Demand for CBD Office Space remains strong, Despite Pandemic

Demand for CBD office space has remained strong across Australian capital cities with the office sector showing resilience in the face of bleak predictions caused by the pandemic.

According to the Property Council of Australia’s latest Office Market Report, tenant demand lifted an average 0.5 per cent across the country’s CBDs.

Despite this, new office buildings coming onto the market pushed aggregate vacancy rates up in capital city and non-capital CBDs.

Property Council Chief Executive Ken Morrison said the figures were heartening given we are living through a third year of the COVID-19 pandemic.

“In a healthy sign for our CBDs, the office market continues to defy previous dire predictions, with demand still in positive territory after nearly three years of the pandemic,” Mr Morrison said.

“Demand for office space was strongest in Brisbane at more than three times historic average, with Sydney, Perth and Adelaide also above average, while demand grew by 0.1 per cent in Melbourne and dropped in Canberra by 0.1 per cent.

“While the Australian office vacancy increased by 0.8 per cent to 12.9 per cent over the six months to July 2022, it’s new office space that is driving this outcome, not businesses wanting less office space,” he said.

The supply of office space across Australia’s capital cities has been above the historical average in four of the last five reporting periods, the report shows. “All capital city CBD markets experienced new supply increases, a combined 1.2 per cent, but supply is forecast to taper off in coming years,” Mr Morrison said.

Mr Morrison said while many predicted a crash in demand for office space and a spiking vacancy rate, this has not occurred.

“This has been underpinned by strong employment and the recognition that an office in city is fundamental to the success of many businesses,” he said.

The July edition of Office Market Report, which is released twice a year, showed overall CBD vacancy increased from 11.3 to 12 per cent, while non-CBD areas saw a rise from 13.9 to 15.2 per cent. Brisbane and Adelaide both recorded vacancy decreases, from 15.4 to 14 per cent and 14.5 to 14.2 per cent respectively, the only two CBDs in which supply didn’t outstrip demand.

The vacancy rate rose in the other capital cities, from 6.3 per cent to 8.6 per cent in Canberra, 9.3 per cent to 10.1 per cent in Sydney, 11.9 per cent to 12.9 per cent in Melbourne and 15 per cent to 15.8 per cent in Perth.

Future supply in the CBD markets is expected to be below the historical average until July 2025, while in the non-CBD markets supply is expected to be above the historical average until July 2023 before reducing in the following years.

Sublease vacancy increased slightly in both the Australian CBD and non-CBD markets, with Melbourne responsible for more than half of all CBD sublease vacancy.

“While the office market has proven to be resilient and demand is in positive territory, our CBDs still need attention,” Mr Morrison said.

“While demand for space is increasing, the number of actual office workers in our city centres is well below pre-pandemic levels and threatens the ecosystem of cafes, restaurants and retailers that help make our CBDs such special places.

“The recovery in our CBDs needs to be top of mind for governments and businesses even as we deal with elevated levels of COVID-19 in the community,” he said.

Read the latest on each CBD market including the views of major agents in the sections below.

Mark Curtain, CBRE Head of Office Leasing, Pacific

“With Australia’s unemployment rate falling to record lows and corporate profitability remaining strong, office users are looking beyond the current economic instability and remain focused on securing quality office solutions that will attract and retain staff for the long term. CBRE recorded 203,528sqm of new 1,000sqm-plus transactions across the national market in H1 2022 and activity grew exponentially in the past three months – 146,572sqm in Q2 against 56,956sqm in Q1 – as the market normalised after the COVID restrictions of late-2021 and early-2022.

“Vacancy rates have generally stabilised across the country with the amount of sublease space returning to the market reducing considerably. During the current cycle, sublease availability peaked in September 2020 at 428,600sqm but has since retracted to 268,553sqm, as tenants proactively pursued competitively-priced space with high-quality existing fitouts. While sublease vacancy will continue to fluctuate in the short term, particularly as major users resolve their long-term office accommodation strategies, it is expected to trend back towards long-term averages over the next 12 months, representing about 1% of the total market.

“Face rental growth is emerging as a strong theme in both existing assets and new development stock, albeit with incentives remaining elevated across most Australian markets. Escalating building costs are driving increased economic rents for new office construction, while landlords are repricing existing stock as they seek to minimise the impact of the current inflationary environment. Gross face rents have grown nationally by 2.3% y-o-y to June 2022.

“Tenant interest in new office development projects remains high across the country, as major office users seek to reinvent their workplace experience and provide more comprehensive amenities for their staff and customers. We anticipate a significant number of pre-commitment transactions across the east coast market will be announced in the second half of the year.”

