This article is from the Australian Property Journal archive
PRIME CBD office rents have declined by as much as 6.7% over the year, but leasing enquiry was solid and tenants’ need for more space due to ongoing social distancing requirements is expected to dampen the impact of COVID-19.
Cushman & Wakefield’s latest Q3 2021 CBD office figures, prime gross effective rents in Sydney have declined by 6.4% year-on-year, Brisbane by 0.3% and Melbourne prime net effective rents fell by 6.7% over the period.
Although leasing activity in Sydney remained relatively solid in the Q3 2021, elevated vacancy continues to put upward pressure on incentives, rising from around 34% in Q2 to 35%.
Prime grade gross face rents are averaging $1,355 sqm per annum. Premium, A grade and B grade gross face rents averaging $1,495, $1,275 and $1,030 respectively. Across the grades gross incentives ranged from 30% to 39%, generally higher in the lower grades or where lease terms were longer.
As a result of the higher incentives, prime gross effective rents fell 0.8% quarter-on-quarter (QoQ) and are down 6.4% year-on-year (YoY). Prime gross effective rents ranging from $745 to $1,000 sqm pa with an average of $885 sqm pa.
Brisbane gross effective rents have remained stable in both the Premium and A grade office markets after the fall in Q1, with gross effective rents averaging $540 and $410 per sqm respectively. Prime declined by 0.3% to $445 per sqm.
B grade recorded a $5 drop in average gross effective rent over Q2 2021 and remain at $430 per sqm per annum. Incentives in Premium and A grade markets have remained the same since Q1, with gross incentives averaging 37.5% and 41.5% respectively. B grade incentives remain at 45.0%, having recorded a slight increase in Q2.
Melbourne continues to feel the impact of rolling lockdowns with prime net effect rent declining by 6.7% to $390 per sqm over the year.
C&W senior research analyst Jake McKinnon and head of research John Sears said net incentives stabilised in Q3 2021 and are expected to remain at these levels for the remainder of the year before falling as the recovery gathers pace in 2022 and workers return to the CBD.
Premium grade net incentives are 39%. The average A grade net incentives were stable at 41%. Currently, B grade net incentives are 38%. Premium grade net face rents were up slightly over the quarter to average $695 per sqm, A grade were also up slightly and average $635 per sqm. There was also a slight rise in B grade net face rents with rents averaging $530 per sqm.
Despite weaker rental growth, leasing enquiry has held up.
A recent Fitch Ratings survey shows the sub 500 sqm market was the most active.
Prior to the latest lockdown in Sydney, C&W found a range of office tenant demand indicators are turning positive including business conditions, financial markets and employment.
“Although there has been some fluctuations, these have remained more-or-less stable. Anecdotally, Cushman & Wakefield’s office leasing team reports solid enquiry in Q3, though some larger tenants continue to reassessing their space needs due to ongoing social distancing requirements and the rise in flexible working, dampening the impact of the improved economy on tenant demand.” McKinnon and Sears said.
Slightly more than 150,000 sqm (sqm) of new and refurbished space is anticipated to come online in the Sydney CBD over 2021. This includes the newly constructed Wynyard Place (68,808 sqm) as well as over 80,000 in refurbished space. Pending pre-commitment, the potential exists for over 1,000,000 sqm of supply to enter the CBD market over the next eight years. In addition to Wynyard Place, notable premium grade towers currently underway include Salesforce Tower (54,000 sqm with 50% pre-committed) and Quay Quarter Tower (88,000 sqm with 87% pre-committed) are due to complete in 2022.
In terms of current and future demand in Melbourne, business confidence is strong and smaller, local businesses are making decisions on three-and five-year terms.
C&W national director of research Tony Crabb said larger tenants are slower to commit with many opting for short term extensions.
“Workers return to the office has been kept to a maximum of 25% by government decree. The rollout of the vaccine over the final quarter of 2021 can be expected to see the lockdown end and a return to higher levels of occupancy in 2022.”
Demand in Melbourne’s office market is led by demand for sub-500sqm spaces, which Knight Frank suggests is evidence of a move to more flexible, agile working spaces post-pandemic. The number of sub-500sqm deals in the first half of this year had almost surpassed the total number recorded in 2020, and the average size of new leases in the period was 1,978 sqm – noticeably below the average level of 3,312 sqm in 2020.
C&W found 351,900 sqm of stock was added in 2020 and 65,500 sqm was withdrawn, the first six months of 2021 saw a mere 13,200 sqm added and 13,500 sqm withdrawn. A further 157,400 sqm of new and refurbished space is due for completion in 2021, of which over 66% is precommitted. A further 185,900 sqm is due for delivery in 2022 though some of this supply may be delayed.
In Brisbane there is currently one project under construction, 80 Ann Street, which will deliver 60,000 sqm to market in early 2022.
McKinnon and Sears said there are a number of projects at various stages of planning and approvals, however the timing and probability of when and if these projects come to market is currently unknown.
Deloitte Access Economics estimates office related white collar employment in the Brisbane CBD decreased by 1,120 in 2020, while the latest employment forecasts expect the white collar employment recovery to be swift, with an increase of 4,300 employees in the CBD in 2021. This is also evidence by an increase in larger briefs coming to market and increased levels of enquiry.
Meanwhile Knight Frank’s latest research shows Prime Adelaide and Canberra office yields have tightened by 80 and 50 basis points respectively. Perth and Brisbane yields also firmed by 10 bps each, to 6.4% and 5.6%. Adelaide yields are at 6.1%, and Canberra’s at 5.9%.
There has been $9.8 billion of office buildings traded in the year to date for $10 million-plus deals, and this is expected to climb to around $15 billion by the end of the year – well in excess of the 2020 total of $11.4 billion.
Benjamin Martin Henry, Real Capital Analytics head of analytics – pacific, recently told Australian Property Journal’s Talking Property podcast, that industrial is catching up to office.
