CBD OFFICE Second Half 2020 - Research & Forecast Report - Colliers
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Research &
Forecast Report
Accelerating success.
CBD OFFICE
Second Half 2020
Accelerating success.
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Joanne Henderson
Director | Research
+61 410 391 093
joanne.henderson@colliers.com
colliers.com.au/colliersedge
CONTENTS
CBD Office Snapshot 4
National Overview 5
CBD Office Snapshot by Market 6
Capital Markets Outlook 12
Occupancy Trends 14
Our Expertise 16
Accelerating success.
CBD OFFICE | Research & Forecast Report | H2 2020
CBD OFFICE
SNAPSHOT
NET SUPPLY NET FACE RENTS NET EFFECTIVE
VACANCY RATE INCENTIVES YIELD
(SQM) ($/SQM P.A.) RENTS ($/SQM P.A.)
Year to Jul- Year to Jul-
Current Jul-21 (f) Current Jun-21 (f) Current Jun-21 (f) Current Jun-21 (f) Current Jun-21 (f)
2020 2021 (f)
SYDNEY 5.60% 9.40%
Premium 3.80% 8.50% $1,173 $1,166 27% 32% $807 $734 4.5% 4.7%
-6,376 125,495
A Grade 4.70% 7.70% $947 $937 26% 31% $651 $594 4.9% 5.1%
B Grade 7.50% 12.70% $788 $754 25% 30% $547 $476 5.2% 6.0%
MELBOURNE 5.80% 9.70%
Premium 6.00% 9.20% $794 $794 25% 35% $593 $530 4.5% 4.7%
159,044 176,753
A Grade 5.60% 10.40% $641 $641 28% 35% $459 $415 4.9% 5.1%
B Grade 6.60% 8.70% $514 $514 27% 35% $377 $339 5.0% 5.8%
BRISBANE 12.90% 13.70%
Premium 5.10% 7.00% $705 $698 37% 37% $384 $378 5.1% 5.3%
48,680 -932
A Grade 13.10% 13.40% $600 $594 38% 39% $319 $301 5.4% 5.6%
B Grade 15.30% 16.70% $482 $477 41% 42% $229 $213 6.3% 7.1%
PERTH 18.4% 20.7%
Premium 6.80% 8.10% $710 $707 41% 46% $417 $380 5.9% 5.9%
26,043 -11,862
A Grade 15.80% 17.10% $578 $549 49% 53% $293 $258 6.6% 6.5%
B Grade 28.70% 28.90% $380 $334 50% 53% $190 $159 7.0% 7.1%
ADELAIDE 14.20% 13.10%
Premium n/a n/a $398 $393 35% 43% $213 $163 6.4% 6.5%
37,788 27,063
A Grade 10.80% 9.00% $404 $400 34% 40% $231 $194 6.5% 6.7%
B Grade 16.60% 15.40% $338 $335 37% 40% $177 $158 7.1% 7.7%
CANBERRA 12.30% 11.10%
A Grade 6.80% 5.70% 17,918 51,650 $405 $404 23% 24% $290 $279 5.6% 5.6%
B Grade 20.10% 19.70% $290 $286 28% 29% $180 $172 7.3% 7.7%
Note: ‘Current’ refers to June 2020 figures.
Melbourne incentives are based on more recent (August 2020) evidence, as the June quarter yielded little evidence for incentive movement.
In light of the current uncertainty around the economic outlook, both domestically and globally, Colliers Research are currently forecasting office markets using three sets of scenarios. The
scenarios provided in this report are our 'base case' scenario, with Colliers also providing our subscriber clients with 'worst case' and 'best case' scenarios.
4
CBD OFFICE | Research & Forecast Report | H2 2020
NATIONAL numbers from 2022 onwards. Conversely, new supply should
become very constrained as very few projects get green-lit over the
OVERVIEW
2020/21 period.
