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Covid-19 Pressure Pushes Office Tenants to Give Up Space

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Vacancy in Australia's previously-strong CBD office markets has increased a modest 1.2 per cent over the six months to July 2020.

According to the Property Council of Australia's latest Office Market Report—a key barometer for the take-up of office space around the country—the nation's notoriously tight CBD markets have remained resilient against the initial impact of the global health crisis.

“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,” Property Council chief executive Ken Morrison said.

“Vacancy rates have 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.”

In Melbourne, now a ghost town amid a second, harsher, lockdown, office vacancy rates have been directly affected with many large corporate tenants moving to give up space and weigh up their long-term strategy.

Since January, when the Property Council reported a 3.2 per cent vacancy rate, Melbourne's office vacancy rate has almost doubled to 5.8 per cent.

Vacancy rates, Australian CBD markets

MarketVacancy rate, Jul 20Vacancy rate, Jan 20Vacancy rate, Jul 19
Sydney5.6%3.9%3.7%
Melbourne5.8%3.2%3.4%
Canberra10.1%10.3%11.1%
Brisbane12.9%12.7%11.9%
Adelaide14.2%14%12.8%
Perth18.4%17.5%18.4%
Combined9.2%8%8%

^ Source: Property Council of Australia, July 2020

“Major lease transactions [in Melbourne] continue, albeit in lower volumes,” Savills Victoria state director Mark Rasmussen said.

“The delivery of significant new office supply and issues relating to Covid will continue to push up vacancy rates and lease incentives.

“Increased sub lease opportunities are providing further attractive options for tenants and currently fitted tenancies are the most popular.”

The vacancy rate for the Sydney CBD hit 5.6 per cent, up from 3.9 per cent in January, influenced by 1.2 per cent reduction in tenant demand.

All other CBD markets tracked have double digit vacancy figures with Canberra sitting at 10.1 per cent, Brisbane 12.9 per cent, Adelaide 14.2 per cent, and Perth 18.4 per cent.

Nationally, office vacancy increased from 8.3 percent to 9.5 percent over the six months, with 60,227sq m of office space absorbed and 353,255sq m of space added to the market. A total of 83,910sq m was withdrawn over the period.

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

All capital city markets recorded lower vacancy in prime over secondary stock.

Vacancy rates, Australian non-CBD markets

MarketVacancy rate, Jul 20Vacancy rate, Jan 20Vacancy rate, Jul 19
East Melbourne2.2%2.4%2%
Parramatta4.5%3.2%2.8%
Macquarie Park6.8%4.6%5.1%
North Sydney8%7.6%7.9%
Chatswood8.8%3.7%5.7%
Crows Nest9%7%6.9%
St Kilda Road9.3%8.7%7.7%
Southbank10.5%9.7%12.4%
Gold Coast13%12.8%12.9%
Brisbane Fringe14.2%13.6%13.7%
Adelaide Fringe14.2%13.6%13.7%
West Perth22.1%17.9%17.3%

^ Source: Property Council of Australia, July 2020

Office vacancy in sub-markets such as East Melbourne remain among the tightest in the country, shrinking to 2.2 per cent over the six months, compared to 2.4 per cent in January.

Sydney locations, such as Parramatta, Chatswood, Macquarie and Crows Nest markets, among others, saw vacancy rates lift, although rates remain well below the national average.

“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,” Morrison said.

“Vibrant CBDs drive investment, growth and productivity and must be part of our national recovery planning,”

Morrison noted that almost 1.2 million square metres of office space was still due to be supplied to CBD markets over the next two and a half years.

A total of 390,500sq m of stock is due to be added to CBD markets over the next six months with a futher 350,086sq m to be added in 2021.

Melbourne will also have to content with 200,000sq m of new and backfill space being added to the market over the remainder of the year, 82 per cent is which has already been pre-committed.

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Article originally posted at: https://www.theurbandeveloper.com/articles/property-council-office-market-report-july-2020