CBD Tenant Demand Sags as Sub-Leasing Surges

The amount of office space available for sublease in the Sydney and Melbourne CBDs has begun to swell as the coronavirus crisis continues to hit corporate Australia, forcing tenants to question the prospects of once-thriving city towers.

The trend, driven by businesses downsizing and relocating, is expected to push vacancy rates up in cities nationally, and with incentives also on the rise, this will ultimately put pressure on values.

Charter Keck Kramer national director Steve Kingston said additional sublease vacancy is likely to come online in both Sydney and Melbourne in the final quarter of this year as occupiers start to make critical decisions about how much space they need.

“Many occupiers have begun to look more critically at their accommodation overhead costs and overall footprint post-pandemic, with most commentary appearing to suggest that the workplace ‘shake-up’ is here to stay,” Kingston said.

“While we are still yet to understand the sweeping impacts of Covid-19 on the office leasing market, we know that tenant demand remains low and that vacancy in all CBD markets is expected to further increase over the next 12 months and beyond.”

Subleasing data, which paints a broader picture of the overall health of an office market by revealing just how much space in the CBD is fully occupied.

This data, otherwise hidden by the headline vacancy rate, acts as a forward indicator for weakening tenant demand as existing leases complete and new deals are struck.

Vacancy rates in the country’s two biggest office markets have already risen significantly over the last six months.

According to recent Property Council of Australia data, Melbourne office vacancy rose from 3.2 per cent to 5.9 per cent over the first six months of the year, equating to 280,000sq m of the CBD market.

Sydney’s vacancy rate has expanded from 3.9 per cent to 5.6 per cent with aggregate tenant demand flat, and mainly driven up by increases in new supply.

According to the latest figures from JLL, 135,000 square metres—or 2.7 per cent of Sydney’s total CBD office stock—is for sublease, while 123,000sq m of sublease has come online in Melbourne.

Two-thirds of Sydney’s sublease vacancy is concentrated in prime grade buildings, with the remainder largely in B-grade stock.

“In NSW, where restrictions have eased in recent months, many organisations are still operating under a hybrid model, with employees splitting their time between the office and home,” Kingston said.

“Many of these CBD sublease vacancies are fully fitted and ready for occupation, presenting cost-effective opportunities for tenants seeking to relocate and driving competition among landlords seeking to fill direct vacancy.”

According to the Property Council, 117,000sq m of new stock is due to enter the market in the second half of 2020 in the Sydney CBD, while 100,000sq m of stock will enter the Melbourne CBD, equating to more than 2 per cent of additional vacancy through subleasing alone.

“The increase in sublease space is enticing tenants into the market,” CBRE office leasing director Chris Fisher said.

“We are seeing larger, opportunistic tenants seek out cost-competitive leasing options, with an increase in inspection activity for both sublease and direct space.

“This is leading to an uptick in proposal requests in both market segments, which is expected to result in space coming off the market in the coming months.”