CBRE National Leasing Market Snapshot H1 23 (AU)

National Leasing Market Snapshot

National Overview

Officeleasing activity across Australia continues to outperform all other commercial sectors as corporate occupiers seek to reinvent their workplaceexperience and encourage employees to return to the office.

Undoubtedly, there is significantpressure within the office sectoras historiccapitalisation rates come under stress and replacementvalues escalate. While the currentmarketcircumstances are weighingon the sectorin the shortterm, it will lead to supply constraints thatwill enablethe markets to recoverand absorb the oversupply thatresulted fromCOVID-19.

Office rents continueto grow both on a face and effectivebasis in mostmarkets across Australiaand we are very confidentthatthe outlook is extremely positive. Australia's economy is astandoutglobally, driven by incredibly stronginternational migration and this will continue to drive the demand forhigh-quality office accommodation thatincreases collaboration, productivity and workplace culture.

While itis hard to ignore the significantvacancy rates thatheadline many of the markets within the US such as New York, Los Angeles and San Francisco, AsiaPacificis in avery differentposition, and we are confident that the Australian office sectorwill stabilise and rebound strongly overthe nextfew years. Brisbane, Perth and Sydney willlead the recovery.

Mark Curtain

Senior Managing Director Advisory and

Transactions,

Pacific

M +61 400 701 307

mark.curtain@cbre.com.au

Australia CBDs

Head of Office Research Australia

Despite the economic headwinds, leasing volumes remain healthy across the Australian office market.

Tom Broderick

There appears to be higherconviction amongstthe corporate sectoron theirlonger-term plans, which is drivingsome of this activity. The smallerend of the marketremains buoyantgiven the typically higher physical occupancy levels of those companies. We continue to observe expansion within this segmentof occupiers.

Larger tenants like the majorbanks are still attempting to drive higherphysicaloccupancy and have contracted footprintoverthe past24 months. We expectbetteroccupancy of office space overthe coming12 months forthese organisations, given a likely softeningin the labourmarket, which will provide employers with more leverage to gettheir staff back to the office.

Sublease availability has been largely stable overthe past12 months across the country. There has been a

gradual decline of professional and financial services companies offeringexcess space forsubleaserecently. However, this has been offset by technology, media and telecommunications firms offeringmore sublease space to the market.

Rental growth has been strongacross the Perth, Sydney and Brisbane markets overthe past 12 months, as a result of solid demand, especially in premium buildings. Adelaide and Melbourne have observed slight declines in effectiverents, given the supply being delivered to the market and the subsequent backfill space left behind from tenants movingto these new buildings.

We expect medium-term supply to moderate, with a combination of high construction costs and softening yields causingnew developments to become less feasible.

Local Leasing Market Snapshot

It’s been a positive start to the year with demand and enquiry still very strong, the number of enquiries in 2023 is only down 12% on last year, however, economic clouds are still impacting decision-making times for all tenants.

On a furtherpositivenote, largeroccupiers of 2,000sqm plus are drivingthe enquiry which we haven’twitnessed since pre-covid, with organisations wantingto create betterworkplace outcomes in better quality and centrally located assets.

We have seen anumberof excitinglargertransactions this yearsupportingthese trends with seven relocations of 5,000sqm or more.

In 2023 thus far, tenants are analysingproperty costs more than they have in the pasttwo years, which is prolongingdecision making. However, landlords are meetingthis demand with more curated solutions, providingmore turn-key solutions to mitigatethe costs of completingnew fitouts.

Although subleasevacancy is on the rise, tenants are lookingforsecurity of tenure and this trend is providing opportunities forourclients to work with sub-tenants to reduce property costs and attract new longer-term tenants fortheirassets

We anticipate the second half of the yearto be positive for ourclients, as weekly occupancy continues to improve, and organisations encourage theirteams to return to work to improve productivity and collaboration in person.

Western Sydney

The first six months of 2023 has been very challenging for Western Sydney with significantly reduced tenant demand and large pending vacancies due to arise as NSW Government departments relocate from generally secondary grade buildings into Walker Corporation’s development at Parramatta Square.

Most institutionalowners have implemented speculativefitoutstrategies to enhance presentation and to increase the likelihood of securingtenants in the shorterterm.

What activity there has been has generally been attributable to tenants’ flightto quality and downsizing, as lease expiries have afforded tenants this opportunity. Lessors have had to offersubstantial incentives to compete forwhatlittletenantactivity there has been.

Caution’ is the byword atmid-year2023 as we are seeingan increasingnumberof tenants deferring decision makingas the interestrate environment remains unsteady, and business confidence more broadly is waning.

North Sydney

Despite dampened sentiment, companies know that productivity comes from collaboration and creative workspaces. Tenants continue a flight to quality as companies are still looking to attract and retain talent in a tight labour market. Many companies are engaging workplace strategists, and conducting location analysis, to ensure the property committed to is the right size and cultural fit and assists in fulfilling the company’s ESG pledge.

Companies like Lendlease, Winten and JQZhave built precincts and are seeingmore tenantactivity as they offerthe convenience of shopping, restaurants, libraries, services and more all within the same building.

North Sydney A grade and premium properties are enjoyinghigh rentalgrowth with rents of circa $1,400/sqm net, representinga34% increase since 2016. However, this growth has been impacted by increased outgoings this yearas land tax, energy prices and insurances increase, impactingtenants'occupancy cost.

