We know the roughly 700 people crammed into the Property Council Office Market Report breakfast at the Fullerton Hotel on Thursday morning were keen to hear about the state of the office market.
Vacancies, low – yes. More new stock coming online – yes. People dribbling back to the office, also yes. But if you were an investor in the sector the “rich data” coming out of the US Bureau of Labor Statistics offered promising rays of sunshine.
According to panellist Andrew Ballantyne, head of research for JLL, the data showed productivity was in fact down and if the Australian pattern followed as it usually does, then expect the same for Australia
While in the immediate period as Covid struck productivity rose, the trend was short lived, he said.
“The data that we have up to the middle of last year, has been trending down quite significantly as well.”
“So that says to me that from a productivity perspective, the model that we have at the moment isn’t the optimal model.”
In fact he’d like to lose the whole “work from home” concept. Flexibility is great, he said. You might have something to do with the kids or have a physio appointment – go for it; nothing negative to expect from that.
Suzanne Currie, chief property officer, corporate services for Westpac Group was inclined to agree WFH is not a good idea. While this giant organisation has a hybrid model, “What we saw during Covid is… that people working remotely and in an isolated manner meant that culture fractures, trust fractures; the ability to execute and be efficient in business is diluted.”
Kevin George, executive general manager, office, for Dexus said businesses, especially small businesses, were appreciating the value of the workplace much more, and were making more investments in the workplace. Even to the extent of moving from the fringe and suburbs to the CBD.
“We’ve got about six or seven deals with companies coming from the fringe and the suburbs in Sydney in the last six months. And all of them are paying more, some of them have had to reduce their space a bit to afford.
“But all of them are saying that look, you know, we need to make sure we’ve got a really good office space that’s really accessible, because we want to encourage more people back. So that’s a good sign.”
But while the crowd was focused on the capital values and vacancies (highlights included here) we were there primarily to pick up the vibe from the big end of town about our patch, sustainability, ESG – call it what you will.
Turns out we were not alone; the crowd was also interested in ESG.
We lost count of the number of times that environment, social and governance acronym was mentioned.
Moderator Leonie Wilkinson, senior vice president, portfolio management, Brookfield Asset Management, noted nine questions on ESG straight up, and the topic kept rising to the surface.
Not so many years ago we struggled to hear the word green mentioned or sustainability mentioned once (which might have had something to do with the Tony Abbott government banning those words – we kid you not).
On Thursday speaker after speaker acknowledged sustainability and increasingly social sustainability was important for investors and the market as a whole. Almost a “hygiene factor” said Kevin George, which if not delivered will show up in your leasing performance.
Interestingly the (arguably aligned) topic of existing secondary stock was also a significant topic of discussion. A week or so ago a Melbourne investor told The Fifth Estate in a phone conversation that they had tenants specifying older buildings to occupy. In line with the lower embodied carbon story of existing stock it seems.
That’s also significant capital wise with panellists pointing out that 40 per cent of CBD users in fact are small tenancies in secondary buildings occupying less than 1000 square metres.
So, in a nutshell: vacancies up, new supply up, ESG up and sustainability looking good for the secondary market.
Following is the media release from the Property Council of Australia on its Office Market Report
The future is looking strong for the Sydney CBD with demand for commercial office space increasing, despite recovering from a pandemic and new hybrid working arrangements.
Half yearly data released today reveals strong demand for office space, with vacancy rates remaining steady 11.3 per cent – up from 10.1 per cent and recording the highest future supply amount across the country to come online in 2023 and 2024.
Property Council’s acting NSW executive director Adina Cirson said contrary to many predictions and media reports, the office was not dead.
“Our results today show that in fact the office is in even more demand than previous reports,” Ms Cirson said.
“The next two years for the Sydney CBD will witness 90,141 square metre of new stock to enter the market in 2023, followed by 147,357 square metre in 2024, which is the highest in the nation.
“Not only does this provide certainty for our CBD, it proves that the Sydney office market will remain as the benchmark, despite the challenges we have faced in the last three years.”
Ms Cirson said the increase in demand demonstrated how companies were taking a “flight to quality” to entice workers back to the office.
“Businesses have realised they will always need a place for employees to come together to receive the benefits of collaboration. Those that have the best offices will have the greatest chance to attract and retain strong talent.”
Ms Cirson said while the latest results were positive, we must continue to advocate for investment in the CBD and greater collaboration by government with the private sector to ensure our economic engine rooms – our city centres thrive.
“The NSW Government should establish a CBD recovery and revitalisation industry partnership group in collaboration with the City of Sydney, the Property Council, and other peak bodies to advise Government on the practical steps to continue the ongoing renewal of the CBD,” Ms Cirson concluded.
Office Market Report January 2023
Analysis – Sydney CBD market
Headline comments:
- Sydney CBD vacancy increased over the period
- This was due to supply additions and negative demand
- Negative demand was concentrated in the lower grades of space
- There is a significant amount of space in the pipeline to be delivered over the next 2 years
Vacancy analysis:
- Vacancy in the Sydney CBD office market increased from 10.1 percent to 11.3 percent
- This was due to 71,707sqm of supply additions and -19,738sqm of net absorption
- 22,379sqm of space was withdrawn over the period
Premium:
- Vacancy increased from 8.6 percent to 10.1 percent
- This was due to 55,207sqm of supply additions
- Demand was positive with 29,106sqm of net absorption recorded
A Grade:
- Vacancy increased from 11.5 percent to 11.8 percent
- This was due to 16,500sqm of supply additions and -3,630sqm of net absorption
B Grade:
- Vacancy increased from 10.5 percent to 12.6 percent over the period
- This was due to -36,101sqm of net absorption
C Grade:
- Vacancy increased from 8.6 percent to 10.3 percent
- This was due to -7,313sqm of net absorption
D Grade:
- Vacancy increased from 7.2 percent to 8.2 percent
- This was due to -1,800sqm of net absorption
Future supply:
- 90,141sqm of new stock is due to enter the market in 2023
- This will be followed by 147,357sqm in 2024
- 63,000sqm is due to come online from 2025 onwards