Australian office sector to experience a K Shape recovery in 2021

AUSTRALIA, 27 January 2021 - JLL Research has released 4Q20 statistics on national office markets. The figures showed negative net absorption of -116,000 sqm was recorded over 4Q20. 

The national CBD office market vacancy rate increased by 1.1 percentage points from 12.2% to 13.3% in 4Q20. 

JLL Head of Research – Australia, Andrew Ballantyne said, “2020 was a year of uncertainty and this was reflected in low levels of leasing activity across most of Australia’s office markets. Uncertainty about the economic outlook and return to work arrangements has led to an increase in sublease availability.

“However, the strong recovery in the Australian labour market over the latter part of 2020 is a positive sign that business sentiment is improving and organisations are becoming more confident in the post vaccine outlook for revenue and profitability,” said Mr Ballantyne. 

The quarterly net absorption contraction was less pronounced over 4Q20. Two of the monitored CBD office markets (Canberra and Perth) actually recorded positive net absorption in 4Q20. 

JLL Head of Leasing – Australia, Tim O’Connor said, “We started to see an increase in leasing enquiry and activity across most geographies over the latter part of 2020 and this has continued into 2021. Nevertheless, most enquiry is lease expiry led and is concentrated in the sub 500 sqm cohort of the market.” 

The Sydney CBD recorded -57,300 sqm of net absorption over the quarter and vacancy increased to 11.9% in 4Q20. The Sydney CBD headline vacancy rate is inflated by the inclusion of sublease availability, which increased to ~170,000 sqm or 3.3% of total stock in 4Q20. 

Mr O’Connor said, “A number of organisations have offered sublease space to the market as part of their cost-cutting measures. However, some of the space is only being offered on short-term leases or has an older style fitout. These spaces will be challenging to lease and we expect some sublease offerings will be withdrawn from the market over the second half of 2021.”

The Melbourne CBD recorded -68,200 sqm of net absorption over the quarter and vacancy increased to 13.2% in 4Q20. 

Mr O’Connor said, “The Melbourne CBD vacancy rate was also influenced by an increase in sublease availability. Similar to Sydney, we do believe that some of these sublease offerings will prove challenging to lease and may be withdrawn when office occupancy levels move back towards the 75% to 80% level.”

The Perth CBD recorded positive net absorption of 6,800 sqm over the quarter. As a result, the Perth CBD vacancy rate tightened to 20.0% in 4Q20.

Mr Ballantyne said, “Commodity prices have moved higher over the past six months improving the sentiment and profitability of mining firms. The Perth CBD is also benefitting from centralisation activity with a number of organisations moving operations back to the CBD.”

Canberra was the most resilient office market over the past 12 months and recorded positive net absorption of 17,300 sqm in 4Q20. The Canberra vacancy rate moved lower over the quarter and now sits at 8.2% – the lowest rate since 3Q09. 

Mr O’Connor said, “The Federal Government and ACT Government continue to be the most active organisations in the Canberra leasing market. However, we have started to see improved enquiry from small to mid-sized private sector organisations and expect they will be more active over 2021.”

The Brisbane CBD recorded -9,100 sqm of net absorption in 4Q20. The headline vacancy rate increased by 0.4 percentage points to 14.0% over the quarter. 

Mr O’Connor said, “We saw a notable increase in leasing enquiry from SMEs towards the end of 2020 and this should translate into an improvement in leasing activity over the first half of 2021.”

The Adelaide CBD recorded -5,500 sqm of net absorption in 4Q20. The headline vacancy rate increased by 1.2 percentage points to 16.6% over the quarter. 

Mr O’Connor said, “The public sector is expected to be one of the most active industry sectors in 2021. As we move towards the latter part of the pandemic, organisations will move from crisis mode into long-term strategic planning.

“From an office leasing market perspective, we expect to see enquiry orientated towards assets with strong health and safety features. The office leasing market will follow a K Shape recovery with high occupancy rates for prime grade assets and vacancy pressures cascaded down to lower quality buildings,” concluded Mr O’Connor.

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