COVID-19 Has Modest Impact on Australian Office Markets So Far

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According to the Property Council of Australia’s most recent Office Market Report, the early stages of COVID-19 has so far delivered only a modest effect on office vacancy rates, reflecting the strong base settings for most CBD markets at the outset of the pandemic.

The report noted that Australian CBD and non-CBD office vacancy increased from 8.3% to 9.5% over the six months to July 2020 with flat tenant-demand overall. Despite COVID-19, aggregate Australian vacancy remains below its historic average, with the key Sydney and Melbourne CBDs sitting at less than 6% vacancy (office vacancies are calculated on the office space being leased, not whether tenant employees are occupying the space or working from home).

Commenting on the report, Property Council Chief Executive, Ken Morrison said: “The impact of COVID-19 on our CBDs and office markets is still at an early phase, but so far the pandemic has had only a modest impact on vacancy rates. Office markets started this pandemic in good shape, with incredibly low vacancies in Sydney and Melbourne, and strengthening positions in most other markets. Vacancy rates increased over the past six months, but tenant-demand has so far been flat, not falling, and overall vacancies are still below the historic average.

“It’s a reminder that office markets have been resilient in the first stage of COVID-19, despite the fact that many office workers have spent months working from home.

“While there’s plenty of commentary about the ‘end-of-the-office’, the data doesn’t suggest this. There’s a long way to go as business works its way through the economic and social impacts of COVID-19.

“Sublease vacancy in capital cities – a key metric in falling markets – increased by 0.2%, but this is still at modest levels compared to previous downturns.

“The reactivation of our CBDs and office buildings will be an important element of our economic recovery in coming months, and something that all levels of government will need to consider carefully. Vibrant CBDs drive investment, growth and productivity and must be part of our national recovery planning.”

Sydney CBD’s vacancy rate was 5.6% (up from 3.9% in January), mostly influenced by 1.2% reduction in tenant demand. Melbourne CBD’s vacancy rate was 5.8% (up from 3.2% in January), but mostly impacted by a 4.6% increase in additional office supply. Vacancies in other capital cities were: Canberra 10.1%; Brisbane 12.9%; Adelaide 14.2%; and Perth 18.4%.

While almost 400,000 sqm of new office space will come onto capital cities markets in the remainder of 2020, Melbourne CBD will account for 48% of this, of which 82% is already pre-committed. Almost 1.2 million sqm of office space will be supplied in CBD markets over the next two-and-a-half years.

Future supply

A total of 631,062 sqm of stock is due to be added in the second half of 2020, more than twice the six-month historic average of 311,113 sqm. In 2021, a further 471,006 sqm is due to come online, while 853,400 sqm is due to come online from 2021 onwards. A total of 888,828 sqm is mooted (436,054 sqm in CBDs and 452,774 sqm in non-CBDs).