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Wednesday, 14th February 2024
A Comprehensive Review of Australia's Commercial Office Market in 2023 and the Path Ahead in 2024
As the major CBD office markets in Australia weathered a series of challenges in 2023, the outlook for 2024 presents a nuanced narrative. While persistent headwinds are expected to persist in the first half of the year, forward-looking indicators hint at potential relief in the second half. This blog delves into key insights shaping the commercial office market, providing a comprehensive view of what to anticipate in the coming year.
Economic and Office Market Outlook
2023 was marked by challenging conditions, setting the stage for a year of two halves in 2024. Economic and office market headwinds will likely persist initially, but signs point to improvement in the latter part of the year. Stability in economic and market conditions is expected to drive a shift in both leasing and capital market activity, offering a more positive outlook for Australia's office market in the second half of 2024 and beyond.
Office Development Outlook
Development and construction pressures are anticipated to endure, impacting office development projects. Pre-commitment to these projects will play a crucial role in shaping the new office supply landscape throughout 2024.
Office Leasing Demand Outlook
The Great Office Upgrade trend is expected to continue in 2024, with tenant relocation and upgrading dominating leasing market themes. Despite historically favourable conditions for tenants, CBD office rental affordability is projected to decline in 2024, particularly compared to Metro locations.
Office Capital Market Outlook
Multiple headwinds affecting office capital market activity are forecasted to persist in 2024. However, factors such as cross-border capital flow are expected to see a resurgence in the second half of the year and into 2025.
Office Occupancy and Hybrid Work
Increased physical occupancy rates in 2023 are expected to approach equilibrium in 2024, reinforcing tenant workspace requirements and driving leasing demand growth. Hybrid work models will continue to shape the future, with a focus on achieving a balance between home and office-based work.
Economic Outlook: Inflation, Interest Rates, and Employment
Inflation and interest rates, key players in 2023's macroeconomic conditions, are expected to remain in focus in 2024. Challenges in addressing the softness of office-based business confidence persist, but a rebound in office-based employment is plausible with improved business conditions and companies demanding a minimum work from office policy.
Office Market Outlook: A Year of Two Halves in 2024
Australia's major CBD office markets are poised for a mixed year, with persistent headwinds in the first half gradually giving way to a more positive outlook in the second half. The flight to quality, amenity, and sustainability is expected to drive a recovery, with high-quality CBD office buildings witnessing the strongest leasing activity.
The Great Office Upgrade: Tenant Relocation
Tenant preferences for high-quality office space continue to fuel The Great Office Upgrade or flight for quality. Relocation to higher quality buildings, focused on productivity, sustainability, and amenity, has been a strong trend in 2023 and expected to continue during 2024.
Australian Office Rental Affordability
While tenant preferences reinforce demand for prime office space, favourable rental affordability conditions have supported a robust relocation trend. However, affordability is projected to decline in 2024 as incentives stabilise..
Australian Office Occupancy Trends
Increased physical occupancy rates in 2023 are indicative of a positive outlook for Australian CBD office occupancy compared to global counterparts. Momentum in office occupancy rates is expected to strengthen leasing demand in 2024 and beyond.
Office Development Challenges
Easing commodity prices in 2023 offer optimism, but supply constraints, elevated input prices, and construction challenges persist. Development and construction market pressures are likely to endure into 2024.
New Office Supply and 'Flight to Quality'
While leasing conditions were challenging in 2023, the 'flight to quality, amenity, and sustainability' remains a strong theme, driving pre-commitments to new office projects. The outlook for new office supply varies across cities, with Sydney facing a significant near-term supply compared to Melbourne.
Capital Market Headwinds
Multiple headwinds, including high interest rates, global caution, and soft leasing market conditions, have led to a slowdown in office capital market activity. A continued buyer-vendor pricing gap is expected, but the strength of these headwinds may ease in the second half of 2024.
Short-term Cycle and Long-term Trend
The current capital value easing cycle is viewed as a short-term phenomenon influenced by cyclical factors and investor sentiment. A reversion to stronger cross-border capital flow and capital growth is anticipated in the late second half of 2024 and into 2025.