Office Market Resilient Despite CBD Vacancies


Commercial transactions are forecast to top $15 billion by the end of the year, despite high vacancy rates in one of the country’s biggest CBDs, according to a Knight Frank report.

Almost $10 billion of office space has been traded in the year to date, and prime office yields have compressed across all major office markets, signalling an improvement and faith in the resilience of the commercial sector.

Melbourne’s office vacancy rates grew 2 per cent to 10.4 per cent in the first half of 2021 as the city’s CBD continues to languish in lockdown. In January 2020 the office vacancy rate was about 3.2 per cent.

Kepler Analytics foot traffic data shows a 97 per cent drop in foot traffic across Melbourne’s CBD compared to same time in 2019, pre-Covid.

But the roadmap for a return to the office is inspiring confidence in the market, according to Knight Frank Australia chief economist Ben Burston.

“The return to yield compression in prime office markets is revealing in that it comes in spite of higher vacancy and continued movement restrictions,” Burston said.

“It speaks to the strength of the impact of lower interest rates and to the weight of investor demand, particularly from offshore capital, seeking to allocate into the Australian market.”

Change in prime CBD office yields in third quarter 2020, 2021

CityQ3 2021Q3 2020Basis points change

^Source: Knight Frank

Burston said yield compression in the smaller office markets of Adelaide and Canberra of up to 80 basis points showed the balancing effect of the pandemic.

“Prior to the pandemic, the stronger rental growth performance of Sydney and Melbourne was commanding a substantial premium in terms of lower yields,” Burston said.

“However, with the near-term rental outlook now more subdued, there is less of a difference between the prospects of different cities and this is being reflected in office yields.

“Notwithstanding higher vacancy rates, clearly investors are optimistic about prospects for the office market beyond the pandemic.

“We expect that the current momentum will carry forward into 2022 with office yields likely to maintain a downward trajectory aided by economic recovery and the release of pent up demand in leasing markets.”

Office transactions greater than $10 million are expected to total about $15 billion at the end of the year, well in excess of the $11.4 billion in transactions of 2020.

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