Australia is witnessing a historic surge in office vacancy rates, reaching 14.8%, the highest in nearly three decades, primarily driven by the adoption of flexible work models and the exit from older buildings, especially those outside Central Business District (CBD) cores, The Australian Financial Review reports.
This trend marks a 50% increase over the average vacancy rate.
The situation is exacerbated by an influx of new office spaces entering the market, coinciding with diminishing demand.
As corporate leases expire, many companies are reconsidering their office space requirements in light of the growing preference for hybrid work arrangements and an uncertain economic growth outlook.
Negative demand
Property Council chief executive officer Mike Zorbas said: "We've now recorded successive periods of negative demand, a phenomenon last seen in the early 2000s. The 2021 spike in supply continues to impact markets nationwide."
The impact is most acute in older office spaces and those located outside CBD cores. The Property Council's biannual CBD office markets update revealed a higher vacancy rate of 14.5% in secondary CBD offices, compared to 12.9% in prime offices.
The latter half of 2023 saw a rapid increase in the headline CBD office vacancy rate, rising by 70 basis points to 13.5% in the six months leading to January, significantly outpacing the 20 basis point rise in the first half of the year.
Zorbas observed a divergence in the office sector, with higher-quality and well-located offices showing more resilience.
However, exceptions exist in Sydney and Adelaide, where prime office space vacancy rates diverged from this trend.
Sydney CBD office leasing specialist Cadigal director Mark Tindale said the harbour city’s prime vacancy rate of 12.5% – 70 basis points higher than for the secondary market – was largely due to the performance of a few specific office towers rather than the entire prime office market.
“With most of Sydney's core premium buildings being at or near 100% leased, many tenants with leases expiring in the next 18 months face an acute shortage of alternatives for premium space to consider for relocation,” he said.
“The non-core prime market, however, faces higher vacancy, less demand and thus, offers more choice for tenants. Accordingly, incentives will likely remain elevated in locations such as the western corridor, midtown and southern CBD.”
Building grade disparity
Kernel Property’s Steve Urwin highlighted the growing disparity between building grades, predicting further challenges for lower-grade and non-core office towers in Sydney, especially with new developments like 39 Martin Place and 33 Alfred Street set to increase supply in 2024.
In Adelaide, the launch of One Festival Tower led to an increase in prime market vacancy, contrasting with the city's secondary building sector.
Melbourne's CBD experienced its third consecutive period of negative demand, pushing the vacancy rate from 14.9% to 16.4% in the past six months due to new openings at 500 Bourke Street and 300 Flinders Street.
Vacancy rates in Brisbane, Canberra, Hobart and Darwin showed slight changes, while Perth was the only capital city to see a decrease, from 15.9% to 14.9%.
Despite high vacancy rates, there is optimism with physical CBD occupancy rates improving to 70% of pre-COVID levels in the third quarter, up from 55% a year earlier, according to CBRE's Tom Broderick.
Zorbas added: "There's been more discussion about the benefits of face-to-face in balance with flexible working.
“We anticipate a lag in these trends reflecting in vacancy figures over the next 12 to 18 months."