Tom Broderick, Head of Office Research, Australia

“During the first half of 2022, we have continued to see tenants looking to upgrade their office space requirements. Of the tenants that have relocated, our data suggests about 75% have moved to a building that commands the same or higher rent than their previous premises. We feel this is partly a way of organically encouraging staff back to the office, by offering an improved experience in a better-quality building.

“The unknown is whether this trend continues in the current environment. Major corporates have generally posted strong revenue through 2021 and early-2022, which has alleviated cost containment pressures. We are yet to see a major drop in sentiment within the leasing market but there is potential for a moderation towards the end of 2022.”

Andrea Roberts, Knight Frank National Head of Leasing

“Despite the negativity in the macroeconomic environment, leasing activity and transactions have continued to increase throughout the first half of 2022, particularly for prime CBD office space.

“Inspection levels in all markets are strong, even when compared to pre-COVID levels of activity. The fact that occupancy levels in each of the CBDs, together with sublease opportunities, have bounced around during 2022 due to a confluence of bad news stories due to floods, excessive rain, strikes, elevated sick leave and a hard school holiday break hasn’t really impacted tenant commitments and transaction levels. Occupiers continue to look through these immediate issues to on focus on the need for a quality environment in their workspace longer term.

“With our historically low unemployment rates at present, the ability to attract talent is probably the biggest challenge facing most companies across the country. In the toolkit to attract the best and the brightest talent, what is highly desired is great design, well built, environmentally friendly, light filled, amenity heavy workplaces, combined with a hybrid working policy. We are seeing more and more employers set their hybrid policies and use technology to manage physical and virtual presences on a day-to-day basis. It’s not a ‘work from home or in the office’ discussion – it’s both, it’s here to stay and future thinking organisations are ensuring that workplaces are fit for purpose with new technology and team configurations to make this seamless and equitable for all employees.

“Given current level of activity on vacant space in Australian CBDs, we expect these enquiry levels to remain strong throughout the balance of 2022.”

Simon Hunt, Managing Director | Office Leasing, Colliers

• Flexibility of the workforce is now a given. Therefore the focus is not on 100% of the workforce being in the office 100% of the time, but on how the office brings the workforce together to collaborate, promote company culture and how it is utilised to offer a different and beneficial experience to working that cannot be created elsewhere. 

• Occupiers who now feel more comfortable with their current and future workplace strategies are moving forward with leasing decisions. This is evident when looking at the continued increase to enquiry levels recorded by Colliers, with a record amount of demand for office space in the first half of 2022. Over 1.622m sqm of enquiries have been recorded, which is an 11% increase on the prior year.

• It’s promising to see businesses continuing to engage with the market across all office space sizes. Within the larger market of over 3,000sqm we’ve seen an additional 61,000sqm enquired for in H1 2022 compared to H1 2021.

• The high levels of enquiry tracked over the last 6-12 months’ is translating to leasing activity.  Q2 Colliers leasing activity for the CBD markets shows a 24% increase in the area (sqm) transacted compared to Q2 2021.  The ongoing focus of providing a high-quality office experience for employees to retain and attract talent and use the workplace to heighten the company culture experience is driving relocation activity.

• Industries such as IT, Finance and Government have been the most active and accounted for over a third of the number of leasing deals in Q2 as traditional office demand industries continue to relocate, upgrading their premises in the process, as occupiers move ahead with their leasing decisions with more certainty. 

• We expect to see a continued strength in deal activity focused on Prime grade stock as the flight to quality thematic continues, which will provide further tailwinds to rising Prime face and effective rents.  However, B-grade is expected to lag with higher vacancy levels.

Joanne Henderson, National Director | Research, Colliers

• National CBD vacancy as per the latest PCA statistics has shown a rise in vacancy levels from 12.0% to 12.9% over the first 6 months of 2022.  A large proportion of the vacancy added has been from new supply entering the market.  However, some of the vacancy recorded is already leased and therefore the vacancy recorded is technically not ‘true available space’ and just a function of timing as a result of PCA methodology. 
  
• If we strip back the supply factor, relocation activity between existing buildings is adding positive net absorption, particularly from sub-1,000sqm tenants as the large amount of SME deal activity over the last 6-12 months start to move into their new office accommodation upon their lease commencements.

In relation to Sydney, Property Council’s Executive Director Luke Achterstraat said the increase from 9.3% to 10.1%, after remaining at 9.3% for 12 months, was predominantly due to an increase in supply in the past six months.

“These latest results paint a positive picture for the outlook of our Sydney CBD, given the surrounding pressures of COVID, industrial action, floods and work from home flexibility,” Mr Achterstraat said.