For this reason, our medium to long term view of Australian office
markets is relatively positive. There are a couple of other factors to
By Anneke Thompson keep in mind:
National Director | Research • Relativity. Whilst Australia is facing a huge set of challenges
anneke.thompson@colliers.com
right now, we are not alone in these challenges and are
commonly accepted as being one of the better performing
The Dual Shock System - short nations in this crisis. Given this, we expect that once the world
term demand, long term supply normalises, that Australia will be viewed as an excellent place
to migrate to, to holiday in, and also to invest in. This will help
The strength of white collar employment growth in Australia,
improve high population growth that office markets have long
particularly in the major cities of Sydney and Melbourne, has
benefitted from.
created good office demand conditions across the country,
• Pre-COVID market vacancy. The two largest office markets in
particularly between 2016 and 2019. Over this time, white collar
Australia, Sydney and Melbourne CBDs, have come in to this
employment across Australian CBDs has grown by 82,000
shock with near record low vacancy rates. Whilst we know
employees, representing circa 900,000sqm of office demand. Net
that vacancy will rise in the short term due to both sub-lease
absorption, however, looks quite different. Over the same period
space coming on market, as well as subdued demand, this low
of time, 645,000sqm of space has been absorbed. What this tells
base of vacancy will serve to soften the vacancy peak.
us is that occupiers have already been taking less space per new
• Infrastructure projects. Sydney, Melbourne and Brisbane all
employee for some time, and the flexible working trend that is now
have major infrastructure projects under construction. These
front and centre was already well advanced. These good demand
projects are due to complete in 2024 (Sydney Metro), 2025
conditions have also been the backbone of kicking off a supply cycle
(Melbourne Metro) and 2024 (Brisbane Cross River Rail).
in both Sydney and Melbourne, and both cities have a number of
While all some years away, we expect that Australia’s economy
projects completing this year and in to 2021.
will be well and truly on a growth path again as these projects
Clearly, COVID-19 has been a major shock, and is impacting white complete.
collar employment more than any other sector of the employment
To put in to numbers how much of an impact this event is having
market. This is both due to the lockdown impact on corporates
on our supply outlook, consider our pre and post COVID gross
and the uncertainty this brings, but also due to border closures
supply forecasts:
effectively stopping any new migrants or overseas students from
entering the country. Border closures will impact demand in both Gross Supply Forecasts 2022 to 2023
the short and medium term, as new migrants have been a major
Forecast as at: Q4 2019 Q3 2020
driver of demand for office space from the business services, (Base Case Outlook)
education, finance and IT sectors.
Sydney CBD 207,906 199,906
As a forecaster, it has never been more challenging to understand
what employment and therefore demand conditions will be this year Melbourne CBD 318,750 202,750
or next. Too many factors are changing on a day-to-day basis for
us to forecast this with any certainty. What we do know, however,
Bear in mind, that the above supply forecasts for Sydney are
is that any short term shock to demand is always met by a long
impacted by Quay Quarter Tower and Circular Quay Tower, both of
term impact to supply cycles. Indeed, this is the key reason why
which are under construction and therefore have set timelines.
Australia’s office property market continually works in cycles. This
system has been even more pronounced in the last 10 years or so, The biggest impact we see is in Melbourne, where there are a
as the development market in Australia has become very financially number of projects currently seeking pre-commitment. The current
disciplined, particularly since the GFC. What this means is that the market conditions are expected to push out the timing of the next
vast majority of office projects get built only once the demand side supply pipeline in that city. We also expect that any supply that does
(or the ‘pre-commitment’) has been met. Post-COVID, we expect complete over the above timeframe, will be met with very high pre-
that this discipline will get even tighter, and a number of projects commitment levels in order to get financing or board approval.
will need higher pre-commitment to obtain funding to commence As a result, we are forecasting vacancy to be trending down in
construction. most CBD markets by 2022.
This is why, even in such uncertain times, we can say with some
confidence that office markets will be close to rebalanced by
2023/24. We expect that current and future vacancy created by
this demand shock to be mopped up by improving employment
5
CBD OFFICE | Research & Forecast Report | H2 2020
SYDNEY CBD
SNAPSHOT
Market Indicators - Jun 2020
Incentives have moved materially in Q2 2020, while net face rents
have held steady. While we expect incentives to continue to increase
over the latter half of 2020 and in to 2021, however, our view is that
TOTAL MARKET a market average of 33% is probably the limit that Sydney landlords
VACANCY RATE will be willing to move to, before face rents start to be impacted.
