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Tenant CS share their latest quarterly market report on the Australian CBD office leasing market
Tenant CS's latest commercial real estate update provides a snapshot of the Australian CBD office leasing markets.
Sydney CBD office market trends
- Uptake in renewals to reduce passing rents
There has been an uptick in lease renewals among tenants who previously secured space with spec fit-outs, providing the space still works for them. Instead, these tenants are opting to fully utilise their incentives as rental abatements resulting in up to 35% reduction in rent.
- Smaller tenants take up more space in top towers
Out of 575 companies that have moved over the past three years, 38% upgraded to higher quality buildings, 11% of which are in the sub 200-250 sqm range.
- Lower demand
Tenant demand is lower than pre-COVID levels highlighted by a negative absorption rate of -69,200 sqm. However, varied submarket performance indicates a tenant preference for prime buildings in CBD-core locations.
- ESG
More tenants are gravitating towards higher-grade assets that boast strong NABERS Ratings. However, cost is still a factor.
- Limited Premium options in the core
There has been an increased demand for premium spaces in core CBD locations. However, premium vacancy is higher outside these areas.
- Decline in office values
Office values remain a key talking point, with Prime CBD office towers experiencing a steep decline since mid-2022. For instance, on March 28, Mirvac sold its 50% stake in 255 George Street for $364 million (a 17% discount).
Melbourne CBD office market trends
- Economic Overview
Australia’s GDP grew by 0.2% this quarter, but per capita growth declined. With Melbourne’s unemployment rising to 4.5%, labour oversupply may impact office mandates and workspace demand.
- Low upcoming stock
A limited amount of stock will come online over the next few years. Coupled with stock withdrawals, this may bring some stability to Melbourne's vacancy rate.
- Project delays
Low pre-commitment levels are leading to project delays, with 17 Bennetts Lane, 85 Spring St, 600 Collins St, 60 & 52 Collins St and Stage 2 of 555 Collins already affected.
- Rise in owner-occupation
A growing number of businesses are making the shift to owner-occupation, with increased demand in suburbs like Cremorne, South Yarra, and Toorak.
- Flight to quality
Melbourne has the country's lowest return-to-office rate, with businesses increasingly prioritising amenities, location, and workspace quality to encourage a return to office.
- ESG
More tenants are gravitating towards higher-grade assets that boast strong NABERS. But cost remains a factor.
- Falling property values
The value of prime CBD office towers has fallen by circa 20-25%. For instance, 628 Bourke Street is currently under offer at $120 million (a 33% decline).
Brisbane CBD office market trends
- Government uptake of Prime space
Significant activity is being observed in A-Grade assets, with government tenants transitioning from B-Grade spaces. However, in Q3 the State Election temporarily halted government leasing requirements.
- Rising interest from smaller tenants
With government leasing activity slowing in recent months due to the state election, smaller tenants (under 1,000 sqm) are now driving demand for office space.
- Lack of new supply
Over the next three years, less than 100,000 sqm of office space is expected to come online, with no significant injections until H2 2025.
- Project delays
The ABS has reported a 31.1% increase in construction costs nationwide. Coupled with QLD’s trades shortage, this has hindered new developments and placed downward pressure on supply and vacancy rates.
- Oversupply of spec fit-outs
In 2023, the leasing rate for speculative fit-outs was reported at just 58%, with B-Grade speculative fit-out leasing sitting around 43%.
- Flight-to-quality
There has been an appetite for higher-grade stock in good locations with efficient floorplates, quality fit-outs and premium amenities. This low leasing rate may prompt some landlords to reconsider their strategy.
To read Tenant CS's full CBD Leasing Markets Q3 Office Snapshot, click here.
Source: Tenant CS
