will continue, and accordingly incentives to keep increasing across Sydney, Melbourne and Brisbane. Rents are yet to notably decline, depending on the economic recovery in 2022 we may see some extra reprieve there too.
The sublease market has varied levels of space availability across cities with no major movement except for Sydney where it has reduced due to substantial take up and withdrawal of space in the first half of 2021.
Outgoings are volatile and increasing, in particular cleaning fees. During lockdowns, buildings are being utilised less but cleaned more. Then there is a case of increasing land tax in Victoria, which will impact businesses’ bottom line.
Approximately 250,000sqm of new and refurbished stock is expected to become available in the Sydney CBD in 2021. This includes 10 Carrington Street (Wynyard Place), which totals 68,808sqm. Notable premium grade buildings to be completed throughout 2022 include:
With the potential for over 1,000,000sqm of stock to become available in the next 8 years, vacancy rates could continue to rise. Total vacancy rates have continually been increasing since Q1 2020, from 3.9% to 8.6% in Q2 2021.
The increasing vacancy is putting pressure on landlords, which has seen incentives continually rising in an attempt to retain and attract new tenants. Incentives have increased from an average of 26.5% in Q2 2020 to 34.5% this quarter. This has led to a reduction of approximately 10%-13% in effective rents across all grades since Q2 2020.
Subleasing space in Sydney has decreased by 28% since Q1 2021. This can be attributed to several factors such as tenant take-up of both sublease and direct space, occupiers withdrawing the space as offices reopen, and tenants negotiating lease surrenders back to the landlord. To break it down, 29,000sqm of sublease space has been taken up, and 32,000sqm of sublease space was withdrawn from the market.
COVID-19 struck at a bad time for Melbourne landlords. Already facing a glut of supply (700,000sqm between 2020 and 2023), landlords were banking on real estate expansion, not contraction. Since the pandemic began, over 280,000sqm of new office developments have been completed. While those properties had 96% pre-commitment, those tenants were not new to the Melbourne market. They are leaving vacancies behind that likely haven’t hit the market yet.
With another 180,000sqm of office developments due to be released over the next 18 months, vacancy rates are going to skyrocket, underpinning a strong tenant market for the next 3-5 years.
With rent levels typically 30% lower than Sydney, it’s no surprise that Melbourne CBD overtook Sydney CBD in terms of office market size in 2020. Companies can have larger footprints for a cheaper price in Melbourne, but since it’s more affordable, the incentives are unlikely to be as high as Sydney. However, some landlords have their own worrying vacancy profiles, so incentives above 45% can be found – if you know where to look.
Now totalling over 180,000sqm in Melbourne’s CBD, available sublease office space could theoretically add another 3.5%-3.8% to Melbourne CBD’s vacancy rates. These options are fitted and furnished, provide short term flexibility, and just like landlord deals offer 30%-50% incentives. Unsurprisingly, the sub-1000sqm market is enjoying these alternatives to traditional landlord leasing.
The total vacancy has increased from 12.7% in Q2 2020 to 13.5% in Q2 2021. Even though vacancy has remained stable quarter on quarter in the first half of this year, it is expected to increase again with the completion of projects, adding more space to the market. Some recently completed projects in Brisbane CBD include 300 George Street (47,000sqm) and 12 Creek St (7,200sqm), and the Midtown Centre (44,000sqm) is nearing completion. 80 Ann Street (60,000sqm) is expected to be completed in 2022.
Most of the tenant demand is for sub 500sqm office space with shorter lease terms. In terms of sublease space, Brisbane has got lower levels of availability than other cities – approximately 50,000sqm, which is a 11.6% increase since December 2020.
COVID-19 has resulted in many tenants retaining their current space on short term extensions, instead opting to sublease excess space or handling back-office space. As a result, rents decreased 9% YoY. Lower rents have been linked to high incentive levels.
Perth CBD did see a rise in vacancy from 18.4% in Q2 2020 to 20% in Q1 2021. Since then, the vacancy rate has remained stable, which is expected to continue.
Some stock has been taken off market for refurbishment and change of use. New supply is also limited, with Capital Tower 2 (25,200sqm) expected to be completed by the end of 2021, and One The Esplanade (50,000sqm) due for completion in H2 2023, with Chevron pre-committing to 42,000sqm in that building.
Transactions are happening but mostly in the sub 500sqm market. There is not much demand for larger space as bigger companies are still rethinking long-term return to office strategy. We expect the market to remain stable for the remainder of 2021, with no major changes forecast to vacancy.
Perth has limited sublease space as most tenants are in the mining, professional services and government industries, who have weathered the pandemic fairly well.
Perth CBD has seen very slight change since the first quarter this year, with rents and incentives across all grades remaining stable. This can be attributed to how the state has handled the pandemic, with the absence of lockdowns enabling quick return to regular trading and lifestyle. Similar to vacancy we forecast rents and incentives to remain stable for Q4 2021. B grade buildings with old existing fitouts are almost impossible to lease, and have landlords offering incentives of above 50%. Deals for buildings with new fit speculative outs are approximately done at 35% or more, plus the fitout.