“Whether each office requires one, three or five days with colleagues, the demand is strong for face-to-face interaction with Sydney witnessing a two per cent rise additional office supply.”

“The office market continues to defy previous dire predictions showing a strong flight to quality with a sharp rise in premium office space demand,” he said.

“International capital is voting with its feet, citing our office markets as some of the safest havens for investment in the region.

“Parramatta continues to prosper with vacancy increase being due to the higher than normal large supply addition due to the completion of 8PSQ. Tenant demand was also positive despite the large office stock addition.”

Mr Achterstraat said while the office market had proven to be resilient and demand is in positive territory, NSW CBDs still needed attention.

“While demand for space is increasing, the number of actual office workers in our Sydney CBD is well below pre-pandemic levels and threatens the ecosystem of cafes, restaurants and retailers that help make our CBDs such special places,” he said.

“The recovery in our CBD needs to be top of mind for governments and businesses even as we deal with elevated levels of COVID-19 in the community.”

Stuart McSorley, Director, Office Leasing 

“The first half of 2022 generated a record level of enquiry, at 272,000sqm, eclipsing Sydney’s previous high from 2021. The most active tenants, in terms of enquiries and inspections, have been those seeking sub-1,000sqm, with expiry and business growth the key drivers.

“Flight to quality was a strong trend across all sectors in the market, with quality fitted space the most sought-after by tenants looking to entice staff back into the office and attract new talent. Many landlords are providing speculative fitouts, from suites to whole floors, to take advantage of this demand, while the broader demand for higher-quality space has resulted in lower vacancies across the Premium-grade market.

“Leasing volumes for the Sydney CBD were lower for H1 2022. However, on the back of record enquiry through the first six months of 2022, we anticipate the deal pipeline to pick up again for the remainder of the year, with the majority of tenants focused on high quality fitted space.

“Professional Services firms remained the main driver for deals transacted in the first half of 2022. Deal terms remained steady with face rents holding despite some headwinds from global uncertainty, inflation and interest-rate rises. Incentives have remained stable, however they are expected to come under pressure and creep up in the short term, due to higher vacancy and global uncertainty.

“Sublease availability fell during H1 to 96,900sqm, from 100,200sqm at the start of the year, with the majority of the sublease market over 1,000sqm accounted for by a number of large tranches of space.”

Al Dunlop, Knight Frank Head of Office Leasing, New South Wales

“The Sydney office market has seen robust transaction volumes off the back of heightened enquiry levels. Enquiry continues on an upward trend with Q1 2022 quarter seeing 103 enquires for a total of 100,000sqm of demand compared to Q2 2022 which saw 134 enquires for a total of 163,000sqm of demand. Despite increased deal volumes, incentives continue to remain stubbornly elevated. Flight to quality and amenity remain key drivers in all enquiries with quality assets seeing growth in face rents. More occupiers are electing to relocate versus stay put and renew.

“In select sizes across Prime assets, we are seeing scarcity of options; this is especially prevalent in the financial Core.

“Despite the tech sell off on global stock markets we are still witnessing steady demand and deal flow from this sector.

We anticipate transactional volumes to build into the years’ end to reflect the rising enquiry levels seen in the first half of 2022.”

Joanne Henderson, National Director | Research, Colliers

• A large proportion of the vacancy added over the first half of 2022 has been from new and returning supply to the market.  Around 20,000sqm of vacancy has been added from the completion of Quay Quarter Tower and refurbishment activity at 477 Pitt Street and 143 Macquarie Street accounting for around a third of the 0.9 percentage point (pps) rise in the vacancy rate. 
  
• However, it is worth noting that at least half of this vacancy has effectively been leased and is merely a function of timing methodology adopted by the PCA with tenants such as IMC Trading at QQT yet to move in.   AMP subleasing around 11,000sqm at QQT has also contributed to around 0.2 pps to the vacancy rate.

• Leasing activity over the last 12 months has been weighted towards occupiers under 1,000sqm with around 45% of leasing transactions from SME’s.  As these smaller occupiers start to move into their new premises, they are underpinning positive net absorption in the Sydney CBD and offsetting some of the larger reductions of space.

Ashley Buller, Head of Office Leasing, Victoria

“Through the first half of 2022, we’ve seen strong and consistent occupier demand, with the previous two years’ concerns around lockdowns subsiding. Tenants seeking sub-500sqm opportunities have been the most active, however momentum is growing among those with larger requirements. We’re also seeing the education sector come back to life, with a number of large transactions underway.

