Nearly two years since the onset of the Covid-19 pandemic, evidence is emerging of how the pandemic has impacted the Australian economy and changed the expected trajectory of Australia’s six largest capital city office markets.
A review of current office market vacancy rates, compared to industry forecasts made prior to the onset of the Covid-19 pandemic, indicates there is just under 500,000 sqm of more vacant space than expected in Australia’s six largest CBD office markets.
Placed in perspective this equates to close to 10% of the total Sydney office stock being vacated as a result of the Covid-19 pandemic. This is according to a new study by the PAR Group, an independent property research collective.
The PAR Group analysis, undertaken by Damian Stone of Y Research and Rob Ellis of The Data App, compared actual office vacancy levels in January 2022 to those which were forecast prior to the Covid-19 pandemic (in January 2020).
The objective of the analysis was an attempt to quantify the potential impact of the Covid-19 pandemic on Australia’s major office markets.
- Compared to forecasts made prior to the Covid-19 pandemic, in January 2020, there was approximately 477,177 sqm of additional vacancy office space in January 2022.
- This additional vacancy represents 2.6% of the total stock across Australia’s six largest capital city office markets.
- Five of Australia’s six largest capital city office markets recorded higher office vacancies than forecast prior to the pandemic.
- The overwhelming majority (over 80%) of the higher-than-expected office vacancy occurred in Sydney and Melbourne. The significantly, higher than forecast, vacancy in Australia’s two largest markets is due to a range of factors, including significant new supply, coupled with the impact of Covid-19 on the business across Australia in 2020-21.
- The current amount of vacant office space in the Melbourne CBD is 98.3%, higher than expected prior to the Covid-19 pandemic, while Sydney has 57.6% more vacant space than forecast.
- Possibly a result of Western Australia’s hard borders, and a business-as-usual approach, Perth performed close to expectations over the course of the Covid-19 pandemic, as actual office vacant space was just over 5,000 sqm more than forecast.
- Canberra was only capital city to record a lower than forecast vacancy. Over 100,000 sqm of additional space has been occupied in Canberra, largely by Government. This outcome probably highlights the significant role the Government and its stimulus measures had on ACT employment and economic performance.
- The higher than envisaged office vacancy levels illustrate the impact of structural change on Australia’s CBD workforces. Previous PAR Group research (http://par.group/getting-quarter-of-million-workers-back-to-the-office/) estimated approximately 228,804 fewer office workers were making the daily commute to Australia’s six largest CBD office markets, representing 19% of the expected office workers.
The chart below illustrates the difference between the actual office vacancy levels in January 2022 compared what was expected from the forecasts made back in January 2020.
Some two years since the onset of the Covid-19 pandemic in Australia, which resulted in nationwide lockdowns, evidence is emerging of how the pandemic has impacted the economy and changed the trajectory of Australia’s six largest capital city office markets.
The higher-than-expected vacant office space, of close to 500,000 sqm, is unsurprising given the uncertainty stemming from the Covid-19 pandemic. Terms that are standard now (doubled dosed, boosted, mask mandates, social distancing and lockdowns) had not entered the public lexicon in early 2020, while working from home became the norm, rather than the exception.
Placed in context, the impact of the Covid-19 pandemic on Australia’s six largest capital city office markets is, a greater than expected, 2.6% of the total office market stock which, by all accounts, is relatively mild. In part, this is because the response, at all levels of Government, via health and numerous stimulus measures have helped ameliorate the impact of the pandemic. Moreover, the overwhelming majority of the higher-than-expected office vacancy space is located in Sydney and Melbourne.
The greater than expected office vacancy levels highlights the impact of Covid-19 on the major business communities through 2020 and 2021. These cities, which are home to both national and international occupiers, have also been impacted changing work practices and contributing to a significant number of office workers unlikely to return to making the five-day commute into the CBD in the future.
Increasingly, it seems, working from home and changes to commuting patterns will continue to have an ongoing impact on office demand in the years ahead. In spite of the ending of Government lockdowns, daily office occupation in late January 2022 was under 10% of pre Covid-19 levels across the eastern states according to a survey of PCA members. Even in WA, where community spreading of the virus has been limited, daily office occupation is falling. This behaviour of both companies and employees illustrates the long-term spill over effects stemming from the pandemic.
Previously, CBDs were, for many workers, ‘destination of default’ – all roads and public transport led to the CBD. Given the broader choices involved in coming to a physical office now, CBDs and their office towers need to give office workers a reason to be there.
In response, so far there has been a flight to quality with tenants wanting the best buildings with the services they offer for staff coming into the office. This trend will likely intensify in the years ahead.
Consequently, the emerging legacy of the Covid-19 pandemic is less demand for vacant older, lower grade office buildings and higher CBD retail vacancies. Solving these issues, which are key to CBD vitality, will remain issues in 2022 and beyond.
Other research undertaken by the http://PAR.Group/ on the impact of the pandemic and e-commerce on commercial property refer to the links below:
For further information, please contact:
Rob Ellis, Director of the Data App. Mob: 0417 195 352 or email: firstname.lastname@example.org
Damian Stone, Principal and Chief Problem Solver of Y Research. M: 0433 525 414 or email: email@example.com
About PAR Group
Real Investment Analytics (RIA), The Data App (TDA) and Y Research are partners in PAR Group, an independent research collective offering a comprehensive range of property research and analytical services. The team is experienced in economics, property research, transactional and corporate strategy; all with extensive industry involvement in both the property and finance sectors. Visit: http://par.group/ for more information.