Reading behind the headlines of Australia’s office markets

SYDNEY, 22 January 2024 – JLL Research has released 4Q23 statistics on national office markets. The figures showed that the aggregated level of occupied stock across CBD office markets was unchanged in 2023 from the level recorded in 2022.

The national CBD office market vacancy rate increased by 0.7 percentage points to 14.9% over 2023. Vacancy is now at the highest level since 1995.

JLL Head of Research – Australasia, Andrew Ballantyne said, “Business conditions are mixed across the Australian economy. The variance in business sentiment and conditions are reflected across office markets with strong net absorption results recorded in Perth and Brisbane; while Melbourne and Sydney saw a contraction in occupied stock.”

“However, the consistent theme across all office markets was strong occupier demand for the best-in-class assets and a willingness to pay a higher rent if the space can be designed in an efficient manner to reduce the cost per employee,” said Mr Ballantyne.

Occupier demand was reflected in a detailed breakdown of net absorption statistics. Across Australia’s CBD office markets, we recorded 148,400 sqm of prime net absorption and -148,800 sqm for secondary grade assets over 2023.

The Perth CBD was the strongest performing office market, recording 75,400 sqm of net absorption over 2023. Perth’s headline vacancy has tightened to 17.3% – the lowest level since early 2015.

JLL Head of Office Leasing – Australia, Tim O’Connor said, “The resource sector is in expansion mode and was very active in the Perth market over 2023. Furthermore, strong demand for project space supports our view that the sector is planning for expansion over the medium-term.”

Perth CBD prime gross effective rents increased by 2.4% over 2023. As the number of options for prime grade contiguous space tightens, we expect to see a reduction in leasing incentives and prime gross effective rents increasing by closer to 5.0% in 2024.

The Brisbane CBD recorded net absorption of 40,500 sqm and a reduction in vacancy to 11.1% over 2023. The prime grade sector of the market is getting very tight with vacancy dropping into single digit territory (9.8%) and rents are moving higher.

From a rental growth perspective, the Brisbane CBD was one of the world’s strongest performing markets in 2023, with prime gross effective rents increasing by 11.3%.

Mr O’Connor said, “The Brisbane market is experiencing strong leasing enquiry and activity from a diverse range of industry sectors. Occupiers are aware that options are limited with the new developments at 360 Queen Street and 205 North Quay not scheduled to reach practical completion until 2025.”

The Adelaide CBD recorded 46,000 sqm of net absorption in 2023. The 2023 calendar year result was 3.5 times higher than the 25-year average and the strongest result since 2008.

Mr Ballantyne said, “Adelaide had several landmark office buildings reach practical completion in 2023. However, even with the completion of these buildings, over 65% of Adelaide’s office stock is in excess of 30 years old. Occupier demand for high quality office space is strong and we are seeing a significant divergence in the leasing performance of prime and secondary grade assets.”

Adelaide CBD prime grade net absorption was +55,900 sqm, compared with -9,900 sqm for secondary grade assets.

The Sydney CBD recorded negative net absorption of -64,100 sqm in 2023. Sydney’s office leasing market story is location-driven with the Core precinct recording 23,600 sqm of net absorption, compared with -87,800 sqm for the rest of the CBD.

Mr Ballantyne said, “Strong leasing activity in the Core precinct has led to upward pressure on market rents for the best quality buildings, mirroring the trend experienced in other gateway cities. In the Sydney CBD, average prime gross effective rents increased by 3.9% over 2023.”

The Melbourne CBD recorded negative net absorption of -71,200 sqm over 2023 – largely attributed to an increase in sublease availability over the year.

Canberra also recorded negative net absorption in 2023 (-27,000 sqm). However, Canberra’s headline vacancy rate remains the tightest across the CBD office markets at 7.8% in 2023.

Mr O’Connor said, “Headline vacancy statistics can be misleading. If you look across Australia’s CBD office markets, almost two-thirds of vacancy is held in only 17% of buildings. A high proportion of these assets will require significant capital expenditure, or they will experience an extended period of elevated vacancy.”

“Limited availability for high quality buildings with superior sustainability credentials and a moderation in new supply over the next three years creates an environment for the highest quality assets to see further rental growth,” concluded Mr O’Connor.

Source: JLL Research