“Smaller, more nimble tenants have taken advantage of the high-quality, Prime-grade spec suites that have been available, with a big percentage of the completed suites now leased. Many Prime-grade owners are now hastily constructing the next wave of suites to capitalise on that demand. Equally, some owners with larger vacancies are now speculatively fitting out 1,000sqm-plus spaces to differentiate their offerings from the competition and lure tenants.

“High-rise, Premium-grade rents in Melbourne’s East End have risen strongly, with a number of transactions reflecting 15-25% improvements against pre-COVID levels. Strong demand and reducing availability are driving this, amid a continued trend of flight to quality. Incentives across the market have remained sticky, and with the current market vacancy, we don’t anticipate this changing in the near future.

“Available sublease space declined by 42% to around 110,000sqm by the end of April, however it has recently increased again to around 140,000sqm due to a number of large offerings coming to market in Docklands. Suburban tenants taking advantage of favourable market terms have contributed strongly to the decline of sublease space, and we see this trend continuing.

“With the current low unemployment rate and the challenges of finding and securing staff for large businesses, the CBD provides a central location to capture employee interest from all geographical locations around Melbourne. Equally with the quality of fitouts available in Docklands and the increase in fitout construction costs, we anticipate suburban tenants will continue to be attracted to this precinct.

“From here, we anticipate a continued improvement in larger tenant activity across the whole market, strong demand in Melbourne’s East End and above-average rental growth in this precinct as stock supply reduces. We also expect to see Docklands continue to lure centralising tenants and fitted space across all size ranges, attracting the strongest tenant demand.”

Hamish Sutherland, Knight Frank Head of Office Leasing, Victoria

“The Melbourne office market has shown positive signs of increasing demand and transaction volumes within the first half of 2022. Whilst the occupancy numbers specifically have not quite jumped as most had anticipated, the volume of genuine enquiries has, and the outlook for the second half of 2022 looks to be improving. While some businesses are still navigating the return to the office, it’s clear tenant demand is largely being driven by a flight to quality for their office accommodation, with a focus on onsite amenity.

“If anything, prime grade CBD face rents have lifted slightly. The majority of transaction evidence is within the buildings which have recently completed upgrade works, repositioning projects or have existing high-quality fitouts in place. Incentives overall seem to have stabilised with tenant decisions continuing to be driven by lease flexibility, quality fitouts and access to outdoor and third space provisions with fitted accommodation still driving the smaller end of the market.

“We expect occupancy rates to continue to climb slowly throughout the balance of 2022 with transaction volumes to remain solid, although uncertainty about the strength and direction of the economy remains a concern given recent events in the financial markets.”

Andrew Beasley, National Director, Melbourne CBD | Office Leasing, Colliers

• Melbourne continues to be affected by a stubborn amount of sublease space, both on and off market, we have also seen tenants “right sizing” as they grapple with their office requirements and adjust for a hybrid workforce. What has been evident in the Melbourne market is the “flight to quality”. Tenants of all sizes are electing to upgrade their accommodation, not only to encourage their staff to return to the office, but as a retention and attraction strategy in a tight labour market. Landlords that are choosing not to upgrade their buildings to meet the demand for quality and higher environmental ratings are likely to be left behind.
  
• Demand for quality fitted space in all size segments remains strong. Tenants are taking advantage of picking up a quality fitout whilst obtaining a significant incentive, which they are converting to rent abatement/rent free to offset their operational costs.  
  
• A cold Melbourne winter combined with an uptick in people getting sick from either covid or the flu has seen a reluctance to return to the office, we’ve also seen major organisations, including Telstra & Westpac encourage staff to work from home. Melbourne is very much suffering from a COVID hangover. We expect as we move into spring and summer that we will start to see an improvement in office occupancy and subsequently an improvement in demand, this will in turn lead to a higher volume of deal flow. The remainder of 2022 will be challenging, however we anticipate that 2023 will see Melbourne market conditions normalise and return to positive net absorption.

Joanne Henderson, National Director | Research, Colliers

• Vacancy added from a number of partial refurbishments (mainly from backfill space) has contributed to the rise in vacancy over the first 6 months of 2022, plus some additional sub-lease vacancy.

• However, a small positive net absorption result has been reported from a number of large new move’s into the Melbourne CBD/or expansion space offsetting some of the larger contractions in the market.  An example being Clemenger who has moved into newly refurbished space at 299 Bourke Street (7,500sqm) relocating from St Kilda Road.

Chris Butters, Managing Director, Brisbane & State Director, Office Leasing, Queensland

“The Brisbane occupier market is now entering the recovery phase of the cycle, with an increasing percentage of active organisations focused on expansionary rather than contractionary requirements.