Sydney
Jul-2020 YoY Change
Vacancy has risen from 3.9% in Jan 2020 to 5.6% in July 2020. We
5.6%
are forecasting a steep rise in vacancy over the latter half of 2020,
Jul-2021 (f) primarily due to sub-lease options coming on to the market. Beyond
9.4% that we expect vacancy to begin to decline in early 2022, as tenants
have more certainty of their space requirements and are more willing
to commit to leases.
AVERAGE NET FACE RENTS (A$/m2 p.a.) Longer term, supply is going to have a major impact on the Sydney
Prime Secondary CBD, which will differentiate the 10 year outlook to 2030 from the
L H L H previous 10 years, when supply in the Sydney CBD was reasonably
$944 $1,195 $731 $846 limited. However, we expect that vacancy will revert to around long
term averages by 2023/24. This will be as a result of a large number
of leases due to expire in this time, as many tenants are currently
AVERAGE GROSS INCENTIVES
holding over leases on a short term basis to deal with occupancy
Prime Secondary
uncertainty.
L H L H
27% 25%
The Flexspace market is likely to play an even bigger role in the
Sydney CBD, and indeed the city more widely, as tenants rely on this
AVERAGE YIELDS sector for expansion and overflow capacity. This sector, therefore is
Prime Secondary likely to re-emerge as a strong source of tenant demand.
L H L H
4.63% 4.78% 5.16% 5.25%
AVERAGE CAPITAL VALUE (A$/m2)
Prime Secondary
L H L H
$19,224 $25,874 $14,007 $16,633
YEAR TO JUL-2020 YEAR TO JUL-2021 (F)
NET SUPPLY
125,495m2
-6,376m2
NET ABSORPTION
-98,290m2 -75,909m2
52 Martin Place, Sydney
Managed on behalf of REST.
6
CBD OFFICE | Research & Forecast Report | H2 2020
MELBOURNE CBD
SNAPSHOT
Market Indicators - Jun 2020
Melbourne CBD prime grade net face rents experienced an annual
rental growth of 6.3% over the year to June 2020. There was no
change in prime grade net face rents from Q1 to Q2 and we expect
TOTAL MARKET that to continue in the short term, offset by an increase in incentives.
VACANCY RATE
Melbourne Jul-2020 YoY Change
An increase in sub-lease is starting to affect the market, with an
5.8% estimated 69,249sqm of space available as at June 2020 within
Jul-2021 (f) Melbourne’s CBD. We expect the volume of sub-lease space to swell
9.7% throughout the second half of 2020.
Deal activity across the Melbourne CBD has been limited since mid-
March, when the impact of the pandemic was first felt in Australia.
AVERAGE NET FACE RENTS (A$/m2 p.a.)
Deals that have emerged were negotiated pre-COVID-19, with
Prime Secondary
incentives and rent reviews experiencing the most movement.
L H L H
$621 $815 $468 $560
The outlook for new supply over the medium-to-long term is difficult
to predict, with developers facing a number of new challenges before
AVERAGE NET INCENTIVES commencing construction, including the change in risk profile, higher
Prime Secondary pre-commitment hurdles, an uncertain rental outlook and access to
L H L H finance. For this reason, we expect to see several projects that are
33% 35% either approved or mooted, to be pushed back or not go ahead at all.
AVERAGE YIELDS
Prime Secondary
L H L H
4.67% 4.74% 5.92% 5.05%
AVERAGE CAPITAL VALUE (A$/m2)
Prime Secondary
L H L H
$13,156 $17,550 $9,267 $11,382
YEAR TO JUL-2020 YEAR TO JUL-2021 (F)
NET SUPPLY
159,044m2 176,753m2
NET ABSORPTION
35,726m2
-22,302m2
200 Victoria Street, Melbourne
Note: Melbourne incentives are as per August 2020, based on more up to date leasing Sold for $72,000,000 on behalf of Australian Unity.
data.
