Office deal activity is poised to pick up after a quieter first quarter in 2023, with likely transactions in the pipeline, according to Colliers’ Lucy Mallick and Chelsea Anstee.
Mallick, who is Senior Executive | Capital Markets, and Anstee, who is Associate Director | Office Leasing, discussed office occupier demand, supply levels, rents, deals, industry headwinds and tailwinds, and share their outlooks for the rest of the year.
Read an edited preview of the interview below or listen to the Voice of Value podcast on your preferred podcast platform here.
Tell us about the office occupier demand across the country in Q1 2023?
Anstee: To be honest, our leasing team didn’t really know what to expect in 2023. At the end of last year, we saw a fair bit of pausing in decision making. I think we came back in 2023 and realised that everyone just needed a really good break. I think we can all kind of attest to that because when we got back we were so pleased to see there was quite a rush of deals. Confidence came back and people just had their mindset on the office and the team and bringing everyone back together. So we’re off and running and the Australian CBD markets in Q1 this year, the deals are showing that it’s really positive as well. So we recorded over 57,000 square meters of office space leased across 111 deals, which is almost three times the area lease compared to Q1 2022, which is a 60% increase on the number of deals.
What’s happening with office deals?
Mallick: Last year there was a major shift, obviously since May last year we have had 10 consecutive interest rate rises. So the first quarter of 2022 was a busy quarter followed by those the interest rate rises. So on a year-by-year basis it’s definitely been a lot more subdued this quarter. But I think what has happened with the most recent interest rate pause, where there’s forecasts for another maybe one to two interest rate rises, I think actually that’s now given investors the confidence and the clarity on where interest rates will be sitting to re-enter the market with a lot of conviction. So whilst this has been a slightly slower quarter, I think we are really going to see that transaction volume pick up through Q2 through to the rest of the year.
What about office supply levels in Australia?
Anstee: In Q1, only one new development and two refurbishments were completed in the CBD office markets, which added 79,000 square meters of office spaces to the stock levels. The new development that was completed over the first quarter is 1 The Esplanade in Perth CBD, which is almost fully leased upon completion.
Mallick: So I think generally in terms of forthcoming supply as well, obviously with current construction cycles where the current construction costs where they are, we really are going to see a slowdown in construction starts. But definitely, particularly in Sydney, construction that is underway for example, like 55 Street or the upcoming Atlassian Tower will definitely go ahead, as well as those over station developments. So beyond that though, I think there might be a of pause in supply until the next construction cycle rolls through.
Did we see much change in office rents during Q1?
Anstee: Yeah, we did. And this is a result of occupiers choosing higher quality office assets to enhance the employee experience or a flight to experience. There’s a big focus on the employee experience and what the building can offer to the employees. So over 60% of our leasing deals in 2022 were for tenants committing to prime grade office spaces, which drove up the annual average national face rental growth by 5.3% across all grades, which is substantial. In recent years, occupiers are focused on the employee experience over the headcount to space ratios, which has ensured greater rental recovery for higher quality assets in sought-after locations. There’s no doubt that B grade landlords are being pushed very hard by the market to upgrade their premises. So it’s not okay to kind of just sit on old office space anymore. We’re seeing a real drive from tenants. They want the most amazing office space and they want the landlords to spend the time, money, and energy to do that for them. They’re no longer willing to go through that process themselves. They want to walk in and have a turnkey kind of market leading product for their staff to work in. And they want the yoga classes at lunchtime and they want the amazing end of trip facilities and all of the amenity food and beverage options close by.
Mallick: It’s been such an interesting transition now from the beginning of our career where you would turn up to an office space and you’d have that unbelievably gorgeous reception area and then you’d go through to where the desks were and it’d be this really sort of scungy back of house, out of sight sort of area. And it’s just been a really nice transition that actually that employee day-to-day at desk experience has really progressed. And that’s what we’re definitely seeing in the investor market as well is that investors see that quality, they see that retention impact on occupiers and they’re really chasing those high quality on floor experiences in their investments.
What are your outlooks for Q2 and the rest of the year?
Mallick: In terms of investment, I think there’s definitely some transactions in the pipeline. So that will give investors a lot of clarity and confidence paired up again with the interest rates sort of stabilising. I think that we will see a really strong transaction volume through to the end of the year.
Anstee: Leasing activity, as I said, it’s been quite strong this year. If the interest rates continue to rise, we might see occupiers start to take a bit more of a cautious approach and pause some of their active searches. But at this stage this is just not the case. From the whole spectrum of the market, we’re seeing massive transactions in negotiation, there is just no slowdown, maybe a little bit of complications in the process, but overall they’re pushing through. Despite all this we’ve seen that the office is a crucial part of a business’s culture strategy and even though I talk to businesses every day and a lot of them have allowed their staff to work from home some portion of the week, but there’s definitely a minimum requirement on I believe like 90% of the companies I talk to. So the office is more relevant than ever and so crucial, especially in the war for talent in Australia at the moment.
The Voice of Value is a podcast series about Australia’s property industry. Powered by the Australian Property Institute, this series features in-depth conversations with Australia’s property leaders about their careers and passions, as well deep dives into different property markets.
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