Demand for office space across Australia continues to hold up reasonably well, new data shows.

But vacancies have increased as new supply has come online.

Releasing its latest Office Market Report, the Property Council of Australia reported that office vacancy rates across Australia rose from 12.1 percent in January to 12.9 percent in July.

However, the increase was driven by supply additions and does not signify a lack of tenant demand.

Over the six months to July, 421,115 sqm of new space came online. This is well above the historic average of 316,459 sqm.

Supply additions have been above average over the past three years on account of new projects which commenced before the pandemic.

On the demand side, net absorption came in at positive 55,670 sqm.

This is lower than the historic six-month average of 145,7090 sqm but nonetheless indicates that demand continues to hold up reasonably well despite the pandemic.

Moreover, vacancies may tighten going forward as new supply additions are expected to fall to below average levels and remain that way until at least 2025 (see chart).

(source: as above)

(Note that vacancy and tenant demand figures quoted here do not necessarily reflect the extent to which staff are working from home or coming into the office. Data included here looks at whether or not a lease is in place for commercial space. It does not measure how many of the tenant’s employees physically attend the office.

In terms of workers actually coming in, the latest data indicates that office occupancies stalled in June as COVID /flu cases rose but have been gradually improving. Overall, office occupancies range from 49 precent in Melbourne to 71 percent in Adelaide.)

(source: as above)

Looking across specific locations, the largest vacancy increases occurred in non-CBD markets.

Overall, vacancies in these markets surged from 13.9 percent in January to 15.2 in July percent as falling demand saw vacancies blow out to above 20 percent in St Kilda Road (Melbourne) and increase sharply in North Sydney whilst new supply additions caused vacancies to blow out in Parramatta.

Moving back to CBDs, vacancies increased more gradually from 11.3 percent in January to 12.0 percent in July as increases in Canberra, Sydney, Melbourne and Perth more than offset modest tightening in Brisbane and Adelaide (see chart).

Across all locations, the market is exceptionally strong in East Melbourne whilst vacancies are also tight in the Gold Coast and Canberra (see chart below).

Conversely, vacancies are highest in St Kilda Road, Parramatta, North Sydney, Crow Nest/St Leonards and Chatswood (see chart below).

(source: as above)

Property Council of Australia chief executive officer Ken Morrison welcomed the results, saying that those who predicted a collapse in office demand had been mistaken.

Nevertheless, he stressed the importance of encouraging workers back into offices.

“In a healthy sign for our CBDs, the office market continues to defy previous dire predictions, with demand still in positive territory after nearly three years of the pandemic …” Morrison said.

“… This has been underpinned by strong employment and the recognition that an office in city is fundamental to the success of many businesses.”

“While the office market has proven to be resilient and demand is in positive territory, our CBDs still need attention.

“While demand for space is increasing, the number of actual office workers in our city centres is well below pre-pandemic levels and threatens the ecosystem of cafes, restaurants and retailers that help make our CBDs such special places.

“The recovery in our CBDs needs to be top of mind for governments and businesses even as we deal with elevated levels of COVID-19 in the community.”

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