7
CBD OFFICE | Research & Forecast Report | H2 2020
BRISBANE CBD
SNAPSHOT
Market Indicators - Jun 2020
The long-term market fundamentals remain sound and supported
by a well-diversified pool of tenants, large government occupancy
(estimated at least at 30% of occupied stock) affordable net face
rents compared to the largest capital cities and restricted new supply
TOTAL MARKET
VACANCY RATE under construction.
Jul-2020 YoY Change Whilst occupiers are expected to remain generally inactive over
12.9% the next 6 months, vacancy is forecast to rise above the long-term
Jul-2021 (f) average of 12.9%. However, Premium grade vacancy is forecast to
Brisbane 13.7%
remain at single-digit levels until at least early 2022.
New supply under construction is limited to two projects adding less
than 5% of the current office stock (103,000sqm). We are forecasting
AVERAGE NET FACE RENTS (A$/m2 p.a.) a development gap beyond 2022 and we envisage that new
Prime Secondary development activity will be conditional upon achieving high levels of
L H L H pre-commitment.
$622 $684 $466 $499
Net effective rents are forecast to follow a downward trend for the
AVERAGE GROSS INCENTIVES next three years and return to current levels between mid-2023 and
Prime Secondary early-2024.
L H L H
37% 41%
AVERAGE YIELDS
Prime Secondary
L H L H
5.11% 5.42% 6.06% 6.53%
AVERAGE CAPITAL VALUE (A$/m2)
Prime Secondary
L H L H
$11,519 $13,406 $7,131 $8,236
YEAR TO JUL-2020 YEAR TO JUL-2021 (F)
NET SUPPLY
48,680m2
-932m2
NET ABSORPTION
27,305m2
-17,839m2
ONE ONE ONE Eagle Street, Brisbane
Valued on behalf of The GPT Group.
8
CBD OFFICE | Research & Forecast Report | H2 2020
CANBERRA CBD
SNAPSHOT
Market Indicators - Jun 2020
Over H1 2020, Canberra has been the only Australian CBD to
demonstrate a decrease in vacancy, with the Civic vacancy recorded
at 6.8%. This has been attributable to the strong government
presence within the CBD, and their increase in take-up to support
TOTAL MARKET
Canberra VACANCY RATE the additional load and strain that COVID-19 has imposed on the
economy.
Jul-2020 YoY Change
6.8% Canberra is typically a ‘move within’ market, therefore, from an
occupancy outlook, we forecast little to no change in occupied stock
Jul-2021 (f)
and net absorption levels are forecast to remain subdued.
5.7%
Net face rents have held steady over the first half of 2020, although
incentives have increased across the market. The increase in
AVERAGE NET FACE RENTS (A$/m2 p.a.)
incentives has caused net effective rents in A and B grade assets to
Prime Secondary
decrease 7.1% and 5.9% respectively, over the first half of the year.
L H L H
$405 $290 Due to the lack of transactional activity within the Canberra Civic
market over H1 2020, there has been no change recorded to office
yields. In June 2020, yields for A and B grade remain at 5.63% and
AVERAGE GROSS INCENTIVES
7.25% respectively.
Prime Secondary
L H L H
23% 28%
AVERAGE YIELDS
Prime Secondary
L H L H
5.00% 6.25% 7.00% 7.50%
AVERAGE CAPITAL VALUE (A$/m2)
Prime Secondary
L H L H
$7,200 $4,000
YEAR TO JUL-2020 YEAR TO JUL-2021 (F)
NET SUPPLY
17,918m2 51,650m2
NET ABSORPTION
13,789m2 53,850m2
480 Northbourne Avenue, Dickson
Valued on behalf of Doma Group.
9
CBD OFFICE | Research & Forecast Report | H2 2020
ADELAIDE CBD
SNAPSHOT
Market Indicators - Jun 2020
There has been limited sublease come to the market which has
been related to the pandemic therefore, vacancy has only increased
marginally to 14.2%.
TOTAL MARKET
VACANCY RATE Leasing enquiry fell during April and May, but has improved
Adelaide significantly in June and July.
