Office markets face a bumpy road ahead

The funds from operations (FFO), being the more accurate measure of earnings for REITs, was $48.6 million, in line with guidance. An interim distribution was 7.05¢, in line with the full-year guidance and was paid on January 31.

“Much of this positive net absorption occurred in metropolitan or near city office markets, with the Melbourne fringe demonstrating the strongest 12-month net absorption, or leasing, of any Australian office market,” Nichols said. “The deals have been a combination of tenants upgrading to new space, demand from staff to be closer to home and also a return of workers to the office for collaboration with colleagues.”

He said the negative leasing trend was concentrated in the Sydney and Melbourne CBDs, which had seen an in increase in supply, but the fund has limited or no exposure to these markets.

That trend was reflected in the latest Property Council of Australia’s Office Market Report for the six months ending January, where the national vacancy rate inched ahead by 0.5 percentage points to 12.5 per cent, the highest level since January 1997.

In the midst of the global pandemic in 2021, the level of vacancy moved to 11.7 per cent. The Sydney CBD saw vacancy rise from 10.1 to 11.3 per cent and 12.9 to 13.8 per cent in Melbourne.

Newly appointed Property Council chief executive Mike Zorbas said while the overall Australia-wide vacancy rate increased, “it comes on the back of solid office construction activity, with the supply of office space exceeding the historical average in five of the last six half-yearly reports.”

Artist impression of Charter Hall’s new $1.5 billion twin tower project at 555 Collins Street, Melbourne.

The data also showed that some areas on the fringe including St Kilda Road Melbourne were hard hit due to the lack of new building being constructed to attract tenants and Parramatta in Sydney’s west which has seen a lot of new construction flood the market.

With a swathe of new skyscrapers that have opened in the past six months larger companies have also taken the opportunity to lease space in the swankier buildings, leaving the older buildings struggling to attract tenants.

Reflecting this trend is a new 10-year lease that has been inked by Allianz Australia to relocate its Melbourne headquarters to 555 Collins Street, being Charter Hall Group’s, new $1.5 billion, twin-tower, state-of-the-art office precinct in Melbourne’s CBD. It is due for completion in June this year.

Investa group executive Michael Cook said the post-COVID period had seen a strong flight to quality as evidenced by the strong take-up of space in Salesforce Tower and Quay Quarter in Sydney.

“Not surprisingly, some tenants have taken the opportunity during this relatively positive or buoyant period to sub-lease excess space,” Cook said.


“The increase in the vacancy rate was more a story of new stock hitting the market, however, demand has been strong and we expect Sydney vacancy rates to improve markedly over the ensuing 12 months.”

He said tenants still had plenty of opportunities to upgrade with B Grade and lesser stock under severe pressure. The competition for tenants has enabled tenants to move up the quality chain.

Cook added that Melbourne was still recovering from the debilitating COVID period, but there was strong cause for greater confidence as the recovery continued.

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