Australia’s office leasing markets show signs of recovery in Q2
One of the demand drivers were tenants seeking small spaces of less than 1,000sqm.
Against the challenging back-drop of the pandemic, Dexus Research says office demand is steadily improving. In a recent report, Dexus Research said positive hiring intentions have led to strong white collar employment growth in the year to May 2021 in NSW (18.3%), Victoria (34.1%) and WA (17.3%).
“Lead indicators have been strong with business confidence and advertised jobs for professionals both running at high levels. The current NSW and Victorian lockdowns are expected to reduce confidence and leasing activity but not derail the recovery.”
Here’s more from Dexus Research:
The recovery was apparent in leasing markets with positive net absorption across the major CBD office markets in the June quarter (see Figure 7). Demand has variously come from small tenants (<1000sqm), the IT industry, firms centralising into the CBDs and a flight to better quality space.
Vacancy in the Sydney CBD rose in the June quarter, due to the completion of several developments, which, while largely pre-committed, still had around 18% of space available. Positively, sub-lease space continued to fall. In the Melbourne CBD, while sub-lease vacancy rose further (to 3.9% of stock), quarterly net absorption was positive because of expansions and recentralisations into the CBD. In Brisbane the completion of Midtown Centre (53% pre-committed) contributed to a rise in vacancy rates.
While face rents held steady, effective rents in CBD office markets fell further in the June quarter due to rising incentives. High vacancy is likely to keep rent growth subdued in the short term.
Investment demand for high quality Australian office assets remains strong, with AsiaPac investors now more optimistic about office demand than investors in other regions according to a CBRE report. Sentiment going forward will depend on both the economic cycle and on further resolution of questions about the pace of the vaccine rollout, the re-invigoration of CBDs and how different companies manage the space requirements of their workforces.
Lead indicators positive, with white-collar employment growth strongest on record. Net absorption was recorded at positive 1,224 square metres in the Q2 2021. The vacancy to 13.2% in Q23. Positively, sub-lease space continued to fall from highs in Q4 2020. While prime net face rents rose 0.4% in Q2 2021, incentives also rose from 31% to 33%, leading to a fall in net effective rents of 3.0%. While leasing and demand metrics were turning more positive, the most recent lockdown will likely dampen sentiment and transaction activity for a month or two. Yields were stable in Q2 with a lack of office transactions.
Demand improves as physical occupancy rates rise steadily. While annual net absorption was recorded at -187,800 square metres in the year to June 2021, quarterly net absorption turned positive in June (6,575 square metres). Sub-lease space remains a concern, with 3.9% sub-lease vacancy recorded in Q2 2021, near record highs. There were several expansions from Financial Services and Government groups, with white-collar employment growth near record high levels. The vacancy rate was recorded at 14.1%, down 0.1% from the March quarter. Investment yields fell 10 basis points in Q2 2021, with a few sales transacting at passing yields between 4.2% and 4.3%.
Investor sentiment strong for Brisbane CBD office assets. Although the Queensland economy has been relatively successful in the management of the COVID-19 pandemic, the Brisbane CBD office market has not been immune to demand shocks and rental falls. Net absorption was recorded at negative 6,400 square metres in Q2 2021, driven by a number of contractions and an increase in sublease space being offered. The vacancy rate rose in June to 15.9%, albeit prime vacancy is lower. Effective rents held steady in Q2-21 (-0.5%), though they were down 7.4% from Q2 2020. Despite this, office sales were strong in Brisbane CBD, with strong interest still evident from a range of investors.
Green shoots flower in Perth CBD, with increasing leasing activity. The vacancy rate fell 50 basis points to 19.7% in June 2021, with healthy leasing demand and upcoming withdrawals of several buildings likely to edge this number lower. Quarterly net absorption was the strongest of all office markets nationally, recorded at 8,500 square metres in Q2 2021. Success in infection management and Perths distance from the rest of Australia has meant that occupancy rates are the highest of all major CBD markets. Investment yields fell 10 basis points in Q2 2021.