Jul-2020 YoY Change
14.2%
83 Pirie Street, Adelaide being developed by Cbus Property is
Jul-2021 (f) due to commence this year with The Department of Transport &
13.1% Infrastructure pre-committing to just over half the building. This
project is due for completion early 2023.
60 King William Street, Adelaide which is currently the Southern
AVERAGE NET FACE RENTS (A$/m2 p.a.)
Cross Arcade and developed by Charter Hall will be demolished to
Prime Secondary
make way for a new building for the federal government commitment
L H L H
of Department of Human Services (DHS). This project is expected to
$333 $455 $276 $376
complete in 2023.
AVERAGE GROSS INCENTIVES
Prime Secondary
L H L H
45% 50%
AVERAGE YIELDS
Prime Secondary
L H L H
5.75% 7.25% 6.96% 7.46%
AVERAGE CAPITAL VALUE (A$/m2)
Prime Secondary
L H L H
$5,779 $6,293 $3,966 $5,040
YEAR TO JUL-2020 YEAR TO JUL-2021 (F)
NET SUPPLY
37,788m2 27,063m2
NET ABSORPTION
40,092m2 4,826m2
121 King William Street, Adelaide
Sold for $82,250,000 in May 2019. Colliers acted on behalf of purchaser,
Charter Hall who acquired the building from 151 Property.
10CBD OFFICE | Research & Forecast Report | H2 2020
PERTH CBD
SNAPSHOT
Market Indicators - Jun 2020
Perth CBD incentives have begun to creep higher following the
easing of COVID-19 pandemic restrictions in Western Australia.
Businesses have had more time to assess their future staffing and
TOTAL MARKET space requirements and landlords re-assessing the demand outlook
VACANCY RATE resulted in the market reverting to being a tenants market.
Jul-2020 YoY Change Vacancy increased marginally to 18.4 percent from 17.5 percent in
18.4% January 2020. Colliers currently anticipates vacancy, as a base
Jul-2021 (f) case, will likely continue to increase to a 20.8 percent peak in
Perth
20.7% 2022. The resources sector remains resilient in the current crisis,
and the outlook for global stimulus puts the WA resources sector
and economy on a strong footing which, at the very least, will help
limit the increase in CBD vacancy. In the best case, improving hard
AVERAGE NET FACE RENTS (A$/m2 p.a.) commodity prices could trigger the revival of additional resource
Prime Secondary investment spend, leading to improving office space demand.
L H L H
$525 $775 $350 $410 Colliers has seen some early signs of a shift in A grade tenant
demand towards more cost effective B grade options. COVID-19’s
AVERAGE NET INCENTIVES impact on bottom-lines and subsequent business sentiment is likely
Prime Secondary driving this shift. More could go down that path if business conditions
continue to be impacted by this pandemic, including decentralisation
L H L H
options for tenants that seek higher car parking ratios and/or have
45% 50%
determined that a CBD location is not pertinent.
AVERAGE YIELDS WA’s success at limiting the health impacts, quicker phasing out
Prime Secondary of restrictions and more resilient economic base could see Perth
L H L H improve in attractiveness as a location to allocate investment capital;
5.65% 6.90% 6.75% 7.25% which we believe will, at the least, limit yield decompression and a
likelihood that Prime yields experience further compression over the
next twelve months.
AVERAGE CAPITAL VALUE (A$/m2)
Prime Secondary
L H L H
$8,015 $13,136 $5,000 $5,857
YEAR TO JUL-2020 YEAR TO JUL-2021 (F)
NET SUPPLY
26,043m2
-11,862m2
NET ABSORPTION
20,915m2
-51,247m2
Brookfield Place Tower 1, 125 St Georges Terrace, Perth
Valued on behalf of Brookfield.
