CBD markets dominate Australia’s Q1 office transaction volumes

Sales totalled AUD1.6b in Q1, over AUD1b of which was from CBD markets.

A recent JLL report reveals that the Australian CBD office market’s net absorption totalled 43,400 sqm in Q1 2023. Five out of the six CBD markets tracked by JLL recorded positive demand over the quarter with the Perth CBD recorded the largest positive demand figure. 

Perth recorded 27,200 sqm of net absorption which was driven by pre-commitment activity into new office completions as well as expansionary activity by the professional services sector. 

Here’s more from JLL:

Despite the positive quarterly demand result, the Australian CBD vacancy rate increased from 14.2% in Q4 2022 to 14.3% in Q1 2023. The increase in the vacancy rate was driven by backfill vacancy as tenants relocated into pre-committed space in newly completed office stock, as well as there being some uncommitted space in these new developments. 

It is expected that tenants will continue to show a preference for prime grade office accommodation over the near-term, driven by the attractive financial metrics on offer across the CBD markets, as well as organisations looking to attract and/or retain talent. 

Completions in Australia's CBD office markets totalled 88,500 sqm across four projects with a blended precommitment rate of 94% in Q1 2023. 

Australian CBD prime gross effective rents (PGER) increased by 0.8% over the quarter. This was the fifth consecutive increase in effective rents and was predominantly driven by an uplift in face rents. Whilst incentives remain elevated across all CBD markets, effective rental growth has recovered over the past year as a result of an uplift in face rents. Tenants are willing to pay a higher face rent as the incentive they are receiving remains attractive.

The uncertain global economic environment will continue to weigh on investor decisions over 2023. Factors weighing on investor decisions include increased cost of debt and increased scrutiny of loan serviceability. Whilst volatility in the futures market is pricing in no further cash rate rises for the remainder of this cycle, there remains a possibility of future rates rises particularly if inflation remains at elevated levels over the coming quarters.

The Australian office market recorded AUD 1.63 billion of transactions volumes across 14 assets in the CBD and metropolitan markets over the quarter. Out of this total, AUD 1.08 billion was concentrated across Australia’s CBD markets. The largest sale over Q1 2023 was Charter Hall’s acquisition of 21 Genge Street, Canberra from Real I.S. for AUD 290.0 million.