“Demand remains focused on the Prime-grade sector of the market, as tenants continue to focus on improving their workplace design and overall class of accommodation. This has been most evident in the pre-commitment market with ~35,000sqm of new transactions from Professional Service Firms looking to reposition for future growth and prosperity. 

“This thematic will undoubtedly result in a tightening of the Prime-grade vacancy rate by year’s end and in turn support face rental growth in this sub-sector.

“Looking forward, we anticipate a buoyant second half of 2022 before a potential pull back in demand in 2023 as increasing interest rate rises and inflation impact corporate revenue and headcount growth.”

Mark McCann, Knight Frank Head of Office Leasing, Queensland

“The Brisbane CBD office market has experienced increased levels of inquiry and transaction volumes over the first half of 2022. Given the disruptive start to 2022, business sentiment has returned, and corporates are now confident to commit to new workplace design. Occupancy rates within most assets in the CBD are improving as return-to-work policies are activated.

“Prime grade face rents have been increasing slightly over the last 12 months and whilst incentive levels have remained high, it does appear they are about to stabilise over the remainder of 2022.

“Current economic factors are contributing to the increase on face rents. As the cost of capital increases and the cost of fitouts is increasing, this is causing corporates to offset higher rents to provide sufficient incentive or capital allowances to deliver new workspace fitouts and design to entice their respective staff back into the office.

“Occupancy trends or demands from major corporates continue to revolve around creating a new workplace environment that considers ‘flight to quality to better grade assets, collaborative and outdoor

spaces, sustainability alignment with corporate values, flexibility in contraction and expansion rights and ability to access ‘third spaces’ within a building.”

Matt Kearney, National Director, Brisbane CBD | Office Leasing, Colliers

• Being only one of the two major office markets to record a reduction in vacancy, confidence in the Brisbane market has surged primarily off the back of employment growth and record levels of net migration to Queensland.
  
• The Premium grade market is the tightest and best performing segment. This can be attributed to a genuine flight to quality for businesses with employers using better workplace and amenities as a draw card to not only attract new talent, but also attract people back into the office where collaboration and team work thrives.  ESG, wellness and flexibility around growth and contraction are also key drivers for occupiers in our market.   
  
• Mirvac’s recently completed Premium grade development 80 Ann Street is a great example of this, being 98% leased to Suncorp, KPMG, APA Group and IWG.  Strong demand for the next-generation product is evident with Deloitte and Minter Ellison pre-committing to the Dexus Waterfront Brisbane development and BDO and Hopgood Ganim pre-committing to Charter Hall and Investa’s 360 Queen Street development. 

• Irrespective of the economic challenges surrounding interest rates and inflation, the Queensland economy is showing resilience and we expect positive momentum to continue within the Brisbane CBD office market.   

Michael Pfitzner, Senior Director, Office Leasing

“Deal activity in the market has started to kick along after a subdued start to 2022, given the dual elections and isolation conditions delaying commitments, despite Adelaide’s nation-leading occupancy levels.

“Tenant demand has been strong throughout the first half of 2022, with 87% of enquiries for fitted out space in better quality accommodation, and 75% seeking 500sqm or less.

“We are seeing good demand from the Technology, Professional Services and Health sectors, with Technology particularly strong on the back of Lot 14 and initiatives such as PwC’s Skilled Service Hub, and increased technology entrepreneurship within Adelaide.

“Going forward, supply will be the big story in Adelaide, namely its impact on the market over the next 12-36 months, with circa 130,000sqm of new development stock coming online. While we anticipate the majority of the new stock will be fully-leased by completion, or close to, history shows that new construction increases rental levels on existing building.

“Similarly, there will be an impact on the backfill accommodation, in terms of what refurbishment the respective owners undertake with their assets and, importantly, when they can complete it. In essence it will be a race to refurbish to beat the competition.”

Martin Potter, Knight Frank Head of Leasing South Australia:

“The Adelaide office market has seen an increased level of activity over the past 12 months as we come out of Covid restrictions and people come back to the office.

“We expect positive net absorption to continue throughout 2022 and 2023, spurred on by new developments due for completion in the second half 2023 adding some 120,000 sqm of which a significant component is precommitted.

“There remains strong demand for new generation offices with existing stock predominantly full and many A grade tenants having lease terms aligned with forecast completion dates of the new developments.

“Face rents remain stable or increasing slightly and although incentives remain a historical highs, they are starting to reduce in the new generation stock as tenant demand is predominantly focused on a flight to quality for their office accommodation.

“We forecast vacancy rates to continue to drop until new stock becomes available in Q3 / Q4 2023 which will see substantial backfill accommodation in need of refurbishment and repositioning.”

