Australian CBD office vacancies hit record highs since 1996

CBD office markets recorded 13.6% headline vacancies in Q1.

According to JLL’s 1Q21 statistics on the national CBD office markets, whilst an economic recovery is underway, the office market still continues to face headwinds. 

No completions were recorded in the national CBD markets over 1Q21, says JLL. Although, withdrawals totalled 9,500sqm across two assets in Canberra and Melbourne. Metro/fringe development activity drove supply over the quarter with eleven developments delivering 85,700sqm of space to the market. 

Here’s more from JLL:

Australian CBD prime gross effective rents (PGER) declined - 1.2% to AUD 576 psm p.a over the quarter. Positive health and economic indicators as well as the vaccine rollout, softened the decline in PGER in 1Q21. 

Moving forward, vacancy is expected to increase further, especially in markets where the supply pipeline is strong. We anticipate significant pre-commitments will be required for larger projects given current elevated vacancy levels, economic volatility and issues regarding back-fill of existing stock.

Other key figures:

13.6% Headline Vacancy Rate As at 1Q21: Vacancy across the CBD office markets (13.6%) continued to increase, reaching the highest recorded vacancy since 1996 (14.2%). The increase was driven by continued contractions in leasing activity and the subsequent rise of sublease availability. As such, vacancy remains above the 10- year average of 10.2%. 

Even with news of a possible vaccine rollout, the Australian economy has a long way to go before reaching pre COVID-19 levels. Nevertheless, 1Q21 economic indicators suggest the economic recovery is underway. The NAB Monthly Business Survey continues to be above pre-pandemic levels with an improvement in both business conditions and confidence recorded over the quarter. 

Seasonally adjusted unemployment for Australia has nearly recovered to its pre-pandemic levels. In March 2021, the unemployment rate fell to 5.6%, largely driven by the reopening of the Victorian Economy

-1.2% Prime Gross Effective Rental Growth q-o-q As at 1Q21: The decline in PGER has been driven by increasing incentives. Since the outset of the pandemic, landlords have competed aggressively to attract and retain tenants by offering higher incentives (increasing from 33.4% to 34.5% in 1Q21).

$2,635 Total Office Market Sales (AUD million) As at 1Q21: Pent-up demand for quality office assets in Australia drove activity with investment volumes reaching AUD 2,634.7 million across 30 sales. The most notable sale was the under construction, Martin Place Metro South Tower which sold for a reported AUD 800.0 million.

5.25% Prime Weighted Average Yield As at 1Q21: The national CBD prime office yield declined 1 bps to 5.25% which is well below the 5-year quarterly average of 5.70%. Investors remain attracted to Australian commercial real estate because of its transparency, long-term economic fundamentals and stable returns.