11CBD OFFICE | Research & Forecast Report | H2 2020
CAPITAL MARKETS
OUTLOOK
By Karina Salas
Associate Director | Research
karina.salas@colliers.com
Economic uncertainty and market volatility have determined the fate Ownership structure supports asset value
of Australian’s capital markets over the first half of the year, with preservation
just a handful of CBD office buildings (over A$5 million) transacted
A recent commercial market sentiment survey conducted by NAB
across Sydney and Melbourne. We have estimated a decline of
has revealed a sentiment fall of 68 points across the Australian office
90% in CBD office sales volumes to A$664 million in H1 2020. This
market underpinned by the increase in vacancy and the expected fall
compares to A$5.5 billion office buildings transacted in H1 2019. Only
in capital values of 4.4% over the next year and 3% over the next two
during the global financial crisis, we saw a similar decline in CBD
years.
office sales volumes across the country, with the recovery taking at
least 2.5 years (or 5 half-year terms). The results of the survey are not a surprise because the office
market status quo has been altered and some experts even compare
Australia’s decisive economic and health response during the
these changes to the industrial revolution in the 19th century. Some
pandemic should not be underestimated as it has had and will
of the most-troubling challenges faced by the Australian CBD office
continue to have a large influence on investor’s sentiment, supporting
market include the now riskier nature of long-term cash flows, the
Australia’s value proposition compared to other advanced economies.
forecast 12-month negative net absorption (of circa 109,000 sqm to
At the time of writing, Australia remains as one of only 10 countries
July 2021), and the potential structural changes in the making.
around the world retaining its AAA credit rating by all three global
rating agencies. This superior credit rating has remained in place, Our analysis of ownership data reveals that 60-70% of CBD
even after the federal government announced (in mid-July) a 2020 office space is owned by institutional investors including public
forecast GDP fall of 3.5% that is expected to trigger a cumulative REITs, superannuation funds, investment managers and insurance
forecast deficit of A$184 billion (equivalent to nearly 10% of GDP) by companies. As a general principle, institutional investors make
June 2021. From a health perspective, many Australian geographical investment decisions based on a robust plan and strategy. As such,
areas have been able to safely reopen economic activity following the institutional investors generally:
successful implementation of pandemic containment measures.
• have a long-term view of the investment supporting the
Whilst we continue to see disruptions of capital flows into the delivery of risk-adjusted returns to investors,
Australian commercial property market, we have seen some early • adhere to best practice corporate governance principles
signs of improved investment appetite for CBD office buildings over supporting their financial strengths, and
the past few weeks. One of the most resilient deals exchanged in • recruit and retain skilled and talented staff able to strategically
June and expected to settle in Q4 this year, is the A$145 million sale reposition the use and purpose of portfolio assets to ensure
of the B grade building located at 350 Queen Street in Melbourne. alignment with occupiers’ needs.
The asset was acquired by a Singaporean institutional investor, TE
Our analysis of ownership data also reveals that about 15% of the
Capital Partners, at a passing yield of 4.8%. The investment offers a
CBD office space across Australia is owned by private investors/
95% building occupancy and a 3.5 years WALE.
developers, with the largest concentration (of at least 15% of stock
Despite the success of this transaction, CBD office investment ownership) seen in the smallest markets of Adelaide, Canberra and
volumes are forecast to remain below the long-term average for Perth. These three office markets combined comprise less than one
the next 12-24 months. This timeframe could extend if economic quarter of the Australian CBD office stock; hence its contribution to
conditions remain subdued beyond 2022. market value is limited.
Based on the outcomes of our analysis, we have the view that the
ownership structure of the Australian CBD office market underpins
the resilience of the sector, supports long-term value preservation
and reduces the risk to see significant distressed asset sales
released for sale during disruptive times.
12CBD OFFICE | Research & Forecast Report | H2 2020
Buyers already achieving higher risk premium As secondary grade assets carry a higher inherent risk, we expect
despite yields holding firmly the spread between the B grade and 10-year bond yields will
widen at a faster pace compared to Prime grade spreads, reaching
The pandemic has redefined the way people and companies
historical high levels of 630-640 bps by early to mid- 2022.
interact and operate, lifting the inherent risk profile of commercial
property assets, particularly in the office and retail sectors. When
investors weight up the risk and return of an investment opportunity,
they usually assess the risk premium of the investment which is
calculated as the difference between the asset yield and the risk-free
rate (in this instance measured as the 10-year bond yield). Under
uncertain economic and market conditions, investors are expected to
seek a higher risk premium to compensate the increase in risk.
