Three things that prove the flight to quality trend persists in Australia’s office sector

Flight to core and flight to CBD themes are now more evident than ever.

The third quarter of 2023 was mixed for the Australian office sector with rent growth tapering. According to Dexus Research, Brisbane and Perth CBDs saw positive net absorption, reflecting the continued strength in these markets. 

Sydney CBD saw its second successive quarter of negative net absorption (-25,000sqm). As this was largely driven by withdrawals, the impact on vacancy was modest. 

Here’s more from Dexus Research:

Melbourne CBD saw a decline in net absorption brought on largely by an increase in sublease space from the finance sector. The leasing market has been characterised by consolidations among larger firms and expansions among smaller firms. Vacancy rates declined in Brisbane and Perth and remained stable in Sydney and Melbourne. 

Flight to quality is a key theme in the office sector, with ‘flight to core’ and ‘flight to CBD’ themes emerging. Tenants are moving from lower-grade spaces to higher-quality office stock, centralising from outside the CBD and taking up space in core CBD locations. Examples of these trends include:

▪ Net absorption is higher for premium stock in each of the CBD markets than any other grade 

▪ Vacancy in non-CBD markets North Sydney and Parramatta has risen markedly compared to that of the CBD 

▪ The Sydney CBD core has the lowest vacancy among the CBD precincts and saw 60,000sqm of net absorption over the past year while all other precincts saw declines 

Rising cap rates and higher construction costs have put pressure on development feasibilities, limiting potential supply in the medium term. The supply pipeline in Sydney for FY24-26 is slightly above average, but pre-commitments are strong. Melbourne saw significant completions over the past few years but has a much more benign development pipeline going forward.