Office vacancies rise in large cities
We've been toying with the idea of buying an office space, but like many others in the market, we've been more than a bit cautious about what direction things are going in next.
The COVID-19 lockdowns dramatically accelerated the pre-existing trend towards more working from home, in Australia and elsewhere in the world.
And while many employers are requiring their staff to be back in the office for 3 or 4 days per week, it's quite evident that overall the demand for office space is considerably lower than before 2020 (office attendance is reportedly about ¾ of what it was).
In the US and Canada there have been numerous examples of hair-raising declines in office valuations, leading to concerns for some bank exposures.
To date, Australia has seen city offices trading at discounts of around 20 per cent from unlisted valuations, but nothing like as extreme outcomes, although the past six months has generally pointed towards an ongoing deterioration.
CBA released a neat chart of PCA office vacancy rates by capital city, which shows that office vacancy rates are still trending quite sharply higher in Sydney, Melbourne, and Adelaide.
Brisbane has very high population growth, and office vacancy rates have declined from 15 per cent to 12 per cent.
Nationally, office vacancy rates at around 15 per cent are the highest since the early 1990s recession, which suggests falling rents and valuations will continue.
Eventually the market will likely stabilise in a high population growth country like Australia, but it may take some years of lower supply for all that space to be taken up, especially for B-grade stock and lower.
The wrap
Overall, while industrial commercial property continues to perform strongly, the fundamentals for office investments remain weak.
Demand for leases is relatively low, and higher interest rates for longer are continuing to push office valuations lower.
Bank loan exposures to office real estate are relatively low in Australia, though there have been some signs of non-performing loans and stress emerging in REITs and leveraged owners of commercial real estate.
There is also some risk that stresses from overseas spill over to Australia, even though domestic exposures and lending policies are quite conservative.
Dexus and Lend Lease announced plans for two gigantic 300-metre office towers in Sydney's CBD over the past week, but with office vacancy rates still trending higher it's hard to envisage them being built this decade.
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