Flight to quality takes CBD business tenants upmarket
Business tenants are switching to better quality accommodation at a faster clip than other office spaces as they seek to win back staff to workplaces in the wake of the pandemic, according to an Investa analysis of CBD leasing data.
The take-up of prime office space accounted for around 95 per cent of CBD leasing activity in the first half of 2022, according to the analysis of conditions in the office market.
“A post-lockdown release of pent-up leasing demand has almost exclusively landed in the prime office market,” said David Cannington, head of research at Investa, one of the country’s major commercial property players.
The leasing data backs up arguments put forward by major landlords, including ASX-listed Charter Hall, Mirvac and Dexus, that a “bifurcation” in office buildings is emerging as corporate tenants push for the latest in amenity to win over staff wedded to flexible working.
“The war for talent means that people really have to create amenity, both within their workplace and in the surrounds,” Charter Hall chief David Harrison told analysts at a company earnings briefing last week.
“There’ll be a big delta between relatively low vacancy rates in modern office buildings in all markets and the older buildings at 30, or 40, and some of them are 50 years old, they’re really going to struggle to retain tenants.”
The Investa analysis shows that gross face rents – which don’t factor in the effect of incentives on overall rent – are rising in response to the demand for prime CBD office space.
Through the first half of 2022, Sydney CBD and Brisbane CBD prime officerents increased at an annualised rate of 9 per cent and 14 per cent respectively. The other CBD markets experienced a more modest annualised growth rate of 5 per cent or less.
Nevertheless, some of that growth is the result of rising inflation. As incentives moderate, there may also be some growth in effective rents, however, after factoring in the impact of inflation, real rents are still falling, on the Investa analysis.
“Most office lease terms provide rent as an effective hedge against inflation,” Mr Cannington said.
“Office rents effectively stalled through the pandemic and growth in real terms, ie adjusted for inflation, is running at the lowest rate since 2010.
“However, inflation-indexed rental increases and rent reviews, combined with positive leasing demand, are expected to drive further growth in nominal prime market office rents over the coming year.”
