Occupier-led market drives repositioning opportunities

Australian East Coast CBD office markets would need to see at least 894,000 square meters withdrawn by 2034, for either refurbishment for higher quality offices or repurposing for alternative uses, before pressure on secondary grade assets is alleviated, according to Colliers Head of Office, Valuation and Advisory Services Jonathan Petsalis.

“Repositioning or repurposing of secondary grade assets is necessary to compete in the current occupier-led market, where supply outstrips demand, and the East Coast CBDs’ vacancy levels are 4.96 percentage points higher than the long-term average of 8.9% as of H2 2023.” Mr. Petsalis said.

It is clear that an occupier-led market will continue to see higher quality office assets in coveted locations favoured in terms of rental growth, according to Colliers Managing Director of Office Leasing Cameron Williams.

“As prime average net effective rents decreased by 0.5% nationally over Q1 this year, and continued incentive creep strengthens conditions preferencing occupiers, average prime rents across the Sydney CBD’s Core and Midtown precincts increased by 1.1% and 1.5%, respectively.” Mr. Williams said.

“By comparison, modern occupier demands such as ESG, amenity and digitisation, saw B Grade assets witness average national negative effective rental growth of -0.4% in Q1 2024.”

The Brisbane CBD is the only office market where positive rental growth is being experienced by both prime and secondary grade assets due to heightened demand from the resources sector, servicing infrastructure development prior to Brisbane’s 2032 Olympics. Average net effective rents for prime and B Grade assets across the Brisbane CBD increased over Q1 2024 by 2% and 3.9%, respectively.

“Scarcity of supply and tight vacancy conditions across prime assets nationally, within the next five years, will ensure higher grade office spaces continue to reap the rewards of both elevated occupancy and rental growth.” Mr. Williams said.

Only 39,000 square metres of new office supply was delivered nationally over Q1 2024, and the only major supply additions expected for the remainder of the year are associated with Over Station Developments.

Vacant C and D Grade stock, which the PCA reported comprises 589,677 square metres or 13.94% of the market as of H2 2023, represents great potential for repositioning to meet long-term demand for higher quality offices, according to Colliers National Director of Research Joanne Henderson.

“As the future of office remains a hot topic, there is no doubt that fundamental drivers of demand, such as population growth, will ensure repositioned secondary grade assets are rewarded with increased occupier and investor appetite.” Ms. Henderson said.

The stabilisation of interest rates and a greater number of occupiers determining their flexible or hybrid work requirements saw a slight uptick in gross leasing volumes over Q1 2024, which were up 5% compared to Q1 2023, driven by a higher proportion of deal activity for offices above 1,000 square metres.