As several countries globally have implemented monetary and fiscal
stimulus measures to reactivate economic activity, we have seen
several advanced economies like Australia, New Zealand, England
and United States reducing the official overnight interbank rate to
historical record low levels. This strategy has effectively triggered
a reduction of the 10-year bond yield allowing for an immediate
repricing of risk in the way of a higher risk premium.
Over the past 6 months, just a handful of CBD office sales have
350 Queen Street, Melbourne
reached unconditional contract stage or actual settlement, providing Sold for $145,000,000 on behalf of a local private investor.
limited evidence of yields holding steady. The 6-months upward
trend on the asset yield spread (compared to the 10-year bond yield)
reveals that investors are already achieving a higher risk premium
despite yields having held steady over the same period. In December
2019, Prime grade investors purchased CBD office buildings
expecting to achieve an average market risk premium of 430 bps
above the 10-year bond yield. In June 2020, the data reveals that
Prime grade investors were expecting to reach an average market
risk premium of 470 bps. Similarly, B grade investors were expecting
to achieve an average risk premium of 550 bps in June 2020
compared to 515 bps reached in December 2019.
Over the next 3 years, we expect that the spread between Prime
grade and 10-year bond yields will continue to widen underpinned by
a further reduction on the cash rate and potential softer asset yields.
We forecast that Prime grade investors will seek to achieve a market
risk premium in the range of 500-505 bps early to mid-2022.
55 Currie Street, Adelaide
Sold for $148,250,000 in September 2019 on behalf of ARC Equity
Partners.
Australian CBD Office Sales (A$5+ million) Australian CBD Office Yield Spread to 10-year Bond Yield
9 Forecast
700
8
600
7
500
6
Spread bp
A$ Billions
400
5
300
4
200
3
100
2
-
1
(100)
0
Jun-10
Jun-11
Jun-12
Jun-13
Jun-14
Jun-15
Jun-16
Jun-17
Jun-18
Jun-19
Jun-20
Jun-21
Jun-22
Jun-23
Jun-00
Jun-01
Jun-02
Jun-03
Jun-04
Jun-05
Jun-06
Jun-07
Jun-08
Jun-09
2007 H1
2007 H2
2011 H1
2011 H2
2015 H1
2015 H2
2018 H1
2018 H2
2016 H1
2016 H2
2014 H1
2014 H2
2012 H1
2012 H2
2009 H1
2009 H2
2008 H1
2008 H2
2010 H1
2010 H2
2017 H1
2017 H2
2020 H1
2013 H1
2013 H2
2019 H1
2019 H2
Half-year sales Long-term average half-year sales National Prime Grade Spread National B Grade Spread
Source: Colliers Edge Source: Colliers Edge
13CBD OFFICE | Research & Forecast Report | H2 2020
OFFICE OCCUPANCY
OUTLOOK
By Kate Gray
Director | Research
kate.gray@colliers.com
In a matter of months, the COVID-19 pandemic has turned life and So, what does all of this mean for the demand for offices going
work upside down. We have all had to get used to social distancing forward? Looking at the data on occupancy from past shocks can
and businesses rapidly adapting to shutdowns with many white- assist in forming a view of what is likely to happen in the future.
collar employees required to work from home. During the early We know that changes to workplaces is nothing new and they have
weeks of work from home, many businesses reported productivity evolved substantially over the last couple of decades. At the heart
was being maintained or even increased as they grappled with of change is the technological advances we have seen including
the rapid change in economic conditions and what that meant for development of Wifi (1997), Google (1998), cloud computing (2006)
their businesses. For many it is a matter of survival with revenue the iPhone (2007), Apps (2008) the iPad (2010) and Skype for
drying up overnight. This resulted in a massive shedding of jobs and Business (2015). Within workplaces we have seen activity-based
reduced work hours which led to the largest stimulus packages in working adopted in the 2000s, hot desking and the use of flexspace
Australian history including JobKeeper, increases in JobSeeker and in more recent years.
now JobTrainer.
