Office market remains volatile – HTW

Demand still low despite apparent return to pre-pandemic activity levels

Office market remains volatile – HTW

The commercial (office) market is currently experiencing a phase of instability, marked by continued high vacancy rates and incentives, despite central business districts (CBDs) showing signs of returning to pre-pandemic activity levels, according to the latest Herron Todd White (HTW) monthly review.

The report cited recent figures from the Property Council of Australia (PCA) showing that the upward trend in vacancy rates persisted into January. The total vacancy rate for national CBD office spaces reached 13.5%, an increase from 12.8% in July 2023. This represents a notable rise from the 8% vacancy rate observed in January 2020, before the pandemic struck.

Specific cities have seen varied changes in their vacancy rates. Sydney’s vacancy rate rose slightly from 11.5% to 12.2%. Melbourne and Adelaide experienced more substantial increases, with Adelaide’s rate jumping from 17% to 19.3% and Melbourne’s from 14.9% to 16.4%. Perth was the outlier, recording a decrease in vacancy rates, while other capital cities remained relatively stable.

“Tenant requirements have changed, which has led to a shift in demand,” Angeline Mann (pictured), commercial director at Herron Todd White, said in the HTW February 2024 Month in Review report on the movements and trends for Australia’s property markets.

“Flexible work spaces remain a common theme among all the capital cities, along with a preference for premium and A Grade space. Most markets around the country are reporting stronger demand in this space. This is evidenced by the lower prime vacancy rates compared to the secondary market.

“Looking ahead, we expect rental rates to stay flat. Incentives remain high across the country with some locations reporting incentives of up to 40%. Given these overall leasing market conditions, general market conditions and the high incentives being reported, we do not expect any substantial growth in rents this year.”

In 2023, predictions pointed towards continued volatility and uncertainty in the office market, with major Australian cities experiencing downward pressure on property values. Factors such as interest rates and diminishing investor demand, driven by high vacancy rates and negative market sentiment, have contributed to a softening in yields in certain areas by up to two basis points.

Transaction activity in major cities has been limited, making it challenging to gauge the full extent of market softening. Agents have reported fewer enquiries, and at the lower end of the market, buyers are showing increased caution, leading to a retreat from the market.

“The challenges in the office market are likely to continue for some time particularly as we navigate generally weaker economic conditions,” Mann said. “Any interest rate cuts are not likely to have an immediate impact on this market and will take time to have any positive effect.”

Want to be regularly updated with mortgage news and features? Get exclusive interviews, breaking news, and industry events in your inbox – subscribe to our FREE daily newsletter. You can also follow us on Facebook, X (formerly Twitter), and LinkedIn.