James Young, State Chief Executive South Australia & National Director | Office Leasing, Colliers

• The Adelaide CBD market is not delivering any real surprises so far this calendar year and is playing out as expected.  Vacancy rates have fallen over the 6 months to July.   The next generation (Gen 3) of office assets are being committed steadily with two of three projects currently under construction at or close to 100% committed.  Downward pressure on prime grade vacancies in particular are providing upward pressure on gross face rents and downward pressure on incentives.  Secondary grade assets that have taken a passive approach to repositioning in particular, are facing downward pressure on face rents and upwards pressure on incentives.  
  
• Vacancy is expected to decline to year end and into Q1 2023 ahead of backfill vacancy being released to the market with vacant possession.  Enquiries seeking office space for lease from 2H 2023 are starting to get a sense of the competition arising from the backfill vacancies in A Grade assets as they set themselves for relaunch and re-leasing.  The influence of backfill supply on vacancies will be increasingly felt over the next 6 to 12 months as the certainty around vacant possession dates and the quality of repositioning strategies become qualified.
  
• Recent announcements by Richard Marles, Deputy Prime Minister and Minister for Defence, confirming South Australia’s ongoing role in the manufacture and sustainment of submarines has galvanised some defence occupier interest.  Increasing demand from this sector in particular will be a positive for the Adelaide CBD as the rising vacancy in 2023 is well placed to absorb same.  The multiplier effect defence sector occupiers have on the professional services market (an Adelaide CBD specialty) is expected to be very positive.
  
• Adelaide’s occupiers are seeking an experience from their new workplace and built environment, on their floor(s) and at ground level and surrounding neighbourhood.  How a specific asset actively caters or prepares to cater for these desires has a significant influence on attracting and retaining occupier interest. 
  
• Broadly speaking, South Australia is well placed over the coming years with a diverse industry base making solid contributions to GSP, continuing positive net interstate migration and specialist knowledge industries gathering momentum such as cyber, defence, space, AI, machine learning and creative industries as well as the health & life science sectors.

Joanne Henderson, National Director | Research, Colliers

• The net change of large occupier moves across the Adelaide CBD offset each other to only add 900sqm to positive net absorption.  Therefore, robust demand from smaller occupiers (below 1,000sqm) has contributed to the majority of net absorption over the first half of 2022. 

• Coupled with no significant supply added to the market, vacancy has reduced to 14.2%, the lowest level of vacancy since the end of 2019.

Andrew Denny, Senior Director, Office Leasing, Western Australia

“The increase in Perth CBD vacancy is all as a result of new stock entering the market in the past six months. This includes the 13,000sqm Dynons refurbishment, the also-refurbished Atrium and the newly-built Capital Square Tower 2. Together these buildings account for over 32,000sqm of new supply.

“Despite Western Australia experiencing its first major COVID outbreak in 2022, underlying tenant demand is still strong. Expanding tenants remain a key and dominant feature of the market, particularly in the mining and engineering sectors. COVID, stock market declines and the Federal election have all failed to impact tenant demand.

“Rents are starting to increase, albeit in select buildings, with West Perth and the suburbs likely to have stronger increases than the CBD. Rent reviews have increased across all markets.

“Looking ahead, the new-build market in the CBD is progressing strongly and will have the biggest impact on the market. One The Esplanade, a 55,000sqm project with Chevron as its major tenant, and the 17,000sqm Capital Square Tower 3 are due for completion in 2023, while the 9,000sqm Westralia Square Tower 2 should be completed in 2022.”

Rick McKenzie, Knight Frank Head of Office Leasing, WA:

“The Perth office market has experienced a heightened level of activity over the past 12 months as improving economic conditions for Western Australia translates to positive net absorption and effective rental growth. Working from home continues to be a challenge to office occupancy, however the growth experienced within the economy positions the office market well to continue its recovery. Western Australia has achieved a triple A credit rating for the first time since 2013 and has experienced employment growth at twice the national average. Whilst we expect positive net absorption to continue throughout 2022 due to revised growth targets of Perth-based businesses, securing staff to fill current vacancies is one of the greatest impediments to office vacancy reducing further. Accordingly, the level of net absorption achieved throughout the remainder of the year will depend heavily on the level of interstate or international migration experienced in Western Australia.

“Investment into building upgrades and amenity will be crucial to ensuring owners capitalise on improved demand given that the low unemployment rate has resulted in a greater emphasis on accommodation serving as a talent attraction and retention tool, whilst also playing a vital role in encouraging people into the office more regularly.”