1997 2006 2008 2015
Although there is still a high level of uncertainty as to how long the
pandemic will last, we are starting to turn our minds to how offices
will look and what lasting impact this pandemic will have on office
demand in the medium and long term. We have seen a plethora of WIFI CLOUD APPS SKYPE FOR
COMPUTING BUSINESS
workplace surveys on the effectiveness of work from home and the
preference of some to continue to do so permanently.
Technology has advanced significantly including the rapid adoption of 1998 2007 2010
video conferencing and ability to access work servers remotely with
this technology being put to the test globally during the pandemic.
In the short term many white-collar sectors were able to move to
remote working with limited impact on productivity. However, as the GOOGLE IPHONE IPAD
pandemic has progressed and we have needed to work remotely for
longer, the novelty has worn off and some of the cracks of working These evolutions have changed how we occupy office space and the
remotely are starting to show. Decision making can be slower, and type of space we occupy, rather than reduced our need for offices.
collaboration is more difficult due to the lack of face-to-face contact. We suspect that once the health crisis has passed and business
The ability to train new starters and turn around to ask a colleague starts to return towards more normal operations that this shock
how to do something or their thoughts on a problem is more difficult will be no different. Until 2004, secondary grade space had higher
remotely. The conversation around the water cooler with those occupancy than prime grade and by 2010 prime grade had higher
outside your team where an idea is shared doesn’t happen. The occupancy than secondary grade space. Occupancy in secondary
absence of all of these things in the medium to long term are likely to grade space is still equivalent to what it was in 1993, despite having
impact the team’s creativity, collaboration and productivity. cheaper rents than prime grade. This indicates that there is a tenant
preference for newer buildings which allow more efficient and
There have been a many surveys conducted on work from home
technologically adaptable workplaces, which improves staff retention,
which survey worker preferences, however they do not provide
engagement and therefore productivity.
true insight into the decisions regarding occupancy, the location of
offices and other factors such as, cybersecurity, workplace safety,
staff retention, training of new staff, client engagement and corporate
culture. The trend across most of these surveys is the majority of
office workers still want to have some face to face contact with
colleagues but would prefer that not all work hours are in the office.
One of the larger surveys conducted in late April was from Bates
Smart and showed that only 17% of people would give up their
permanent desk as 84% missed the social interaction with their
colleagues.
14CBD OFFICE | Research & Forecast Report | H2 2020
We are starting to see some trends start to emerge. In larger cities
Occupied Stock by Grade - Australian CBD’s
there is talk of a ‘hub and spoke’ model, where there is a smaller
CBD hub office and there are several satellite offices which are 12,000,000
closer to home. An interesting example is banking where the branch 10,000,000
network could also be utilised as an office for some of the current
8,000,000
CBD workforce. This could lead to higher demand in suburban office
locations. Conversely there are also some tenants which are looking
s qm
6,000,000
at consolidation of leases once a lease expires and moving to less
4,000,000
locations.
2,000,000
We are starting to see some tenants looking for more flexibility in
lease terms with the ability to increase and decrease occupancy as 0
Jul-94
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Jul-93
Jul-97
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Jul-01
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their business needs change. We think that this is likely to lead to
more adoption of flexspace for the increases in demand when the Prime Secondary
business need requires. Source: PCA OMR Jan 2020, Colliers International
While we are seeing that the pandemic has changed the way we
work, we think that this will lead to the next evolution as to how
we use office space rather than all of us taking our laptops and
moving home. They are more likely to be collaborative spaces with
more break-out areas and more flexible hours where some are
worked in the office and some from home. Ultimately people are
wired for social connection and offices play a key part in providing
a place for that connection to take place. We see this as being key to
underpinning the next evolution of office design.
121 Marcus Clarke Street, Canberra 133 Mary Street, Brisbane
26,123 sqm managed on behalf of MTAA Superannuation Fund & Realmont Appointed and leased on behalf of ARA.
Property Partners.
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Colliers International does not give any warranty in relation to the accuracy of the information
contained in this report. If you intend to rely upon the information contained herein, you must take
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not been verified by us. We have no belief one way or the other in relation to the accuracy of such
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