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COMMERICAL OFFICE | Staff Reporter, Australia
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Sydney, North Sydney office vacancy rates see largest gains in Q4 2020

Vacancies increased 11.9% and 19.1%, respectively.

After an uncertain year for office markets, Dexus Research says an improvement in many of the key leading indicators signals a period of strengthening demand ahead. Business conditions recorded by the December 2020 NAB Business Survey were at the highest level since 2018. Professional job advertisements, an indicator of corporate hiring intentions, were up 31% on six months ago. Employment in white collar industries has grown by 2.5% over the past 12 months.

Vacancy rates have generally risen. A number of tenants have put surplus space on the market as a sublease, increasing the recorded vacancy rate. Sublease vacancy in the Sydney CBD stands at 3.3% of stock, however only part of it is competitive with prime space given the short tenure and quality of fit-out. The nature of sublease vacancy is that it can be quickly withdrawn if conditions improve. The total vacancy rates in Sydney and North-Sydney saw the largest gains past quarter, rising to 11.9% and 19.1% respectively.

Office building occupancy levels (the proportion of people actually in the office on a daily basis) remained below pre-COVID levels at the end of 2020, with Government guidelines, multinational sentiment and concerns about public transport the biggest deterrents. The risk of further clusters means it may take some time for work practices to move back towards pre-COVID levels.

Face rents held relatively steady in Q4 2020. However, effective rents fell significantly on the back of increasing incentives. The growing availability of space and competition to maintain occupancy suggests incentives will remain elevated for a considerable time. The anticipated end of the Job Keeper subsidies in March 2021 will be keenly watched, with small to medium sized occupiers more likely to be affected.

Here’s more from Dexus Research:

Sydney CBD

The Sydney CBD is feeling the effects of the pandemic following a mid-year slump in economic activity and ongoing mobility restrictions. Sydney CBD’s total vacancy rate rose further in the December quarter to 11.9%, as a number of occupiers handed back surplus space on a sublease basis. Annual net absorption was recorded at -278,000 square metres, the lowest yearly total on record. Face rents largely remained flat, however rising incentives led to net effective rents falling by 2.2% in the December quarter, bringing annual falls to 15.1%. Yields were stable in Q4 2020, albeit there was a lack of office transactions.

North Sydney

North Sydney’s vacancy rate lifted to 19.1% in Q4 2020, more than double the level in the previous year (8.5%) and considerably higher than the 10 year average. A sizeable supply pipeline expected to be delivered over the next 3 years (more than 20% of total stock) is likely to keep pressure on rents and incentives. While face rents held steady in 2020, competitive leasing deals saw a steep rise in incentives, leading to effective rents falling 9.3% in the past 6 months alone. Prime investment yields are estimated to have risen by 13 basis points over the latter half of 2020.

Macquarie Park

Like other office markets, Macquarie Park is experiencing weaker conditions. Net absorption was recorded at 21,000 square metres over the past 6 months, though this was largely due to the withdrawal of the Macquarie Technology Centre (11-17 Khartoum Rd) in December. A number of relocations by smaller occupiers led to a rise in vacancy rates to 11.2%, up from 5.3% the year prior. Although face rents grew marginally, rising incentives led to further falls in effective rents (-4.8% in the year to Q4 2020).

Parramatta .

Parramatta is feeling the effects of new supply at a time of weak demand. Effective rents fell 19% in the year to December 2020, in line with sharply rising incentives. A flurry of development activity over the past 5 years has meant that the market now has a distinctly two-tiered market, with newly built stock likely to attract a sizable rent premium over existing lower quality stock. Vacancy rates rose sharply over 2020, with prime vacancy rates reaching 9.1% in December 2020, up from just 0.9% at the start of the year. Interest in Parramatta's office assets remained strong, with prime investment yields estimates to have contracted slightly by 7 basis points over the latter half of 2020.

Melbourne CBD

Melbourne CBD has been impacted by the underperformance of the Victorian economy after two lockdowns in 2020. Annual net absorption in the Melbourne CBD was -189,000 square metres, with the vacancy rate rising to 13.2% in Q4 2020. While there is uncertainty about the level of tenant demand over the next 6 months, the leading indicators for Victoria are beginning to improve. Lockdowns have kept leasing volumes very low and rent falls over the past 6 months were less pronounced than expected, with net effective rents falling by 7.8% over the period. Incentives were estimated to have risen to 30% in Q4 2020.

Brisbane CBD

The Brisbane CBD office market has weathered COVID-19 better than the southern states due to the relative performance of the Queensland economy and management of the pandemic. Over the 2020 calendar year, net absorption was recorded at -50,000 square metres, driven by a number of contractions and an increase in sublease space being offered. The vacancy rate rose to 14.0% in Q4 2020 and the upcoming supply pipeline likely to put further upward pressure on vacancy rates in 2021. net effective rents contracted 0.6% in 2020 on the back of rising incentives. Like other markets, a lack of transaction activity saw prime investment yields hold over 2020.

Perth CBD

The Perth CBD market has been relatively insulated from COVID-19, with office occupancy levels consistently the highest of any CBD market nationally. Net absorption in Q4 2020 was +6,800 square metres as expansions and moves into the CBD by resources related groups surpassed a small number of occupiers offering sublease space. This helped to decrease the total vacancy rate by 0.1% to 20.0% in Q4 2020. Face and effective rents held steady. A considerable state budget surplus in conjunction with a strong resources sector and a limited supply pipeline offer green shoots for the long ailing market
 

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