Office vacancies hit all-time highs on the city fringes

Company managers who remain optimistic about staff returning to work are being dealt a worrying blow as office vacancy rates stay stubbornly high, particularly in city fringe locations and low-grade buildings.

A flood of new buildings in Sydney’s Parramatta and a drain of workers from St Kilda Road to Cremorne, in Melbourne, are compounding leasing difficulties for some office landlords.

Parramatta, where office vacancy is at 22 per cent.

While larger landlords such as Mirvac report stronger leasing numbers in their new buildings in well-located city centres, vacancy in non-CBD zones rose from 17.3 to 17.9 per cent, close to an all-time high.

The weaker sentiment of the market was revealed in the latest Property Council of Australia’s Office Market Report for the six months to the end of January, when the national average vacancy rate ticked up from 12.8 to 13.5 per cent.

As has been the trend for some time, where they can, tenants are taking shiny new digs in prime new office buildings which boast a vacancy rate of 12.9 per cent, compared with a vacancy of 14.5 per cent in the secondary office market.

‘There is a clear divergence between older, low-quality stock and the new premium office buildings bringing new life into the capital cities.’

PCA CEO Mike Zorbas

Property Council chief executive Mike Zorbas said the figures indicate that there is a clear divergence between older, low-quality stock and the new premium office buildings bringing new life into the capital cities.

The hardest-hit area is St Kilda Road, one of Melbourne’s main arteries to its bayside suburbs. There, vacancy has hit close to 28 per cent, with predictions that it is likely to track higher before heading lower as offices are either converted to residential buildings or leased once owners reduce rents.

The new ANZAC railway station, poised to open in the Domain section of St Kilda Road, may ease the commute for remaining workers, but the massive construction project has made working on the strip disruptive.

Older buildings in the precinct are increasingly converting to residential.

Last year, Hong Kong-based investor Mars sold 424-426 St Kilda Road to developer Tim Gurner for around $80 million. The 4645 square metre site is earmarked for an $800 million luxury apartment project.

Cushman & Wakefield’s national director and head of metropolitan office leasing for Victoria said ANZAC Station, set to open later this year or early next, will support this market. “Buildings located near the station are already seeing an increase in leasing activity, and we expect this to accelerate closer to opening,” McKendry said.

“We have seen massive investment from Mirvac into 380 St Kilda Road to reposition the asset to benefit from the station opening directly opposite the building.”

CBRE research analyst Cameron Douglas-Perrine said the headline vacancy levels in St Kilda Road continue to demonstrate signs of weakened demand; however bright spots remain in the market.

“With secondary vacancy nearing 30 per cent, owners of existing assets have begun re-evaluating the future of their place within the precinct,” Douglas-Perrine said.

“With current demand levels in secondary stock subdued, repurposing and conversion have become a point of discussion for landlords.”

Vanessa Rader, head of research at Ray White, said the lack of “bums on seats” has been exacerbated by the withdrawal of office stock across many CBD and non-CBD markets.

“Despite some great leasing deals on offer in the Melbourne CBD market, tenants have flowed into the smaller East Melbourne and Southbank markets over the last six months, improving occupancy to 6.8 per cent and 17 per cent respectively,” Rader said.

Sydney’s western city, Parramatta, has gone from hero with close to zero vacancy pre-COVID to now sitting at 22 per cent vacancy. The surge in vacancy is mainly due to the large-scale development at Parramatta Square, which has unleashed a swag of space in a short period of time.

CBRE director of office leasing for western Sydney Mark Martin said like almost every market in Australia, tenants have a plethora of fit-out options to consider, so leasing open-plan accommodation will remain challenging.

“We expect to see most tenants continue the downsizing trend that started over the past few years in thehybrid work-from-home model, with relocation largely leading to a reduction in overall space occupied,” Martin said.

This continued tenant departures from older stock is creating major asset vacancies with many landlords finding it difficult to secure fresh capital to refurbish and re-position assets, said Cushman & Wakefield’s national director and NSW head of metropolitan office leasing Giuseppe Ruberto.

“Continued tenant departures from older stock is creating major asset vacancies with many landlords finding it difficult to secure fresh capital to refurbish and re-position assets,” Ruberto said.

“Landlords with large vacancies in these ageing assets are working with planning authorities to secure alternate uses for sites with build-to-rent and mixed use the preferred options.”

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