Jemma Hutchinson, National Director, Perth | Office Leasing, Colliers

• Whilst we are likely to see a minor uptick in vacancy during the first half of 2022, a lot of this being refurbished stock coming back online and a mix between A & B Grade stock. We do know that some of this stock coming back online is already under offer. This space will continue to Lease over the coming months given the increased demand for office space here in WA.
  
• We are forecasting the vacancy will continue to decline and then stabilize over the next few years even with new stock coming online, Perth is renowned for leasing it’s new developments ahead of PC or shortly thereafter. New buildings will create an automatic correction for the existing office market, given where the construction costs are sitting.
• Mining resources have always been identified with Perth, but now we now have Tech which includes mining tech, rare earth minerals and renewables entering the demand for office space with this we are seeing new businesses come in to play.

• We are back at the sort of numbers we saw at the peak of the last mining boom back 2010. We have seen 55 per cent of tenants expand their office footprint in Perth since 2019.  

• Flight to Quality remains the same story we have seen for a number of years now, however flight to experience is now the main focus as employers look to get workers back into the office. Building owners are having to get creative and offer experience and convivence to future proof their assets.

• We are seeing a lot of owners now looking at de-risking/diversifying assets, rather than targeting large multi floor tenants we are seeing owners focus more on single floor occupiers to create a better expiry profile for their assets.

• I am not saying we are going to get back to the height of the last mining boom but we will now see a healthy stabilised growth coming off the back of such a low base here in WA. The Premium office space will continue to tighten, we have seen face rental growth across all asset Grades and we have seen those incentives start to decline across the board.

• I believe cost of debt will cause some pain, however there is a lot of capital out there sitting back and waiting to take advantage of the right opportunities.

• West Perth is one to watch here in WA, When West Perth is improving it’s a very positive sign for the outlook on the Perth broader market including the CBD. West Perth is your mining services, junior exploration companies on the forefront of the demand. West Perth has seen 8 times the historic average in positive net absorption and will be announcing a further decline in overall vacancy for the first half of 22. We will continue to see West Perth decline throughout the remainder of 2022.

• For those owners who have refurbished their stock in West Perth they will continue to see momentum across their assets, if you’re an owner with B and C grade stock in West Perth, its time to refurbish and take advantage of this demand we are seeing. Incentives in West Perth have always held between 35-40%.

Troy Markos, Director, Office Leasing, ACT

“The Canberra office market has experienced some of its best market conditions in some time. This has been felt not only by occupiers, who have had less choice than ever before, but also landlords experiencing more favourable commercial outcomes with face rents starting to increase.  

“Vacancy is forecast to increase over the next 12 months with new supply to be added to the market, particularly at the Prime end. Among those additions, Morris Property Group’s One City Hill development is due for completion in 2023 and high-quality A-grade buildings such as ISPT’s Pathway Place and 5 Farrell Place City are being refurbished and brought back online.  

“The office suite market was the subject of the most activity in H1 with 76% of enquiry sitting below 500sqm, and the majority of groups seeking fitted space. The most in-demand locations have been the CBD and Parliamentary precinct and occupiers have most commonly been in the Professional Services, IT, Cybersecurity and Defence sectors, with most contracting to the Commonwealth.

“There has been a noticeable flight to quality with occupiers seeking space that will help them attract staff back to the office or assist in the war for talent, which is their main struggle right now. This has aided the increase in face rents, as we have seen occupiers are happy to pay more for the right space, but they are expecting more from the buildings they are choosing, namely bookable shared meeting rooms and flexible parking arrangements.

“The Commonwealth was less active in H1 due to the Federal election, which included a period of Caretaker Government until an outcome was decided. The change of Government will be positive for the Canberra market, with the public sector set to expand and several Machinery of Government Changes underway. The Commonwealth is working through these now, which will result in increased leasing activity later in 2022 and early-2023.”

Daniel McGrath, Knight Frank Head of Agency, ACT

“Canberra continues to have one of the tightest vacancy rates in Australia, signifying resilience over the past two years and validating the city’s positive sentiment as an investment hub.

“This is mainly due to the high proportion of public sector requirements in the market and the continued insulation of the private sector market, with a large focus on Government contractors.

“The outcome of the recent Federal election has yet to determine the impact on the Canberra market however with expansion expected in the education, defence and cyber sectors, there are encouraging signals that the market will remain more than stable.

“The lower grade markets have also seen an uplift in uptake, mainly through the growth in the private sector, and building owners being proactive in addressing tenant requirements.”

