Declining demand for CBD office space across Sydney and Melbourne has driven national vacancy rates up in the last six months.
CBD office vacancy rates nationally have risen to a near three-decade high, driven by weakening demand and an influx of office supply in Sydney and Melbourne.
The national CBD vacancy rate increased by 20 basis points in the last six months, from 12.6 per cent to 12.8 per cent, which was the highest rate since 1996, according to the Property Council of Australia’s biannual CBD office markets update.
Barangaroo Towers were among the offices that experienced contractions in demand. Louie Douvis
It was spurred by a contraction of office demand in the Sydney and Melbourne CBDs, which led to Sydney CBD’s office vacancy rate rising 20 basis points to 11.5 per cent, while Melbourne recorded a 90 basis point jump to 15 per cent.
Among Sydney’s major office contractions were Westpac at 275 Kent Street, various tenants at Lendlease’s Barangaroo Towers, the ATO relocating and contracting, and the Department of Corrective Services relocating and downsizing at 20 Lee Street.
In Melbourne, BHP downsized its office needs at 171 Collins Street, while the Department of Home Affairs did the same on the corner of Latrobe and Harbour Esplanade. Other downsizing and relocating moves included AustralianSuper at 130 Lonsdale Street and The Age at 655 Collins Street. The Age had previously moved to the Docklands headquarters of Nine, the publisher of this masthead.
Across both CBDs, more leases are set to expire in the second half of 2023, with the potential for some office towers to have as much as 30,000 square metres vacant.
Property Council chief executive Mike Zorbas said the decreased demand was due to companies downsizing based on outlooks predicting a global recession. With Australia on track to avoid a recession, he said an influx of migrants and heavy government investment into public transport infrastructure could counteract the negative demand.
Treasurer Jim Chalmers’ May budget forecast an extra 1.5 million migrants over five years, with a record 400,000 in 2022-23 and 315,000 in 2023-24.
But Mr Zorbas said negative demand was not the sole reason for higher vacancy rates in Sydney and Melbourne, citing above-average office supply additions since 2020. He said Melbourne’s office supply increases in particular were “substantially above average” – the highest since before the global financial crisis despite office demand not growing at the same pace.
“The very big peak in supply additions in 2021 and 2022 – well and truly eclipsing the average – explains a lot of where we are now,” he said.
Kernel Property’s Steve Urwin, a tenant advocate, said the Melbourne CBD had become overbuilt and vacancy rates would worsen.
“It’s bad now but the anticipated peak vacancy is not here yet. It’s atrocious at the moment, and it’s getting worse,” he said. “Last time we had this in Melbourne was in the early ’90s when the city was overbuilt. It really did take a couple of decades for the city to properly recover and now they’re building more and more stuff again.”
In a Q2 Melbourne office update, JLL said it expected Melbourne’s overall vacancy rate would not peak for another two to three years due to “the next wave of office supply which remains largely uncommitted from large occupiers”.
Mr Urwin also warned that the real vacancy rates across Australia could be even higher than indicated by the Property Council as it did not account for “shadow vacancies”, which is empty office space that continues to have rents paid on it despite being minimally occupied as a result of changing work patterns.
“There’s a raft of desks unoccupied. It varies from business group to business group, but you look at the banks’ huge vacancies that’s being held and sat on – we anticipate over time that will dissipate as leases come to an end and people take less space,” Mr Urwin said.
Like Sydney and Melbourne, Perth and Adelaide recorded higher vacancy rates over the last six months despite growing demand for office CBD space. The increases in vacancy rates were due to new office supply in those CBDs, which culminated in the Perth CBD’s office vacancy rate rising by 20 basis points to 15.9 per cent and Adelaide’s CBD office vacancy rate growing by 90 basis points to 17 per cent.
Brisbane and Canberra CBDs were exceptions to the growing vacancies trend as demand exceeded supply, resulting in vacancy rates dropping substantially to 11.6 per cent and 8.2 per cent respectively. In Brisbane’s CBD demand grew by 1.3 per cent, while no new offices were built over the last six months.
Outside of CBDs, the office headwinds from companies reassessing floor space needs were even stronger. For non-CBD offices, vacancy rates reached their highest levels in almost 30 years at 17.3 per cent.
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