Supply Outstrips Demand as Flexible Working Stymies Office Sector

Demand for office space is dropping into negative territory as an uptick in new supply skews the latest results from the Property Council of Australia.

Vacancy rates increased from 12.6 per cent to 12.8 per cent nationally, however this was a better result than non-CBD areas which increased from 15.2 per cent to 17.3 per cent in the six months to July.

Supply had a large impact on the results, and has exceeded the historical average in metro areas in five of the past seven reports, confounded by flexible working models, the report said. 

Even more office space is expected to become available in the second half of 2023 before new projects ease up giving a more positive outlook for the office market beyond 2025.  

PCA office vacancies: first half of 2023 

^{^July 2023 PCA Office Market Report}

Property Council chief executive Mike Zorbas said demand remained strong in four of the six capital cities captured in the survey, but it had subsided across the big two.

“Sydney and Melbourne experienced slight vacancy rate increases with more than 200,000sq m of new office space planned in the next three years,” Zorbas said.

“However, pre-commitment rates are lower than Brisbane, with only 42 per cent in Sydney and 17.4 per cent in Melbourne already secured by tenants.”

Colliers Victoria head of office leasing Andrew Beasley said they expected an improvement in the demand-supply balance during the coming 6 to 12 months.

“This is supported by the number of leases struck in the first half of this year, which is 27 per cent higher than the first half of 2022,” Beasley said.

“We also had stronger enquiry levels than previous years, particularly now at the larger end of the market—more than 5000 square metres.”

JLL NSW head of office leasing Will Hamilton said they were seeing good levels of face rental growth, particularly in high rise rents in premium and better A-grade assets.

“There will be a low of office development activity this year with only around 11,000 sqm of office stock projected to complete,” Hamilton said.

“While a larger supply wave is anticipated to hit the market next year, 63 per cent is already committed. Beyond that, the next office development is scheduled to complete in 2027.”