Office vacancy rates should drop “sharply” over the next two years in Australia, prompting a warning from AMP Capital’s head of real estate Kylie O’Connor: “Don’t write off the office.”
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Three key takeaways:
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History shows that office vacancy rates bounce back faster than expected after significant downturns, says AMP Capital’s O’Connor.
“Do not underestimate the speed and magnitude of an upturn,” she says.
“Over the past 40 years, the Australian office market has experienced five major downturns. While all of them had different causes, the effect on demand for office space was relatively similar and so were the subsequent recoveries.”
In all cases, O’Connor says, market corrections were followed by a strong rebound in office demand. The 5.6 per cent average increase in occupied space in Sydney’s CBD and the 5.5 per cent in Melbourne CBD over the two years following a downturn are cases in point.
“Many pieces are coming together for the outlook in 2022, which is set to mark a turning point for the office market. As the vaccination rollout progresses and the risk of further lockdowns should recede, expectations are for office workers to return to the CBD in steadily growing numbers.”
The AMP Capital Wholesale Office Fund has more than $7 billion in core office assets, providing investors with exposure to an office portfolio exclusively located in Sydney and Melbourne.
O’Connor says several new office developments in Sydney and Melbourne are likely to push up vacancy levels this year.
“However, following the market correction last year, medium-term supply risks have significantly reduced as several new projects have been scaled back, put on hold or have been withdrawn altogether.
“Overall, our estimate for additional supply from 2021 to 2025 has already reduced by over 50 per cent compared to our pre-COVID forecast, with moderate supply levels to further support an office market recovery over the coming years.”
O’Connor points to the City of Perth as a “good snapshot” of how office markets rebound. Perth is one of a small number of global cities with only limited restrictions or COVID-19 transmissions. Workers were free to return to the office in May last year.
“While it was slow going at first, as office workers returned to the CBD following the first lockdown, physical office occupancy steadily increased to 77 per cent by October 2020,” she says, referring to Property Council office occupancy figures. “This is just 6.5 per cent below the last pre-COVID reading in January 2020 of 83.5 per cent.”
“The experience in Perth is promising and provides optimism that we will see our CBDs regain their previous vitality sooner rather than later.
“It also highlights how crucial the ongoing virus control and avoidance of further lockdowns is for a sustained recovery in the office market and the economy as a whole,” O’Connor concludes.
Read AMP Capital’s latest insight report, Capitalising on the COVID-19 recovery.