The Australian office market in 2024 continues to experience significant volatility in much the same vein as 2023. Nationally, vacancy rates remain high and incentives are elevated, with demand still lagging behind pre-pandemic levels despite busier city centres.
As of July 2024, the Property Council of Australia reported a total office vacancy rate of 13.6 per cent across all grades, up slightly from 13.5 per cent in January 2024. This reflects a significant increase from the pre-pandemic vacancy rate of eight per cent recorded in January 2020, indicating that the market has yet to fully recover.
Hobart maintains the lowest vacancy rate in the country, with a total of 2.8 per cent across all grades, while Melbourne and Adelaide have the highest vacancy rates, standing at 18 per cent and 17.5 per cent respectively.
Tenant demand is increasingly focused on flexible workspaces, a consistent trend across Australia’s major capital cities. Companies are seeking to relocate or upgrade to better quality office spaces, with premium and A-grade buildings continuing to attract stronger demand and exhibiting lower vacancy rates. In contrast, secondary office spaces remain harder to lease, contributing to the elevated overall vacancy levels.
Rental rates in 2024 have largely remained flat in line with 2023 levels, with only marginal signs of growth in certain markets where supply is limited. High incentives, reaching over 40 per cent in some CBDs, have persisted, keeping face rental growth subdued. Given the challenging leasing conditions and the prevalence of incentives, material rental increases are unlikely in the near future.
Economic uncertainty continues to weigh on the office market, driven by persistent inflationary pressures and elevated interest rates. Investors and businesses remain cautious, and this uncertainty has contributed to downward pressure on office property values. Yields have softened in some markets by as much as 250 basis points, reflecting weaker investor demand due to high vacancies and negative sentiment.
The ongoing challenge across Australia’s major cities is the lack of office property transactions, making it difficult to assess the full extent of market softening. Transaction volumes in Perth and Melbourne have shown a small decline while Sydney, Brisbane and Adelaide are showing signs of increased activity. We are now seeing more distressed sales which further muddies the waters as these tend to distort valuations by impacting the perception of market values.
Looking ahead, the office market faces ongoing challenges. With economic conditions expected to remain weak and vacancy rates still elevated, it is likely that the volatility in the office sector will persist throughout the remainder of 2024 and beyond. Investors and occupiers alike will continue to navigate a cautious market environment.
Jason Stevens
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