Smaller Offices Drive ‘Surprise’ Demand Bounceback

“Nimble and agile” smaller tenants are fuelling the ongoing rise in office space interest, according to Colliers.

Data from Colliers suggested that the “need for office space post-pandemic has bounced back”, mirroring some of the findings of the Property Council’s latest Office Market Report.

Potential tenants enquired about 1.69 million sq m of office space in the second half of 2022, marking a surprising uptick of interest, particularly from the smaller end of the market.

While national occupier enquiry across all office markets slowed slightly towards the end of 2022, there was a “record-breaking” quarter in the third quarter of the year. 

Potential tenants enquired about nearly 958,000sq m in that period, according to Colliers’ Office Demand Index, and there was sustained interest in the sub-1000sq m section of the market, which has also prompted interest by developers in speculative suites.

Leasing deal activity recovered well, growing 5.2 per cent in the first half of 2022, although momentum slowed due to economic growth concerns into 2023.  

Despite this, Colliers’ leasing volumes still surpassed 2021, up 4 per cent on the number of deals. 

Colliers managing director of office leasing Simon Hunt said that this was driven by a continued uplift in activity from tenants seeking office space of less than 1000 square metres. 

“There was a 40 per cent increase in enquiry for office space under 1000sq m and a 6 per cent increase for office space between 1000—2999sq m when comparing the second halves of 2021 and 2022,” Hunt said.

“We have seen increasing demand from smaller occupiers who have proven more nimble and agile while several larger occupiers are taking more time to finalise their post-pandemic office requirements.”

The flight to quality also affected leasing deals, with most relocation activity driven by demand for higher office quality. 

Sixty per cent of leasing deals during 2022 were from tenants committing to prime-grade offices, Colliers said. 

However, prime vacancy has risen with national CBD vacancy rates up 0.6 percentage points to 12.8 per cent, partly due to vacant new or refurbished stock becoming available as a result of developers upgrading existing assets, such as the Gold and Blue towers in Brisbane. 

“The 0.6 percentage point increase to the national CBD vacancy rate was largely underpinned by new developments and refurbished office buildings coming to market in Sydney and Melbourne,” Colliers national director of research Joanne Henderson said. 

“Small tenant activity for office space below 1000sq m appears to be offsetting larger contractionary moves within the CBDs to a significant extent, resulting in a relatively neutral net absorption result of only -138sq m and a decline in vacancy levels in Perth and Brisbane,” she said.

 “New supply in the Adelaide, Canberra and Perth CBD markets, which surpasses the long-term average, will add vacancy pressures over the next six to 12 months, but we expect this will be addressed by the healthy levels of occupier demand we are seeing in these markets and heightened expansionary activity from smaller tenants.”