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Research Research

Enough of homework?

Sep 19, 2023
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In the context of the big structural and cyclical headwinds in the Australian office market, there are some noteworthy submarket trends across the different categories, with deep implications for the future for the office investment landscape, particularly the allocation across asset types.

  • Across four Australian capital cities, secondary CBD office markets have performed the worse over the past 2½ years. The contraction in demand has been more dramatic here, spurred on by the withdrawal of stock for new metro rail stations. Moreover, the corrections in effective rents and cap rates have also been the sharpest in this space.
  • Similarly, prime CBD offices (including trophy assets) have struggled overall, with a moderate rebound in net absorption after a big dip during COVID. With the marked uplift in vacancies, there has been a material deterioration in both effective rents and cap rates.
  • Meanwhile, there has been remarkable resilience in the city fringe office markets, quite at odds with the relative weakness in city centres. Specifically, there has been a robust demand uplift in the prime fringe segment, which held up well during the lockdown, before accelerating further upon reopening. Meanwhile, the adverse moves in vacancies, rents and cap rates have been relatively more muted.

Altogether, there has been a net reduction in aggregate office demand given the shift for some people to work from home on an enduring basis and the more recent cyclical slowdown due to higher interest rates.

At the same time, there are significant shifts within these office market segments – trends which are still unfolding – as occupiers express strong preferences for specific office segments, likely reflecting a combination of factors including better rental affordability, serviceable transport access, modern amenities and reduced crowding.

In other words, tenants and workers are still returning to the office, albeit to a different location and a different segment of the office market.