The office market nationally is going through a period of volatility. Around the country we have seen continued high vacancy rates and high incentives, and whilst we are seeing busier city centres, demand has not regained momentum.
Vacancy rates around the country continued their upward trend, with the Property Council of Australia reporting a total vacancy rate in July 2023 of 12.8 per cent, up from January 2023 by 0.3 per cent. This is a significant increase on the pre-pandemic vacancy rate which was reported by the PCA in January 2020 at eight per cent.
Tenant demand continues to be centred around flexible workspaces and is a common theme among all the capital cities. The current tenant demand is being driven by tenants wishing to relocate or upgrade with most markets reporting lower vacancy and stronger demand in the premium and A-grade spaces.
This year we have seen rental rates remain flat with only some green shoots in some of the fringe markets with less supply. Incentives have stayed high across the country with some locations reporting incentives of up to 40 per cent. Given the overall leasing market conditions, general market conditions and the high incentives being reported, we do not expect there to be any substantial growth in rents for some time to come.
Early in 2023 we had predicted the office market to remain generally volatile and uncertain. This has been true of most markets. Inflation and interest rates have continued to be a concern for investors and businesses alike.
Around the country the office market continues to face downward pressure on values. Interest rates and waning investor demand on the back of high vacancy rates and negative market sentiment have led to a softening in yields in some locations by as much as two basis points.
A common theme in our major cities is a lack of transactions making it difficult to ascertain the extent of the softening in the market. Many agents are reporting a lack of new enquiries for offices. They are also noting increasingly challenging conditions in which buyers do not proceed with a sale and often the length of time needed to finalise a sale is noticeably increasing.
The challenges in the office market are likely to continue for some time particularly as we navigate the generally weaker economic conditions ahead.