As we enter the new financial year, this month’s Last 30 instalment focuses on the commercial office market and the latest statistics from the Property Council of Australia (PCA).
The backdrop is a challenging economic environment, and indicators generally point towards further deterioration.
The July 2024 edition of the PCA Office Market Report, released on 1 August, shows a slight decrease in the national office market vacancy, down to 14.6% from 14.8% in the first six months of 2024. Key CBD vacancy headlines include:
- Vacancy decreases in Sydney (12.2% to 11.6%), Brisbane (11.7% to 9.5%) and Adelaide (19.3% to 17.5%)
- Melbourne CBD Vacancy increased to 18% but did not hit the highs of 20%, as some predicted.
- Other cities increased or remained flat - Canberra (9.5%), Perth (15.5%), Hobart (2.8%), Darwin (14.4%)
While owners in some locations will take comfort in even a mild vacancy contraction, no headline-grabbing improvement in performance was observed, as Australia continues to flirt with recession and occupier trends remain defiant against any wholesale return to the office.
The office sector continues to grapple with historically high vacancy rates, a result of strategic decisions made by businesses. These decisions, driven by a combination of workers staying at home and businesses realising the potential of a smaller office footprint, are shaping the future of the market.
This was evidenced by a July survey revealing that 19 of Sydney's 25 biggest office occupiers have cut their footpints by a combined 200,000 sqm. Owner representatives Lorraine Lee of Dexus and Adam Crowe of Investa at the PCA Office Market Breakfast in Sydney were in fierce agreement that the quality of tenant amenities in new and heavily upgraded assets is the key to fighting this tide, with solid leasing performance in new buildings such as 39 Martin Place in Sydney held up as examples.
This was further evidenced as the PCA statistics shows the “flight to quality” plays out in real time, with national B grade vacancy elevated at 17.1% compared to premium grade vacancy at 12%. Neither are historically healthy figures; however, the very real concept of “stranded assets” is now becoming more prevalent in discussions as the economics of investment in lower-quality buildings walk a delicate tightrope.
While asset quality, tenant amenities and sustainability are consistently regarded as critical response trends, commercial owners face balancing cost control in an inflationary environment with investing in highly people-centric amenities.
The result is that shared spaces are becoming even more creative in their design, execution, and accessibility. They are no longer simply a solution for hard-to-lease spaces but rather the critical selling point for office assets. Recent examples where the bar has been raised include spaces accessible to every tenant in a building, including the top floor of 111 Eagle Street in Brisbane. In comparison, 66 King Street in Sydney has been relaunched with a stunning rooftop offering tenants a Wi-Fi-enabled shared rooftop, inspiring a new wave of innovation in the market.
On the other hand, outgoings are becoming a key battleground, as office owners look to extract any competitive advantage from a cost centre that has blown out significantly in recent years due to labour and materials costs. Competitive owners are already drilling down deeper than ever, with insurance premiums a key focus, where independent conflict-free advice on asset replacement cost is in growing demand from the Acumentis Valuations and Asset Advisory team.
Looking at capital markets, Brisbane was the site of a growing list of examples illustrating the office market value correction, with Quintessential acquiring 240 Queen Street for a reported $250m - reflecting a 17% drop from Brisbane CBD A grade values. This on the back of Sydney’s 5 Martin Place transacting at a discount of 24% from peak market values adds evidence to the levels of market correction, albeit still with historically low transaction volumes to reference.