PropTrack office snapshot 2021

Highlights

• Tenant demand has strengthened in every capital city over the last six months, despite the rise in remote working.
• Sales of offices in 2021 have increased from 2020, but remain below pre-COVID levels.
  Demand to buy offices is recovering faster than the demand to lease offices.
• Lower effective rents have made leasing office space in Australia’s major CBDs more affordable.
• This has led to an increase in the proportion of businesses looking to lease in CBDs.
• Office investors have a growing focus on assets with high quality, low risk tenants.
• Lifestyle features are more important to occupiers post-COVID, with more businesses searching for offices in close proximity to food and hospitality amenity and fitness facilities.

How are search volumes tracking?

Omicron has delayed the return to the office many were expecting following vaccine thresholds being met. While many businesses have already established post-COVID frameworks for remote and hybrid work practices, determining new space requirements remains a challenge. The average number of days employees choose to work from their offices is likely to remain unclear until we are on the other side of the pandemic.

How many days employees spend in the office isn’t clear yet. Picture: realcommercial.com.au/for-sale

Historically, searches to buy and lease offices have moved together in close unison. Throughout the pandemic, however, we have seen them diverge. Work from home mandates, especially in Melbourne and Sydney, have led many businesses to delay leasing decisions until they have more confidence in an uninterrupted return to the office. Investors, in contrast, tend to hold a longer term view. As a result, the recovery in buyer demand has outpaced that of leasing demand.

Tenant demand for offices increased in every Australian capital city over the six months ending January 2022, according to the Property Council of Australia, bucking expectations that the rise in remote working would lead to decreased demand for space. While vacancy rates have risen in the Sydney, Melbourne and Brisbane CBDs over this period, this was due to an increase in supply in these markets outweighing the growth in tenant demand. Every other CBD market has seen vacancy decline over the past six months.

Sales are picking up

Following the initial outbreak of COVID-19 in March 2020, a significant drop-off in activity was seen across the commercial property market. Activity has since resumed, though overall sales volumes remain below pre-COVID levels.

In 2021, Real Capital Analytics estimate offices priced at $1 million or more accounted for $21.3 billion worth of sales in Australia. That’s 57% higher than the volumes seen in the same price range in 2020, though still below 2019’s levels.

Investors remain confident in the future of the office market, with several major transactions occurring in 2021. These include Blackstone’s purchase of a 50% share in 225 George St, Sydney for $925 million, and the purchase of 681 Collins Street, Melbourne by NPS for $1.2 billion.

Where are investors looking to buy?

Among those searching to buy offices, CBD markets remain the most in demand. In New South Wales, 15% of all searches to buy offices were in the Sydney CBD, up from 13.2% 12 months ago. The Brisbane, Canberra and Darwin CBDs also saw their respective proportions of buy searches increase in 2021.

In contrast, the proportion of office buy searches in the Melbourne CBD has declined over the past year, down from 10.1% in 2020 to 9.5% in 2021. Rising vacancy and falling rents have likely contributed to this decrease in demand, with similar declines seen in the Adelaide, Perth and Hobart CBDs.

Where are businesses looking to lease?

Across Australia, CBDs remain the most popular locations searched for by those looking to lease offices. What’s more, the proportion of businesses looking to lease in CBD markets has increased from 12 months ago. This is likely due to the fall in CBD effective rents seen since the onset of the pandemic, making these markets more affordable.

Comparing 2021 with 2020, the proportion of businesses searching to lease in the Sydney CBD has increased from 13.7% to 18%, the proportion in Melbourne from 11.7% to 13.7%, Brisbane 9% to 9.7% and Perth 13.5% to 15%.

Kitchen is one of the more popular search terms used by buyers and investors on realcommercial.com.au in the past 12 months. Picture: realcommercial.com.au/for-sale

Adelaide was the only city to see a slight dip in the proportion of CBD searches, though it remains the most dominant office market, accounting for 30.1% of all South Australia searches.

Many city fringe markets have also increased in relative popularity, with notable rises seen in Surry Hills in New South Wales, Richmond in Victoria, and Fortitude Valley in Queensland.

Floor space requirements

So far, the distribution of searches by minimum floor space has remained relatively unchanged compared to pre-COVID levels in both the buy and lease categories. Searches are concentrated at the smaller end, with 52.1% of buy searches and 56.5% of lease searches at the sub-200sqm level.

Social distancing stipulations, and continued uncertainty around post-COVID space requirements, have likely delayed the decrease in space-to-employee ratios expected following the rise in remote working. We expect to see average lease sizes decline over the coming years.

What are investors looking for in the offices they buy?

A significant share of searches to buy offices come from developers looking for opportunities to convert to residential, with ‘residential’ the most included keyword in both 2020 and 2021.

Office investors are displaying more caution compared to pre-COVID, and are increasingly focused on assets with high quality tenants and lease structures already in place. ‘Tenanted’ was the second most searched keyword among buyers, up 10% year-on-year, with related terms such as ‘high yield’ also recording a rise.

Offices tenanted or appropriate for use by medical and childcare businesses have seen a significant rise in popularity over the past 12 months, jumping into the top five most searched terms. Properties tenanted by medical and childcare have performed strongly over the past 12 months as investors increasingly target lower risk, “recession proof” assets.

What are businesses looking for in the offices they lease?

Among those looking to lease offices, ‘kitchen’ was the most included keyword accompanying searches, up 57% year-on-year.

At the smaller end, many occupiers were looking for offices with a dwelling attached, with ‘residential’ the third most searched keyword.

Searches for class ‘9B’ buildings ranked second among those looking to lease offices. This classification is required where people gather for social, political, theatrical, religious or civic purposes, for example, education.

Many businesses are looking for spaces that allow teams to collaborate more. Picture: Getty

Following the rise in remote working, businesses are expecting more from the offices they lease. Offices are being seen as more than just a place to sit and work, with the social and collaborative benefits of offices increasingly the focus.

Over the past 12 months the prevalence of searches for offices in close proximity to cafes and restaurants has increased by a whopping 292%, while searches for offices nearby fitness facilities such as gyms and yoga studios have increased by 115%.

Spaces like balconies and terraces have also grown in importance to tenants, and were the sixth most included keywords, up 23% year-on-year. End of trip shower facilities are also front of mind for tenants, being the fifth most included search term. Searches including ‘end of trip/shower’ have increased by 75% over the past 12 months, perhaps due to an increased aversion to public transport in the wake of the pandemic.