The Australian office sector moves into the downturn phase of the cycle

AUSTRALIA, 10 JULY 2020 – JLL Research has released 2Q 2020 statistics on national office markets. The figures showed negative net absorption of -147,600 sqm was recorded over the second quarter.

The national CBD office market vacancy rate increased by 1.8 percentage points from 8.4% to 10.2% in 2Q20.

JLL Head of Research – Australia, Andrew Ballantyne said, “The past 12 weeks have been unprecedented for the Australian office sector. Headcount reductions have been concentrated in the hospitality, retail, arts & recreation and construction sectors, but traditional office using industry sectors have not been immune.

“Policy measures have provided downside protection to the economy and the re-opening of the economy has occurred well ahead of expectations. However, many organisations will struggle to find a pathway back to pre-crisis revenue levels and this will have an impact on office sector demand,” said Mr Ballantyne.

All six of the monitored CBD office markets recorded negative net absorption in 2Q20.

JLL Head of Leasing – Australia, Tim O’Connor said, “In an environment of uncertain revenue projections, organisations have pivoted towards addressing their cost base. We have seen a number of organisations downsize their space requirements and sublease availability has started to increase.”

The Sydney CBD recorded -66,600 sqm of net absorption over the quarter and vacancy increased to 7.5% in 2Q20. While vacancy increased across all grades, Premium (6.0%) and A Grade (7.6%) were significantly tighter than secondary (8.2%) grade vacancy.

Mr O’Connor said, “Sydney CBD leasing enquiry started to improve from a very low base as we emerged from lockdown. The bulk of enquiry is concentrated in the sub 800 sqm cohort of the market and is seeking fitted space.”

The Melbourne CBD recorded -42,300 sqm of net absorption over 2Q20. The completion of a number of new developments and the associated backfill space pushed the Melbourne CBD vacancy rate up to 7.7% in 2Q20.

Mr O’Connor said, “The education (tertiary and vocational) sector has been one of the industry sectors most impacted by COVID-19. We have seen a number of institutions including RMIT and Monash University downsize their occupational footprint in the Melbourne CBD over Q2.”

The Brisbane CBD recorded -15,700 sqm of net absorption in 2Q20. The headline vacancy rate increased by 0.7 percentage points to 12.8% over the quarter.

Mr O’Connor said, “The number of leasing inspections have started to improve in the Brisbane CBD. However, the majority of enquiry is concentrated in the sub 500 sqm cohort of the market.”

The Perth CBD recorded -10,500 sqm of net absorption over the quarter. As a result, the Perth CBD vacancy rate moved out to 20.1% in 2Q20.

Mr Ballantyne said, “We are closely watching the announcement of new infrastructure projects both domestically and overseas. The mining sector will be a direct beneficiary of new infrastructure projects and we may see an increase in project space over the latter part of 2020 and into 2021.”

Canberra recorded -8,200 sqm of net absorption over the quarter. However, net absorption was positive over the 2019/20 financial year (26,200 sqm). The withdrawal of office stock for refurbishment led to the Canberra office market vacancy rate tightening to 8.2%.

Mr O’Connor said, “The number of cyber-attacks on public bodies and private sector organisations have increased over the past three months. The Commonwealth of Australia has already announced new funding into cyber security and the creation of new jobs. The expansion of the public sector will be positive for the Canberra office market.”

The Adelaide CBD recorded -4,400 sqm in 2Q20, but positive net absorption of 15,300 sqm over the 2019/20 financial year. The headline vacancy rate increased by 0.6 percentage points to 14.7% over the quarter.

Mr O’Connor said, “The work from home experience has shown it has a viable place in a modern flexible workplace strategy. However, the office re-entry has shown the importance of office space for collaboration, ideas generation and employee socialisation.

“The trajectory of Australia’s economic recovery will determine the employment outlook and demand for office space. While a number of organisations will downsize and offer sublease space to the market, we expect to see increased leasing enquiry from organisations in the public sector, digital economy and healthcare sectors,” concluded Mr O’Connor.

Australian CBD office Markets Net Absorption

Australian CBD office Markets, Vacancy Rate by Grade