Three years on from the start of the COVID-19 pandemic, office owners, landlords and investors are still navigating how best to respond to the structural changes being experienced by the entire sector. Workers are increasingly engaged in remote and/or hybrid working arrangements, resulting in a drawn-out return to the office seen across the country.

Despite the ongoing obstacles occurring nation-wide, recent reports into the country’s office market show Australian metropolitan CBDs are slowly recovering. H1 2022 figures reveal the total occupied stock in Australian CBDs is 1% higher than levels recorded pre-pandemic – a major achievement considering the significance of the sector downturn following COVID-19 lockdowns.1 CBRE’s recent Future of the Office Survey shows that over the past year, the adoption of hybrid working has increased, and so too has the need for adaptable and collaborative spaces as key priorities in new office designs. As such, the focus on finding and retaining the best possible employees and encouraging them back into the office has seen an upturn in owners responding to changing tenant requirements, including providing
fitouts which are multi-purpose and conducive to collaborative work.2


National office outlook – the key takeaways

The Australian office market experienced troughs and peaks in the first half of the year, with occupancy rates falling, rising and then eventually stalling. Factors at play influencing these yo-yoing figures were the ongoing COVID-19 pandemic coupled with a severe cold and flu season. A spike in demand for office space then followed, led by enquiries in Brisbane, increasing the national rate by 11% to more than 1.622 million sqm.3 Collier’s Office Demand Index for HY 2022 shows this increase was mainly driven by post-lockdown interest in the 3,000 sqm-plus market with the first six months of the year seeing an increase of 61,000 square metres enquired for, compared to the same period in 2021.

The BIS Oxford Economics latest Australian Property Outlook Report suggests the major CBD office markets are close to peak vacancy levels, or at best, in early stages of recovery.4 Of the major city CBD office markets only Canberra Civic bucked the national trend, recording a vacancy rate of approximately 6.5%, while all other cities recorded on or above 10%. And while in the major CBD office markets, net absorption has turned positive, the aforementioned uptick in supply, a protracted return to the office post-COVID-19 lockdowns, and increasing numbers of employees preferencing hybrid work arrangements means the sector’s recovery looks set to be prolonged.

Adelaide
The Adelaide office market continued to rise after its initial recovery in H2 2021, with demand for office space remaining positive in the six months leading to July 2022. With no new supply in the market, the CBD vacancy rate declined to an estimated 13.8%. There was stronger demand for prime grade assets with net absorption of 33,400 sqm, while secondary grade net absorption was -18,300 sqm, highlighting the “nationwide trend of the flight-to-quality with tenants favouring the Prime and A-Grade stock.”5 The forecast points to healthy net absorption over the next few years as the economy recovers and more businesses make leasing decisions.

Canberra
Of all major CBD office markets, only Canberra Civic managed a single-digit vacancy rate and remains in a position of relative strength, boasting the lowest vacancy rate of all the major Australian office markets, sitting at 6.5% in June 2022 before lifting to 8.6% in July. In the coming six months, there is expected to be a rise in office completions, though much of this supply is committed to public sector tenants. The announcement of the new Cabinet is expected to benefit the Canberra office market with positive net absorption projected for the next three years.

Brisbane
The Brisbane office market hit an estimated vacancy rate peak of circa 15% for the CBD in June 2022, but looks set to begin recovery as the rate dropped to 14% in July, and the market pulled ahead of other major CBDs by recording its highest demand in office space since 2017.6 The trend of solid net take-up is expected to continue into 2023 as workers return to the office and “as the economy and the office workforce expands at a healthy pace.”7 However, the recovery in vacancy rates will be slowed by the continued pipeline of supply expected in this FY, through to FY25, with BIS Oxford Economics predicting vacancy rates won’t fall below 10% in Brisbane till 2028.

Melbourne
Vacancy rates in the Melbourne office market are estimated to have peaked, reaching 12.9% for the CBD in July 2022, due to weak (though positive) net absorption and robust supply additions. In the medium term, the CBD’s supply cycle is set to be moderate, as are net absorptions with occupiers taking time to assess and clarify their office space requirements. CBD vacancy rates for 2023 are estimated to remain elevated before eventually decreasing to approximately 6.4% in 2029.

Perth
Perth’s office market recovery has seen mixed results, with robust completions in FY22 broadly matching positive net absorption, keeping the CBD vacancy rate at 15.8% as of July 2022. Office completions means the Perth office market remains heavily oversupplied and will continue this way until at least mid-20238. However, as the WA resources industry remained resilient throughout the COVID-19 pandemic, providing support to economic conditions, occupiers are gearing up to service strengthening resources investment and the strongly growing WA economy.

Sydney
In the six months to July 2022, the Sydney CBD office market vacancy rate rose from 9.3% to 10.1%, as supply outstripped modest demand. Net absorption across the market is expected to be positive but moderate near term, gathering more pace in the coming year as workers return to the office and more businesses commit to leases. However, it’s estimated that the ongoing supply cycle will keep vacancy rates above 9% for the next 12 months, with CBD vacancy rates expected to slowly decrease to approximately 5% by around 2028.


Attracting workers back to the office: fitouts and upgrades built-for-purpose

The role of the office has changed dramatically over the last three years, and while the pandemic accelerated the shift from office reliance to a more flexible and/or hybrid working approach, industry consensus is that the change was inevitable.9 But the power that face-to-face interaction and collaboration still offers is one of the main drivers for employers to move their entire workforce back to the office, which is why it’s still considered critical for businesses to retain a corporate address of some kind, and more importantly, spaces that encourage innovation.10 If offices provide spaces dedicated to the growing and changing needs of tenants, the floor space should be absorbed quickly. As such, office fitout upgrades are now an overarching theme within the Australian office market, with businesses committed to understanding the requirements of running an efficient and attractive workspace - now and into the future – and landlords seeking to keep occupancy levels stable. 11


Outlook for the remainder of 2022 and beyond

The COVID-19 pandemic and subsequent lockdowns have delayed a return to the office for many workers, and the shift to hybrid work will continue to dampen net absorption. However, the Australian CBD office sector is now slowly recovering from the impacts of the last three years with the focus now on enticing workers back to the office space and more importantly, understanding what facilities and features will keep them there in the longer term. Recent reports released by the PCA show that the current level of occupancy in office spaces is mainly due to workers’ preferences for greater flexibility including working from home, but the workplace is still at the core of a business – and it will attract people to firms and back to the office if the space is considered or custom-built for the tenant and its people.


Footnotes:
1.CBRE Research, Australian Office Figures Q2 2022, 2022
2.Property Council of Australia, July 2022 Office Market Snapshot, 2022
3.Australian Property Journal, Office leasing defies rollercoaster market, July 2022
4.BIS Oxford Economics, Australian Property Outlook Report, July 2022
5.JLL, Australian Tenant Perspectives, 2022
6.Property Council of Australia (PCA), Office Market Report June 2022, 2022
7.BIS Oxford Economics
8.BIS Oxford Economics  
9.McKinsey Global Institute, The future of work after COVID-19, 2021
10.JLL, Tenant Perspectives H1 2022, August 2022
11.JLL, Tenant Perspectives H1 2022, August 2022