Office vacancies hit record high with some cities trailing considerably behind

According to PCA’s latest office market report, non-CBD markets recorded a larger increase in vacancies than CBD’s and surpassed a previous record set in 1995, expanding from 10.4 to 13.4 per cent.

CBD’s, on the other hand, suffered a slightly less notable increase, growing from 9.2 per cent to 11.1 per cent – the highest level since January 2015.

But while COVID-19 has reduced tenant demand for office space, Property Council chief executive Ken Morrison said that most of the increase in vacancy related to new office buildings coming into the market.

“While it was not a surprise to see office vacancies increase in the middle of a pandemic, it is the new supply of office space that is responsible for three-quarters of this impact, not reduced tenant demand,” Mr Morrison said.

“COVID-19 has reduced demand for office space as businesses downsize, but this had a much smaller influence on vacancy rates than the new supply coming on stream.”

Despite prolonged periods of lockdown, Melbourne’s vacancy rate climbed at a slightly slower pace than that recorded in Sydney, with an increase from 5.8 per cent to 8.2 per cent. In Sydney, the figure rose to 8.6 per cent from 5.6 per cent.

Rise to continue in Sydney and Melbourne

Commenting on these findings, CBRE’s head of office leasing, Mark Curtain, opined that Sydney and Melbourne will continue to see vacancy rates increase further during the course of 2021, albeit at a considerably slower rate.

“Sublease space continues to be a major factor in both Sydney and Melbourne markets, at record highs of 350,000 sq m and accounting for 80 per cent of Australia’s total sublease space. Rising vacancy is expected to continue pushing incentives up, which will drive further declines in prime effective rents,” said Mr Curtain.

PCA’s data revealed a less drastic impact in all other major CBD markets where, despite double-digit vacancy figures, less drastic increases were clocked.

As such, Canberra’s rate remained unchanged at 10.1 per cent, while Brisbane inched up to 13.6 per cent from 12.9 per cent. Adelaide’s vacancy rate expanded to 16.0 per cent from 14.3 per cent, while Perth’s edged up to 20.0 per cent from 18.4 per cent.

But Mr Curtain is confident market activity will rebound in the smaller major cities.

Referencing CBRE’s research, he suggested that Brisbane should enjoy a rebound as a result of growth in resources, health and public sectors, while Perth is tipped to be one of a few markets across the country where the vacancy rate is expected to drop in 2021. 

Canberra too is set to enjoy “strong market demand” as a result of federal market activity, while Adelaide’s office market is predicted to record “stronger market performance” on the back of an increase in white-collar jobs.

Recent deals prop up interest in CBDs

PCA’s data also held some good news, with strong interest in commercial property evidenced in recent deals.

In late 2020, a series of major pre-commitment transactions were recorded in Sydney, Melbourne and Adelaide totalling over 40,000 sq m to both public and private sector users, the CBRE reported.

“These long-term lease commitments are an important sign to the market that office-based working remains the preference for most organisations going forward,” Mr Curtain said.

CBRE’s most recent Asia Pacific tenant engagement surveys indicated that most corporates will seek to bring the majority of their staff back to their corporate office but offer employees greater locational flexibility and more generous workspace ratios to achieve acceptable social distancing.

“While the impacts of COVID continue to weigh on transactional activity and vacancy rates across Australia, we are optimistic that the office sector will witness renewed vitality and activity in 2021,” Mr Curtain said.