Rental growth and investor preferences for quality office assets will see an office market recovery in Australia in 2024, according to Colliers.

Colliers expects capital values will drop an average of 10% from peak to trough, compared to a 25% drop during the GFC.

New occupier office strategies prioritising quality spaces means office leasing values will support capital values and ensure the market commences recovering in 2024, according to Colliers’ Head of Office Capital Markets Adam Woodward (pictured).

“Unlike historical patterns during times of economic turbulance, office leasing and capital values are not currently aligned,” Woodward said.

“This means demand for new and enhanced workplace environments will see average capital values for Premium and A Grade office assets in CBDs decline by around 5% and 12% respectively, while values of B Grade assets may fall by as much as 20% by March 2024.

“We anticipate capital values across all grades will commence recovery post March 2024, however, Prime values will remain significantly stronger.”

Highly sought-after wellness, experience and ESG features will commence redefining the investment landscape this year, according to Colliers’ National Director of Research Joanne Henderson.

“Occupier demand and rents are ensuring prime office yields in CBDs are more resilient, softening 30 basis points last year to average 5.28%, while secondary office asset yields softened by 50 to 75 basis points to average 6.22%,” Henderson said.

“There remains a substantial pool of capital, and with interest rates expected to peak mid‑2023, we predict a faster recovery rate than the GFC, when it took around five years for capital values across all office grades to rebound.”

Singapore and Hong Kong were likely to represent the largest share of offshore capital fuelling the market again this year.

Singapore accounted for 51% or $2.3 billion of foreign investment in the office market for 2022, while Hong Kong represented 27% or $1.2 billion.

New South Wales secured the dominant share of investment, with 46% of sale activity last year. \

This will likely continue, with 60% of 750 global investors surveyed, identifying the Sydney CBD Office market as a top preference in 2023.

“In the investment markets, Australia, and the Sydney CBD, remain attractive on a global basis due to the stability of local markets and level of returns available when compared against other major international markets,” Woodward said.

“Major institutions opted to consolidate holdings into the assets least likely to be adversely impacted by a valuation reset – Sydney Prime assets.”

About 63% of respondents to Colliers Global Investor Survey stated the office sector remained their top pick for the APAC region.

Investors also emphasised quality assets and ESG, with 37% indicating they were planning a capital program – a disposal or acquisition strategy based on the environmental performance of their assets.

“An evolution of the office market defined by ESG and higher quality spaces will not only uplift capital values and attract increasing foreign investment this year, it will reshape the future of work in accordance with what we now expect from our office environments and how we use them,” Woodward said.