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 is 12.2%, up from the 11.5% recorded in Q3 2023. This figure is at its highest in a decade; however, it could be even higher once you consider subleasing opportunities, backfill spaces and shadow vacancies.
This q-o-q rise is due to an increase in supply of new and refurbished stock, which was limited to smaller developments such as:
In 2024, several developments are planned to come online, including:
Though pre-commitment levels look good, 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 year-on-year increases across all grades, with Premium rising from $1,525 to $1,705, A-grade from $1,335 to $1,405 and B-grade from $1,045 to $1,135.
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.
The gap between Prime and Secondary face rents is the largest it's been in five years, underpinned by the ongoing flight to quality trend.
Sydney CBD’s sublease availability as a percentage of total stock is now sitting at 2.5% (approx. 130,000 sqm), 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 reports showing an absorption of -64,628 sqm in the second half of 2023. This indicates that more commercial space was vacated than leased, with many factors contributing to this trend, including flight-to-quality and downsizing.
B-Grade stock has been the hardest hit, with vacancy jumping from 10.6% in Q4 2022 to 12.4% in Q4 2023. Though this figure is high, it's been partially mitigated by the permanent withdrawal of stock (approx. 52,000sqm) for the Hunter Street Metro Station.
However, while overall demand has been sluggish, not every submarket within the CBD has been hit equally hard.
Prime CBD office spaces in sought-after locations in the city core, such as Salesforce Tower, have been less affected by vacancy than buildings in less desirable (i.e. non-core) locations. This is reflected in 12-month net absorption figures, where the Core and The Rocks recorded 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 depending on location, both lower and higher-grade assets are set to suffer as larger tenants continue to relocate to higher-quality buildings and abandon non-core CBD options.
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 25-27.5% decline since mid-2022 due to rising interest rates and the work-from-home trend.
This decline 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.)
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.
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 the Sydney CBD continues to be driven by the following key industries:
However, before 2023, the tech industry was the biggest driver of leasing demand globally, and its recent downturn has sent ripples through the commercial real estate sector and increased vacancy rates worldwide.
Tech companies in various industries, including giants like Meta and Twitter, have started adopting a more conservative approach to their expenditure and real estate footprints, especially as the nature of their work often does not necessitate a physical presence. For instance, in September 2023, Meta announced it would pay approximately $181 million (the equivalent of seven years of rent) to relinquish its office space in Central London due to their ongoing adoption of hybrid work.
Melbourne CBD's overall vacancy rate continues its upward trend, climbing from 15% in Q3 2023 to 16.5% in Q4 2023. This is primarily due to the addition of approximately 63,000 sqm of space with 500 Bourke St and 300 Flinders St openings.
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). Net effective rents remained stable q-o-q but are experiencing downward pressure thanks to high incentives, elevated vacancy levels and the rising cost of outgoings.
Sublease availability as a percentage of total stock has increased from 2.2% in Q3 to 2.9% in Q4 (148,110 sqm), primarily driven by two listings totalling 57,000 sqm.
However, this figure is not 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 already 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 major stock withdrawals, including:
This may bring some stability to Melbourne's rapidly increasing vacancy rate, which has risen by over 400% (from 3.2%) in Q1 2020. However, between late 2025 and 2027, several significant developments are set to come online, including 7 Spencer Street, 600 Collins Street and 435 Bourke Street, which will inject circa 200,000 sqm into the city and add more pressure to vacancy rates.
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. Environmental ratings are also becoming more critical, with more tenants preferring to enter buildings with a high NABERs rating and green initiatives.
Lower-grade assets are bearing the brunt of this, with a noticeable shift in demand for Premium and A-grade spaces over their B, C, and D-grade counterparts. The divide is clearly illustrated in the city's overall vacancy rate, which 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 20.4% in Q4 2023. The trend is also exemplified by Premium being the only grade that saw positive net absorption over the quarter.
While low supply and withdrawals will aid the recovery of Melbourne's overall vacancy rate, 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.
Office attendance has improved across Australia. However, the Melbourne CBD has seen the slowest recovery, with an occupancy rate of 56%-63%, up from 47% on February 23. This sluggish comeback indicates that there's more underutilised space in today's market than just a few years ago and underpins the rise in sublease availability.
Unfortunately for tenants and landlords alike, much of this excess space is unlikely to be sublet for one reason or another. So, many businesses are paying for space they'll eventually shed once their leases expire.
The trend also underscores a structural shift in Melbourne's office utilisation, with many businesses permanently adopting flexible work arrangements for their staff, which will continue to impact vacancy.
Over the past few years, more and more landlords have undertaken speculative fit-outs and building upgrades to make this 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. 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, projecting that values could plummet by as much as 21.5%. We're already witnessing this trend unfold, as evidenced by Mirvac's recent endeavour 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.
Like Sydney, the towers maintaining their value are premium buildings in the CBD core. And 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 increased slightly over the quarter, from 11.6% to 11.7%, down from 14% in Q4 2022 y-o-y. This comes from increased demand for Prime office space and the withdrawal of Christie Centre (320 Adelaide St, 13,000 sqm) for refurbishment.
Given limited supply and strong demand, Gross Face and Effective Rents have increased Q-o-Q. Significant movement was seen in Premium and A-Grade assets, where Premium Gross Effective Rent increased from $635 to $645 and $465 to $480, respectively. This comes from an increased demand for higher-quality space and limited new supply in the pipeline.
B-grade effective rent also increased from $380 to $385, though this rise is minor compared to the higher-quality assets.
Though incentives remain elevated to encourage tenant relocations, they have seen slight decreases Q-o-Q, currently averaging 40% for prime space and 44% 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).
Over the next decade, we anticipate that rents will continue to increase while incentives will decrease as Brisbane reaps the benefits of increased demand, interstate migration and the Olympics.
Sublease space in Brisbane remains the lowest in the country, dropping from 0.5% to 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.
Over the last year, approximately 29,000sqm of sublease space has come online, including:
The reason behind this trend is not immediately apparent. However, we will continue monitoring reports to better understand the underlying causes.
Significant activity was observed in A-Grade assets during the latter half of 2023, with state government tenants transitioning from B-Grade spaces. This has brought A-grade vacancy down to 15.8% and pushed B-grade vacancy back up to 9.9%, creating a large volume of backfill space that secondary landlords are struggling to fill.
Though B-grade vacancy has remained below 10%, it has increased since Q1 2023 from 9.5% to 9.9%, fuelled by the flight-to-quality trend. Another driving factor is the drop in demand from smaller tenants. 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.
Premium grade vacancy has stabilised at 4.4%, lacking notable activity. With KPMG set to relocate, vacancy in this grade is expected to rise. However, this backfill space will be the only 5,000+ sqm premium grade vacancy in the golden triangle (until the completion of 360 Queen Street, which will be A grade), so any rise is likely to be short-lived.
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.
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. However, from there, an injection of new supply and refurbished space could push the Brisbane CBD vacancy rate back into low double digits.
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 on 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. We’ve also seen an uptick in tenants seeking buildings with green initiatives.
This is eradicating the 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, smaller buildings, such as 41 George Street, 150 Charlotte Street and 140 Elizabeth Street, may be withdrawn for refurbishment or potential redevelopment, placing 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.