Australian office vacancy ratios have tended to react positively to local and global economic shocks over the past two decades, according to a new academic study.
The research comes as businesses continue to reassess their office space needs in the wake of the COVID-19 pandemic.
The rise in working from home and new investments in technology and telecommunications have greatly changed the way people work and are expected to have long-lasting effects on commercial property markets.
The study examined the responses of Australian total office vacancy ratios to shocks caused by global and local economic uncertainties between 1998 and 2020.
The study was conducted by Hassan F. Gholipour (Western Sydney University), Amir Arjomandi (University of Wollongong), Mohammad Reza Farzanegan (Philipps-Universität Marburg) and Sharon Yam (Western Sydney University).
The research results suggested that office vacancy ratios responded positively to economic uncertainty shocks in general, especially to local economic uncertainty.
It strongly suggested that the Australian office market was more sensitive to local economic uncertainty than global uncertainty.
Moreover, the office vacancy ratios of the different office grades responded differently to these economic shocks.
The office vacancy ratio in premium-grade offices reacted to both shocks after one year with its responses fading out in year three.
B-grade and C-grade vacancy ratios responded to both shocks within the first year and responses lasted for about four years.
Additionally, sub-lease vacancy ratios in the aggregate office space showed quick responses to uncertainty shocks, dying out in two years.
However, direct vacancy ratios responded after about one year and then faded out in three years.
What these office vacancy trends means for fund managers, investors and developers
These findings have different implications for fund managers, investors, and developers.
As the office sector plays a vital role in investment fund portfolios, such as those of REITs and unlisted property funds in Australia, increased vacancies may have a considerable impact on their short-to-medium rental income and return on investments.
Hence, individual and institutional investors with direct investment (in office buildings) and/or indirect investment (through property funds) in the Australian office sector, should consider that different office grades respond differently to uncertainties (in terms of their vacancies) and the ‘wait and see’ strategy may require varied waiting times depending on the grades.
In addition, a better understanding about how the Australian office market, as a whole and by office grade, responds to uncertainties may influence developers’ behaviour with respect to development plans, setting rents and lease terms.