Demand for office space across major Australian cities continues to hold up reasonably well, the latest data shows.

But vacancies are still rising as a large pipeline of new supply continues to come online.

Releasing the latest edition of its Office Market Report, the Property Council of Australia said that office vacancies across CBD markets increased from 12.0 percent in July last year to 12.5 percent in January.

At this level, vacancies are at their highest level since 1997 (see chart).

The result was driven by a higher than average increase in supply, which exceeded historic averages for the third consecutive six-month period as new stock continues to come online after a high number of development projects commenced in the latter part of the last decade.

This has led to higher-than-average levels of new additions coming onto the market for five of the past six half-year periods.

Encouragingly, however, demand continues to hold up reasonably well, with net absorption (0.1 percent) remaining in positive territory for the third consecutive period.

The latest report comes amid increasing signs that workers continue to come to offices despite COVID and a shift toward flexible working arrangements.

The most recent Property Council Office Occupier survey indicates that occupancy rates continue to rise and now stand at between 50 and 80 percent of pre-pandemic levels across major capital cities.

Meanwhile, demand for workers (and thus space to accommodate them) continues to be underpinned by the strong labour force, which has seen unemployment fall to levels of 3.5 percent.

Going forward, however, the market may continue to be challenged over the coming year as economic expectations remain subdued on account of high inflation and rising interest rates.

This may affect demand at a time when a large volume of new supply is expected to be delivered over the second half of the year (see chart).

Property Council of Australia Chief Executive Officer Mike Zorbas welcomed the results, saying that cities remain a strong engine of the nation’s economy.

“This is the third six-month period of positive demand nationally for office space in our CBDs,” Zorbas said.

“Organisations see that an office presence in our cities is an essential part of doing business.

“While new supply has increased total vacant space in some areas, these latest numbers are a vote of confidence in our CBDs.”

Zorbas cautions, however, that ongoing attention to CBDs is needed.

“Growing skilled migration and the return of overseas students is most welcome. The leadership role of governments and the active engagement of their teams in CBD life should remain front of mind for decision-makers in 2023,”Zorbas said.

“The Property Council will continue to work with governments to unlock the full potential of our capital cities.”

In terms of individual markets, vacancies rose in Sydney, Melbourne, Canberra and Adelaide but declined in Brisbane, Pert and Hobart.

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