Empty offices fill up as remote-work momentum shows signs of slowing

Empty offices are filling up again in Australia’s major cities, signaling a potential slowdown in the momentum of remote work. According to a recent Property Council survey, vacancy rates in Sydney’s office sector dropped slightly to 13.3 percent over the past six months, marking a half-percentage-point decline. This trend reflects growing corporate interest in leasing office space amid lower rental prices, particularly in prime locations. In Melbourne, the situation appears even more pronounced. The city's office vacancy rate remains at 18.9 percent, a historic high left in the wake of strict pandemic lockdowns. However, demand for office space in Melbourne has surged compared to other Australian cities, except for Brisbane and Perth. Large corporations are increasingly opting for centrally located buildings, driven by attractive rents and landlord incentives such as rent-free periods or financial support for office fit-outs. These factors, coupled with amenities like gyms, cafés, and proximity to public transportation, are enticing businesses back into urban centers. One notable example is retail giant Coles, which is currently transforming a largely empty building at 720 Bourke Street in Melbourne’s Docklands. Previously home to insurer Medibank, the site now features Coles' signage and is set to become the company’s new headquarters. The move involves relocating its workforce from its current Hawthorn East location to the newly renovated space over the next year. The shift toward central business districts is affecting other areas negatively. Vacancy rates continue to rise in suburban office hubs such as Parramatta, Chatswood, Macquarie Park, North Sydney, and Crows Nest in Sydney, as well as St Kilda Road in Melbourne. In some cases, these outer areas face vacancy rates exceeding 30 percent, highlighting a clear disparity between city center and surrounding regions. A crucial metric for assessing the health of Australia’s office market is “positive net absorption,” which refers to situations where more space is occupied than vacated. This indicator has shown improvement, turning positive late last year. As of July, Sydney’s office market recorded a net absorption of 18,715 square meters over the previous six months, well above the long-term average of approximately 8,000 square meters. Tom Broderick, head of research at CBRE, noted that tenant inquiries and activity have improved significantly this year compared to last. Sydney has effectively reached a new normal, with office attendance improving steadily over the past year. This stability allows tenants to make longer-term decisions, with some companies expanding their operations by 10 to 20 percent since the onset of the pandemic. Despite these positive developments, challenges persist. Even prior to the Middle East conflict, which has increased costs for fuel, transport, and other essentials, developers faced mounting pressures. A sharp rise in material, labor, and construction costs, alongside increasing interest rates that elevate borrowing expenses, has rendered new office tower development economically unviable. Looking ahead, future projects in both Melbourne and Sydney remain limited. Commercial real estate agencies predict that vacancy rates will begin to decline starting next year. Tony McGough, head of research at Knight Frank’s Victorian office, expressed optimism, stating, “It’s going to start looking much more positive next year.” With these forecasts, the Australian office market appears poised for gradual recovery, albeit with continued disparities between city centers and their outskirts.