CBD Office: Slightly more than 150,000 square metre (sqm) of new and refurbished space is anticipated to come online in the Sydney CBD over 2022. Leasing activity remained solid and rents generally stable in Q4 2021. The average Prime grade incentive remains at 35% and gross face rents continue to average $1,355 sqm per annum (pa). Although the Omicron variant has increased the downside risk to this forecast in the short term, barring further economic restrictions growth may be pushed back into the second half of 2022.
Metro Office: Rental conditions in Sydney office markets have stabilized do a degree after a period of weakness caused by the COVID-19 pandemic. Incentives remain elevated and continue to drift higher across most submarkets. Tighter conditions are beginning to emerge in some pockets of the market, such as North Sydney Prime. After more than 300,000 square metres (sqm) of new office space hit Sydney metropolitan office markets during 2020 and more than 200,000 sqm during 2021, only 120,000sqm of new supply is set to hit the market over the next 24 months.
According to Jamie King, National Director, Office Leasing at Cushman & Wakefield, Sydney CBD’s flight to quality remains key with Premium stock high in demand.
“The first two weeks of 2022 saw approximately 30 new briefs in the market with requirements totalling circa 18,000sqm, a positive sign for the year ahead.
“Existing quality fit outs and new build fit outs are the key focus for tenants, as opposed to refurbished suites. Working from Home pressures continue along with a fight for talent, resulting in tenants keen to place make their new office providing reason for a return from staff.”
CBD Office: As Australia’s economic growth rates improve, so too are the proportions of that growth contributed by our two largest States. Net incentives stabilised in Q4 2021. The consolidation of incentives is reflective of a market that has seen a welcomed increase in the number of enquiries, but still has a variety of tenant options available across quality office accommodation.
As the recovery gathers pace in Australia’s two biggest States hit hardest by COVID 19, their return to greater proportions of our economy should also be reflected in workers returning to the CBDs. Premium grade net incentives are 39% for the third consecutive quarter. Metro Office: In terms of current and future demand, business confidence is strong and smaller, local businesses are making decisions on three- and five-year terms. 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.
According to Chas Keogh, National Director and Joint Head of CBD Office Leasing at Cushman & Wakefield, the Melbourne CBD office market has become quite segmented, and incentives aren’t necessarily the key story anymore, although they look to have stabilised, with landlords being able to hold face rents steady.
“With the ‘flight to quality” story playing out, tenants in particularly larger tenants are showing signs of confidence in the future of the workplace. Many larger deals completed at the end of last year such as WSP, Aware Super and Medibank are testament to that.
“Smaller tenants do have greater optionality by comparison to larger occupier however that isn’t abnormal in any market. However, what it does highlight for landlords targeting these tenants is that how they position their asset needs to fast tracked and proactive. They need to be aggressive in showing tenants that they covet them. Buildings with additional amenity such as third spaces and an operating cafe have proven attractive in this market. Whilst ESG is imperative the influence on a tenant’s decision is more significant on larger occupiers than smaller ones.
Ben McKendry, National Director, Head of Metropolitan Leasing VIC at Cushman & Wakefield said record rents are being achieved across several fringe markets including St Kilda Road, South Melbourne, Cremorne, and Collingwood.
“Face rents are being supported by higher than normal incentives however we are seeing incentives begin to head lower as supply tightens. Refurbished space is leasing well across the city fringe with Tenants moving into new buildings and using incentives to build new fit outs that encourage staff back into the office.
“Flight to Quality is a consistent theme across the market, the supply of new buildings of A grade quality in top locations hasn’t been seen before and we believe supply will tighten up significantly across the A grade market in 2022 and 2023 which will flow through into the refurbished B grade market allowing these owners to capitalise also.
“Non refurbished stock will continue to struggle to attract tenants as owners who meet the market by offering extra amenity will see continued strong lease activity”.
CBD Office: Gross effective rents have remained stable in both the Premium and A grade office markets across 2021, with gross effective rents averaging $540 and $410 per square metre per annum, respectively. B grade gross effective rent remains at $340 sqm pa. Like the rents, incentives in Premium and A grade markets have remained stable for 2021, with gross incentives averaging 37.5% and 41.5% respectively. B grade incentives remain at 45.0%, having only recorded a slight increase in Q2.
Peter Dodd, QLD Head of Office Leasing at Cushman & Wakefield said “The start of 2022 has been met with enthusiasm by occupiers and landlords.
“Tenants are looking to upgrade accommodation where possible and are recentralising into inner fringe and CBD locations. We expect to see rental growth in Premium and A grade buildings”.
Ed Howard, Associate Director, Commercial Sales & Leasing at Cushman & Wakefield Gold Coast, said High grade/A grade has performed best across the Gold Coast in terms of vacancy absorption while the lower grade buildings have lagged or slightly increased in vacancy.
“Several new office developments are currently under construction in different parts of the city with most of them 'spec' builds without pre-committed tenants. This increase in spec construction hasn't really been seen since the mid 2000's.
“The 'strata' market is performing well with most of vacant office strata being purchased by owner occupiers.
“Notably the Gold Coast strata office market makes up about 30% of all office space that exists in the city, being the highest concentration of strata titled office property compared to any other city/office market in Australia”.
According to James Cox, Director WA – Valuation & Advisory at Cushman& Wakefield, Face rents within Premium and A-Grade office buildings in Perth have remained relatively stable for the past 12 months whilst incentives remain at historical highs ranging from around 45% to 55% depending upon the face rent, lease term and quality of covenant.
“We are seeing a higher percentage of longer (7 to 10 year) lease terms being negotiated for Premium and high A grade space as tenants seek to lock in historically high incentives, with a flight to quality and centrality being a continued theme from tenants moving away from older secondary office stock”.