Data from the Property Council of Australia (PCA) shows that the national CBD office vacancy rate has risen from 12.6% to 12.8% in the last six months. This is its highest level since 1996.
The CBD office vacancy rate in Sydney has risen by 20 basis points to 11.5%, amid lower demand for office space. The vacancy rate in Melbourne rose by 90 basis points to 15%.
A number of corporations and government agencies relocated or scaled back their office requirements during the period.
PCA chief executive Mike Zorbas said the demand for office space had decreased due to companies downsizing based on outlooks predicting a global recession.
However, negative demand was not the only explanation for increasing vacancy rates in Sydney and Melbourne, with the PCA also citing above-average office supply increases since 2020.
Zorbas claimed that Melbourne’s office supply increases were “substantially above average” – the highest since before the global financial crisis – despite the fact that office demand was not expanding at the same rate.
“The very big peak in supply additions in 2021 and 2022 – well and truly eclipsing the average – explains a lot of where we are now”, he said.
The PCA believes vacancy rates in Sydney and Melbourne could come under further pressure in the second half of 2023, with more leases expiring.
This view is supported by Kernel Property’s Steve Urwin, a tenant advocate, who believes Melbourne’s CBD had become overbuilt and vacancy rates would worsen.
“It’s bad now but the anticipated peak vacancy is not here yet. It’s atrocious at the moment, and it’s getting worse”, he said.
“Last time we had this in Melbourne was in the early ’90s when the city was overbuilt. It really did take a couple of decades for the city to properly recover and now they’re building more and more stuff again”.
Urwin also warned that the true vacancy rate across Australia could be even higher than the PCA’s estimate because it did not account for “shadow vacancies”. These are empty office spaces that continue to be rented despite being barely occupied due to changing work patterns.
“There’s a raft of desks unoccupied. It varies from business group to business group, but you look at the banks’ huge vacancies that’s being held and sat on – we anticipate over time that will dissipate as leases come to an end and people take less space”, Urwin said.
Meanwhile, the latest Melbourne Institute & Roy Morgan Taking The Pulse of the Nation report showed that “employers have been asking for more time in the office, but workers have become used to the flexibility of working from home”.
“Almost all workers (94% in June 2023) would like to work at least part of their work hours at home, and 64% would like a hybrid arrangement where they work both at home and the office”.
“Employers largely agree, with 60% of workers reporting their employers would permit hybrid work. This increased from 49% of employers permitting hybrid work in April 2021”.
With remote work now an embedded feature in Australia, the demand for commercial space in the nation’s CBDs will remain low.
This follows the record commercial property build that took place in 2021 and 2022.
This has posed an unsettling question to commercial real estate investors and financiers alike: If people never again shop in malls or work in offices like they did before the pandemic, how secure are the fortunes they have tied in bricks and mortar?
Falling office demand and record supply can mean only thing: a nasty commercial property bust akin to the early 1990s recession.
