Office Values Down But Sector Not Out

Office asset values have chalked up their biggest falls in capital growth since 2009 with all investor and developers’ eyes on the sector ahead of reporting season.

Although storm clouds are looming over the sector, vacancy remains stable and a drop in new available stock has buoyed the asset values, which are down but not out.

Office asset values recorded a 5.2 per cent fall in capital growth in the second quarter for 2023 in the MSCI/Mercer Australia Core Wholesale Monthly Property Fund Index.

The data set for commercial real estate revealed the overall national return was -2.8 per cent including -3.4 per cent for retail and 0.8 per cent capital growth for industrial.

JLL Australia also released data for office vacancy in June, which remained steady at 14.4 per cent for the June quarter nationally.

Across the cities, Melbourne office vacancy climbed to 16.2 per cent, Sydney to 14.4 per cent, while Brisbane fell to 12.6 per cent, the biggest improvement in the country.

Nationally more space was leased than made available for the quarter, at 13,400sq m positive net absorption and 141,200sq m in the financial year.

Meanwhile, there was a hiatus in the supply cycle due to tight profit margins and a greater focus on pre-lease commitments as noted in Investa’s office development outlook.

Transactions have held their value with four commercial properties on Collins Street, Melboune, sold for a combined $11.21 million and 30 offers to purchase last month.

In Sydney, Centuria Capital Group sold its belltower office building at South Eveleigh for $18.25 million, 14 per cent above book value.

MSCI head of Pacific real assets research Benjamin Martin-Henry said the uncertain economic outlook coupled with the pressures of rising inflation and interest rates continued to take their toll.

“After months of speculation about when the market will see significant falls in value for the office sector, they have finally arrived. 
 
“The one month capital growth for June alone came in at -5.2 per cent, which drove the worst 12-month total return since early 2010.”

JLL Australia head of office leasing Tim O’Connor said demand for higher quality and more sustainable space was pronounced.

“Leasing enquiry and activity is concentrated in higher quality office buildings,” O’Connor said.

“We are seeing organisations upgrade their real estate requirements to create an environment that supports connectivity, collaboration and socialisation.”