Aaron Bruce, National Director, Canberra | Office Leasing, Colliers

• Vacancy in the Canberra market is expected to continue to grow over the next 6- 12 months as some major tenants vacate existing buildings (such as the Dept Agriculture into Civic Quarter 2) and some refurbishment projects that have had space temporarily unavailable come back online. With further movements afoot later in the year and into early 2023 we expect this trend to continue after the market has experienced a 4-5 year period of continuous vacancy rate declines.  
  
• Some of the major vacancy changes in the Canberra CBD are related to the Dept of Agricultures move out of the ISPT City West precinct and into their new premises at Civic Quarter 2. The other major vacancy changes relate to the vacancy backfill space that the Clean Energy Regulator vacated at 5 Farrell Place and the refurbishment completion and re-entry back into the market of the final stage of Central Village at 3 Constitution Avenue.
  
• The two key tenant trends in the market are firstly the major Commonwealth Government open market processes which are all still in various stages of assessment in the market. The second would be the real lack of high end A Grade quality of stock available in the market (with no new construction underway yet outside of the Canberra Airport precinct) and the issues this is creating for any corporate private sector tenants. These tenants are invariably having to look at short to medium term lease extensions and needing to be patient to bide their time until some further new stock is created in the market.
  
• Canberra has now weathered the Federal Election and the ‘caretaker’ mode of immobility that it always creates and is set now for a busy ‘catch up’ period of enquiry and new briefs through the back half of 2022. We look forward to the busy market activity levels expected ahead.

Joanne Henderson, National Director | Research, Colliers

• After reporting a period of low vacancy (the lowest since 2008) over the last 12 months, Canberra’s new supply cycle has started to hit the market with 4 new developments and one full refurbishment completing over the first half of 2022.

Stefan Perkowski, Head of Office Leasing, North Sydney

“North Sydney continues its transformative journey with significant new transport infrastructure coming online, and new residential and commercial office towers advancing to completion.

“Throughout H1 2022 and into 2023, this is headlined by Lendlease’s Victoria Cross Development and 2-4 Blue Street, and LaSalle Investment Management’s project at 88 Walker Street. The opening of the Sydney Metro in 2024 will significantly improve connectivity with both the Sydney CBD and suburbs.

“Throughout H1 2022 we have witnessed demand from larger occupiers for 1,000sqm-plus floorplates, resulting in a number of leases being granted, primarily in flight-to-quality deals. Examples include IWG and Galderma, which leased the last remaining floors at 1 Denison Street, totalling 5,750sqm. We are seeing larger occupiers still considering North Sydney as a preferred location, equating to more than 15,000sqm of potential net absorption. These occupiers include SMEC, Hollard, Nokia, Equifax and WSP.

“While the overall vacancy rate remains stable, all new developments and quality A-grade assets have benefitted from this leasing activity, with assets in this grade enjoying a vacancy rate closer to 8%. Fuelled by the IT sector, a driving factor for this has been strong business conditions, which are leading to many businesses expanding strongly and taking larger premises. Flight to quality has remained a very strong trend, and in H1 2022 we saw more businesses relocate to North Sydney from the suburbs than ever before.

“We anticipate vacancy rates will decrease in the second half of 2022 and into 2023 on the back of stronger business conditions and a lack of new office supply until the completion of the Victoria Cross development.”

Mark Martin, Director, Office Leasing 

“For the first four or five months of 2022, confidence levels remained generally positive. But with war raging in Ukraine, interest rates steadily climbing and the drumbeat of a new COVID variant kicking off, it is not surprising that tenants are becoming less certain about committing to office space.

“CBRE’s Western Sydney Office Leasing team entered the new year with a swathe of negotiations with solicitors instructed. However, since then, up to 5,000sqm of deals in the pipeline have not gone ahead in three separate transactions, and tenants delaying decisions is becoming more common.

“Despite the winding back in confidence, patterns have emerged and lease deals are concluding in some numbers. Emerging trends include flight to quality, especially from industrial-zoned precincts.

“Recent examples include Australian Agribusiness and Krones Pacific moving from nearby industrial precincts to Institutional-grade office buildings in Rhodes. Elsewhere, two parties are negotiating moves to Parramatta from industrial properties at Huntingwood and Eastern Creek, to occupy in excess of 11,000sqm of office space combined.

“The large volume of vacancy recorded mid-year is due to the number of new buildings recently completing, adding to the market stockpile, primarily at 8 Parramatta Square. Much of this is considered vacant as it is not yet occupied, but in reality that vacancy will fall quickly in future reporting periods as much of this new space is pre-leased.

“A feature of H1 2022 has been the increase in the favourability of terms being granted, in particular net incentives. While 38-42% was the norm at the tail end of 2021, these can now be as much as 45% at mid-2022. The growth is yet to show signs of stopping.”