Home Property Australia ‘Beyond a building’ the flight to quality office space continues

‘Beyond a building’ the flight to quality office space continues

  • February 28, 2024
  • by Property Australia
Lendlease Investment Management Managing Director Vanessa Orth

Demand for high-quality office space is continuing, reflecting an overall ‘flight to quality’ trend as tenants look to create spaces for their staff that are more than ‘just buildings’. 

The January 2024 edition of the Office Market Report, which is released twice a year, showed overall CBD vacancy increased from 12.8 to 13.5 per cent nationally. Non-CBD areas saw an increase from 17.3 to 17.9 per cent. 

However, the vacancy rate for prime office space across the country was lower than secondary assets in every capital city besides Sydney and Adelaide. The Australian CBD prime vacancy rate across the country was 12.9 per cent compared to a vacancy rate of 14.5 per cent in the secondary market. 

Vanessa Orth, Managing Director, Lendlease Investment Management Australia said workplaces are evolving beyond just providing a building where people work to multi-faceted places that encourage connection, productivity and convenience as well as providing valuable services and experiences.

It’s about delivering beyond a tenant’s goals, to creating an experience their employees want, the unique things that create a sense of energy that draws people into the precinct,” she said.

“We identified these trends years before Covid, particularly around experience, amenity, wellbeing and sustainability, and have been creating precincts with these things in mind. If you look at Barangaroo, it’s a community that has its own identity, personality and attracts workers, tourists and the general public.”

She said the group’s success at Baranagroo South in Sydney reflects the “clear flight to quality trend”. 

Lendlease recently secured current tenant KPMG Australia to a renewed lease in Tower Three at Barangaroo South, to 2034.

The renewal of KPMG continues an active and successful 18-month period of leasing for Lendlease’s Barangaroo South precinct, which is experiencing a strong tenant retention rate with approx. 90 per cent of tenants making future office commitments choosing to recommit to the precinct. Overall, approx. 123,000 sqm of renewals and new leases have been completed. 

“Demand from new tenants has resulted in subleasing opportunities being substantially absorbed,” Ms Orth said.

“Several tenants have expanded their footprint as they have renewed leases. Overall, the precinct is around 93 per cent occupied with negotiations underway for remaining space.”

Charter Hall are noticing tenant demand heading towards high-quality office space as well.

The group just announced that it has commenced main works construction at its new $1.8 billion Chifley South development in the super core precinct of Sydney CBD. The building is already 55 per cent pre-committed. 

Charter Hall is targeting practical completion in 2027, with the project seeing strong demand for new premium office buildings, as likely new premium quality completions in the coming years remain limited. Upon completion, the precinct is expected to comprise a $3.8 billion two-tower complex owned by a wholesale partnership with some of Charter Hall’s largest wholesale investors, including GIC, VFMC and TelstraSuper.

Charter Hall Office CEO Carmel Hourigan said businesses are demanding best in class buildings. 

“This isn’t a new phenomenon, but it was certainly accelerated by business leaders’ desire to bring their people back into the office post-COVID lockdowns,” she said.

“What we are seeing now is that demand for these prime assets is outpacing supply, driving extremely low vacancies in best-in-class offices and increasing vacancies in lower-quality buildings.

“Chifley South is one of very few projects planned in the Sydney CBD between 2024 and 2027, meaning it’s well-positioned to absorb growing demand.

“Chifley has always been known as a pre-eminent address for the business, finance and legal community in Sydney. The addition of Chifley South, along with the precinct-wide sustainability upgrade, will enable us to meet the needs of our tenant customers.”

She said the demand for high-quality office space is rooted in “the need to carve out the role of the office”.

“Most people now have a work-from-home set up; we have the technology that allows for remote work; many businesses have flexible working policies. This has driven a mindset shift around the office for business leaders. It’s no longer about providing space to work – it’s about collaboration, innovation, mentorship, and culture.

“We increasingly see employers requiring minimum periods of working from office locations in what will become a softer labour market in many industries. But corporate and government know that modern, sustainable and well-located CBD offices will be critical in incentivising the shift in a more mutually beneficial way for employers and employees.”