Empty offices fill up as remote-work momentum shows signs of slowing

Growing demand for office space in Australia’s big cities suggests the momentum for remote working may be fading as companies take advantage of lower rents to shift into better towers.

Vacancy in Sydney’s offices has edged down half a per cent over the past six months to 13.3 per cent as big firms leased more space than they did over the same period to January this year, a new Property Council survey shows.

Melbourne’s vacancy rate is still at historically high levels, 18.9 per cent, the legacy of sharp lockdowns during the pandemic, but demand from companies for offices in the southern capital was higher than in most other cities apart from Brisbane and Perth, the figures show.

“The office market has moved from the correction phase to the recovery phase, but it remains a story of quality and location,” the council’s chief executive, Mike Zorbas, said. “Major occupiers are seeking the best buildings.”

Attractive rents and landlords’ incentives – usually in the form of rent-free periods or paying for office fitouts – along with amenities like gyms, cafes and transport hubs are luring firms back to city towers.

Retail giant Coles is fitting out a largely vacant building at 720 Bourke Street in Melbourne’s Docklands that was previously occupied by insurer Medibank. Coles’ signage has gone up on the building, and the supermarket chain will relocate its workforce from its current headquarters in Hawthorn East into its new digs over the next year.

The gravitational shift towards CBDs is having a negative impact on other landlords.

Vacancies in office-heavy Sydney suburbs like Parramatta, Chatswood, Macquarie Park, North Sydney and Crows Nest, and in Melbourne’s St Kilda Road, are still rising and are markedly higher there than in the respective city centres. St Kilda Road’s office towers, for example, are burdened with a vacancy rate above 30 per cent.

A key indicator of the health of the country’s office markets, what the property industry calls “positive net absorption,” where more space is being taken up by tenants than is vacated, is rising.

“Net absorption numbers turned positive late last year,” said Tony McGough, head of research at commercial agency Knight Frank’s Victorian office. “This is a sign of people coming back into the city.”

Over the six months to July, Sydney’s office market experienced net absorption of 18,715 square metres, well above the long-term average of about 8000 square metres, said Tom Broderick, head of research at another agency, CBRE. “The feedback has been that activity and inquiry is better this year than last year,” Broderick said.

“Office attendance has definitely improved. Sydney has been close to the new normal for 12 months now. Because of that, tenants are able to make long-term decisions. Some companies have expanded by 10 to 20 per cent since the pandemic,” he said.

Even before the conflict in the Middle East erupted and put pressure on fuel, transport and other costs, developers were struggling with a sharp increase in materials, labour and construction costs that, combined with rising interest rates pushing up the cost of debt, has made it uneconomic to build new office towers.

Future projects in both Melbourne and Sydney are thin on the ground and commercial agents are forecasting vacancy rates to drop from next year. “It’s going to start looking much more positive next year,” McGough said.

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