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High vacancy rates to get considerably worse in Australia’s main office markets
Substantial additions in the pipeline and the full effects of work-from-home will push office vacancy up and new office construction down
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Already high office vacancy rates have considerably further to rise, due to new supply additions and the rationalisation of office space requirements, with the implication being a downturn in new office building.
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New office building is currently very strong, with a surge in approvals and commencements in 2022 and early 2023, which will lead to high levels of work done and office completions over the next two years. We estimate an increase of 44% in office commencements in 2022/23, leading to a strong forecast increase in work done, peaking at $10 billion (in 2020/21 prices) in calendar 2024.
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While new supply will be high in the near term, we expect office demand to remain weak, due to slower economic growth and the effects of work-from-home steadily flowing through to office occupancy. The result will be high vacancy rates across the country getting even higher, and a decline in new office building starts.
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We expect negative net absorption (demand) to continue for the remainder of 2023 and 2024, as the effects of work-from-home gradually filter through to office space occupancy. Ultimately, this will reduce expected returns on new buildings, and cause a downturn in commencements through to a low point in 2026/27.
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The value of Australian office commencements is forecast to drop by one third (in real terms) during 2023/24 to 2026/27. Work done is expected to fall from around $10 billion in 2024 to a low point of $7 billion in 2027.
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The outlook for the Sydney and Melbourne office markets is particularly poor. In both these markets, there has been a high level of additions at a time when demand has been weak or negative. We forecast negative demand in both these markets over the next couple of years, which will exacerbate vacancy rates.
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In the combined Sydney office market (CBD plus metro locations), we forecast the vacancy rate to increase from 15% in June 2023, to a peak of just over 18% during 2024/25. In the combined Melbourne office market (CBD plus metro locations) vacancy has been on a steep upward trend, from 15% in December 2022 to an estimated 16% in June 2023, and we forecast a peak of over 18% by the end of 2024.
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Our forecasts include a high level of withdrawals in both Sydney and Melbourne. If space is not withdrawn at the level we expect, vacancy rates could be considerably worse.
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The forecasts for office space demand incorporate a continued downward trend in the amount of office space leased per employee. The report notes that this trend began well before the pandemic, but will continue as the full effects of lower office occupancy post-pandemic become realised.
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