Office vacancy rates across Australia have risen to their highest level in more than two decades as new supply additions coincide with falling levels of demand.

Releasing its latest report, the Property Council of Australia says the national vacancy rate across CBD markets increased from 9.6 percent in July last year to 11.7 percent in January.

At this level, vacancies are higher than at any other time since January 1997.

Vacancies in non-CBD markets, meanwhile, surged from 10.7 percent to 13.7 percent to reach their highest recorded level since January 1995.

Whilst falling demand was a contributing factor, the result was primarily driven by new supply additions.

Across CBD markets, 544,510 square meters (sqm) of space was added over the six months to January.

This represents the highest level of additions since the six months to July 2010 and is almost double the historic average of 311,793 sqm.

Meanwhile, net absorption plummeted to -89.477 sqm – the lowest level on record since July 2013 and well below the 125,604 sqm average.

Likewise, vacancies outside the CBD were also driven by new supply and falling demand.

Across non-CBD markets, net absorption was -68,790 square meters – the lowest level of demand on record and well below the historic average of 55,156 sqm.

Meanwhile, more than two and a half times the average volume of new stock was added (204,677 sqm).

(Note: the above data does not reflect the phenomenon of employees working from home due to COVID.

Office vacancies are calculated on whether a lease is in place for office space, not whether the tenant’s employees are present in that space each day or working from home.)

Property Council Chief Executive Ken Morrison said while COVID-19 had reduced demand for office space, most of the increase in vacancy relates to new office buildings coming into the market.

“While it was not a surprise to see office vacancies increase in the middle of a pandemic, it is the new supply of office space that is responsible for three quarters of this impact, not reduced tenant demand,” Morrison said.

“COVID-19 has reduced demand for office space as businesses downsize, but this had a much smaller influence on vacancy rates than the new supply coming on stream.

Morrison said the importance of major employment centres should not be underestimated.

Pointing to recent deals, he added that interest in commercial property and in particular CBD premium stock remained.

“Despite talk of a flight from the CBD in response to COVID-19, non-CBD markets also saw notable increases in vacancy indicating that widespread health restrictions across all workplaces and the economic downturn caused by the pandemic were strong prevailing influences, rather than an aversion to CBD offices,” Morrison said.

“As our office markets adapt to a COVID-normal setting, business and government have a critical role to play in supporting the return to office workplaces and helping more people come back to office precincts.

“Vibrant CBDs drive investment, growth and productivity and must be part of our national recovery planning.”