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Don’t write off the office
Investment management
01 September 2021

Commercial office vacancy rates should drop sharply in the next two years as Australia emerges from COVID lockdowns due to high vaccination rates, increasing employment, and a decline in the popularity of work from home, according to AMP Capital research.

While office occupancy rates have been decimated in some capital cities by the response to COVID, history shows that office occupancy rates bounce back faster than expected after significant downturns.

AMP Capital Head of Real Estate Kylie O’Connor said: "Do not underestimate the speed and magnitude of an upturn. Over the past 40 years, the Australian office market has experienced five major downturns. While all of them had different causes, the effect on demand for office space was relatively similar and so were the subsequent recoveries.

"In all cases, market corrections were followed by a strong rebound in office demand. The Sydney and Melbourne CBDs recorded an increase in occupied space of 5.6% and 5.5%, respectively on average, over the two years following a downturn.

“Many pieces are coming together for the outlook in 2022, which is set to mark a turning point for the office market. As the vaccination rollout progresses and the risk of further lockdowns should recede, expectations are for office workers to return to the CBD in steadily growing numbers.

"We are forecasting that net absorption in the Sydney CBD market will improve strongly in 2022, supported by higher base demand as COVID lockdowns ease, and high levels of pre-existing commitments to new developments," Ms O’Connor said. 

AMP Capital Head of Real Estate, Kylie O’Connor.

Australia’s strong economic recovery has been interrupted by lockdowns across the country, but despite this short-term pain, the economic momentum following the re-opening will bode well for commercial real estate and those investors able to find value from both traditional and alternative real estate sectors.

The completion of a number of office developments in Sydney and Melbourne is likely to see vacancy levels increase during the course of this year, with a number of larger projects potentially coming on to the market over the short-term. However, following the market correction last year, medium-term supply risks have significantly reduced as several new projects have been scaled back, put on hold or have been withdrawn altogether. Overall our estimate for additional supply from 2021 to 2025 has already reduced by over 50% compared to our pre-COVID forecast, with moderate supply levels to further support an office market recovery over the coming years. 

"The City of Perth provides a good snapshot of how the market rebounds. Perth is one of a potentially small number of cities globally with a sizeable office market where over a prolonged period of time there has been only limited or no government restrictions in place whilst also having limited to no local COVID-19 transmissions. Workers were free to return to the office in May last year,” said Ms O’Connor.

AMP Capital's Head of Real Estate, Kylie O'Connor, says Perth has shown positive rebound signs.

"While it was slow going at first, as office workers returned to the CBD following the first lockdown, physical office occupancy steadily increased to 77% by October 2020, according to the Property Council of Australia, just 6.5% below the last pre-COVID reading in January 2020 of 83.5%. 

"The experience in Perth is promising and provides optimism that we will see our CBDs regain their previous vitality sooner rather than later, it also highlights how crucial the ongoing virus control and avoidance of further lockdowns is for a sustained recovery in the office market and the economy as a whole,” Ms O’Connor concluded.

The AMP Capital Wholesale Office Fund (AWOF) has over $7 billion in core office assets, providing investors with exposure to an office portfolio exclusively located in the markets of Sydney and Melbourne. The fund strategy is focused on owning prime, well-located office assets and leveraging the capability of around 550 real estate specialists to deliver superior investment results. This approach has resulted in AWOF being the top-performing wholesale office fund in Australia, leading its peers over the last one, two and three years.*

Further detail can be found in the full report from our Real Estate Research team.