After the economic downturn of 2020, Australia’s office markets responded positively through the first half of 2021. The more recent lockdowns will delay this trend as leasing inspections and transactions are inevitably postponed. Momentum in the labour market, however, remains supportive.
The underlying fundamentals in the sector are showing the first signs of recovery. An analysis of net absorption (change in occupied office space) highlights the tenant “flight to quality” with five of the six major office submarkets in Australia posting positive net absorption in Q2 2021.
Of the major markets, Perth CBD recorded the strongest level (8,548 square metres) followed by Melbourne CBD (6,575 sq m), Canberra (4,230 sq m), Adelaide CBD (1,846 sq m), and Sydney CBD (1,224 sq m). Brisbane CBD recorded a negative result (-6,407 sq m) in the quarter.
The increase in office space demand has had the effect of generally stabilising total vacancy rates at their peak, which across the major markets is now 14%. In Perth, Melbourne and Adelaide CBDs, for example, vacancy has stopped rising and appears to have plateaued at the top of the cycle.
In Q2 2021, Canberra’s office vacancy dropped just below 7% for the first time since 2008. For the Melbourne and Sydney CBDs, office vacancy is at its highest level since the early 1990s, with recovery to pre-Covid-19 levels expected to take between three to five years.
Leasing incentives have stimulated this take-up in office space. Although they appear to have flattened in the Perth CBD, this is where prime office incentives remain highest, with JLL Research reporting 49% in Q2 2021. Brisbane Fringe and Brisbane CBD also remain high, at 43% and 41% respectively. At the other end of the spectrum, prime office incentives are lowest in the Sydney Fringe and Canberra, JLL reporting both in the low 20s (%) in Q2 2021.
Overall, leasing incentives continue to rise in most submarkets, but importantly for property valuations, face rents remain broadly stable.
Office yields have been relatively steady through the last 16 months, but have now started to re-compress in some submarkets, despite the high vacancy. This has been evident in CBD and suburban submarkets and across prime- and secondary-grade assets. It’s a sign of investor confidence in the future of the sector.
Despite the intermittent nature of the recovery, indications are the office market is heading in the right direction; current employment growth remains a key support. We highlighted in a previous Observation the close relationship between office leasing demand and labour market (employment growth) trends. The strong rebound in the demand for labour points to a long-run recovery in demand for office space across Australia, even if it is stop-start in nature.