Will CBD office markets stabilise at record vacancy rates?

March 2024

ResolveXO Research shows that Australian CBD office contractions are levelling off following a four-year slide.

One notable trend highlighted in TrendXO is the fluctuation in office sizes across different industries and cities.

In 2021, Melbourne recorded the largest average increase in office size at 60%, primarily within the legal and medical industries. However, since then, a consistent trend of downsizing has been observed.

2022 marked the most significant contraction in office space over the four years, with all CBD markets reducing in average office size. Adelaide and Melbourne were particularly affected, both recording a 31% reduction largely driven by the > 5,000sqm office size category across various industries such as Media, Financial Services, Legal, and Telecommunications.
In 2023, the research indicates a potential stabilisation as the dust settles on company working practices. Despite a rise in relocations last year (which would typically suggest larger office reductions when considering recent history), the Australian CBD office market experienced the lowest level of contraction with a decrease of only 5%.

The first quarter of 2024 has already shown signs of stabilisation as companies solidify their work arrangements, be it flexible, hybrid or traditional office models. However economic uncertainty and an increasing number of stranded assets will continue to shape the Australian office market.

The PCA has reported a vacancy rate of 12.9% for Australian CBD prime assets, compared to 14.5% in the secondary market. Stranded assets are a growing concern as vacancy remains elevated and largely concentrated within secondary grade due to:

Shifting working models
Changes in industry needs (technological advancements)
Outdated buildings lacking modern amenities and efficiencies
A lack of energy efficiency features or ESG consideration

It's no surprise the research points to a sustained preference for high-quality office space, with tenants favouring prime and refurbished character buildings over less desirable options.

Then what?

The issue of stranded assets in CBD office markets has been well documented [including my brief thoughts in a previous post], however without a solution, a continued rise in these assets could lock the market into a 'high vacancy-high incentive' environment.

While as a Tenant Advisor, I like achieving record incentives for my clients, this may have long-lasting impacts that ultimately hinder a broader market recovery.

ABOUT: TrendXO breaks down ResolveXO's transaction data highlighting tenant trends and insights, by office market.

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