Hybrid workingis here to stay so, to compete for tenants, landlords need to continueto ensure office premises have earned the commute and are better than home.

Melbourne CBD

While the overall market vacancy rate continues to rise, office sentiment on the ground is cautiously optimistic. The trend of overall deal size increasing has continued as larger tenants gain further confidence in the longer-term needs around officeoccupancy and subsequently their office size.

Fitted space continues to gain stronginterestfrom tenants due to the uncertainty around construction costs and delivery, with many owners now speculatively constructingwhole floorfit-outs

Additionally, we are seeinganew trend of owners repurposingexistingfit-outs, typically refurbishing frontof houses and breakoutspaces. This provides benefits from both an environmental wastepointof view and costsavings, which can then be offered to prospective tenants.

While flightto quality remains astrongtheme, we are seeingagood deal of activity across all grades of space. In addition, we have seen very strongactivity within the education sector, with over15,000sqm of deals concluded in the firsthalf of 2023.

A bigpercentage of Melbourne’s largesttransactions continue to take place in Docklands, with many of these deals in sublease space. This has been positive given these spaces have, in many instances, attracted tenants thatare centralising, resultingin positive absorption forthe CBD and slowingthe increase in sublease supply.

Rents have remained resilientduringH1, and we anticipate this will continue in H2. However, due to the increase in supply, incentives have remained strong and will likely increasefurther. We also saw the Commonwealth Bank committo a new building, furtherdemonstratingrenewed confidencefrom largertenants in theirlong-term property needs. This decision is astrongindicatorof the positive sentiment in the Melbourne commercial real estatesector, as it reflects CommBank’s commitmentto investin the city's future and provides atestamentto the city's growth and development.

As Brisbane office vacancy rates continue to compress, particularly in the prime grade sector of the market, gross face rents are growing on a quarter-by-quarter basis.

Furtherfuellingthesedynamics is the limited supply pipeline, with only two netadditions due to the enter the marketoverthe next36 months, and the exponentialgrowth of both the Resource and Governmentsectors, which are on track to lease more than 50,000sqm of additional ‘A’ grade office space in 2023.

Lookingforward to the second half of the year, we anticipate afurthertighteningin vacancy rates as active organisations jostleforthe remainingcontiguous tranches of better-quality accommodation. We also anticipate thatthe broadervacancy rate will retractto circa 10%, with prime rates likely to come in at 8% to 8.5%.

Gold Coast

The Gold Coast office market has maintained low vacancy over the last six-month period, at 6.3%. The slight increase of 0.3% is related to the addition of a new supply of 6,820sqm at Robina, exclusively for Services Australia’s new Gold Coast headquarters.

Services Australiaexited anumberof sites around the Gold Coast, which have already started to be backfilled and will be reflected in the Property Council’s nextsixmonthly reportto 31 December2023.

Low vacancy level is likely to remain along-term marketcondition as historically any new office building is no greaterthan 7,000sqm and with a 10-year average annual netabsorption of around 6,000sqm, any new supply willhave limited impact, unless a pipeline of new construction is in play.

In the period from2000 to 2010, the Gold Coastoffice marketgrew by over170,000sqm primarily from the emergence of the Robina/Varsity Lakes submarketand since 2010, the overall Gold Coastoffice marketsize has reduced by almost20,000 sqm, as oldersupply in areas in Southportand Surfers Paradise have been removed. This willsee the Gold Coastmarketsittingas

a landlord-driven marketforthe longerterm which typically occurs when vacancy reaches sub 10%.

The only new supply forH2 2023 being 2,300 sqm in Robinawill have negligible impacton overall vacancy as itis focussed on medical occupiers. No new supply additions are currently planned forconstruction, and this places any new supply unlikely untilatleast 2026/2027 although this is relianton strongrental growth to high $600 to mid $700/sqm gross to support construction costescalations.

The Robina/Varsity markethas now surpassed the Southportmarketas the largestoffice precincton the Gold Coast at almost141,000 sqm and it has contributed to 60% of the overall growth of the Gold Coastmarketsince 2000. The SouthportCBDhas been reducingin size since 2013 as older-style buildings are removed from the market.

The Adelaide office leasing market has been relatively stable over the past six months, with the trends of strong demand and limited new supply continuing. CBRE data has shown in the last quarter alone, we tracked over 71,000sqm of tenant enquiry with some 10,100sqm of lease deals completed.

The limited supply of high quality new office space has continued to push face rentals into the upperend of the market, with incentives holdingsteady atpreCOVIDrates.

Much activity is now surroundingthe race to reposition and refurb some 70,000sqm of backfill space thathas been created as a resultof the new supply, namely 83 Pirie Street, 60KingWilliam Streetand Festival Plaza. This wave of works will only liftthe quality of space on offerand mostlikely see good leasingactivity with no othernew supply forecastforsome years.

Perth CBD

Perth’s office market continues to deliver resilience and some surprising upside given the headwinds facing office markets globally.

Strong tenant demand, underpinned by Perth’s buoyant mining sector, is ongoing and expected to continue.

The CBD had substantial new supply enterthe market in the last six months, yetthere is stillstrongrent growth at the top end of the market. This is a trend that will continueforatleastthe next12 months. CBRE Research numbers show Perth CBDPremium grade effectiverents grew by 11.1% in 2022, the highest increase since 2011, with forecasts of a further7.8% in 2023. Rentgrowth in lowergrade buildings willbe significantly lower.

The West Perth and suburban office marketshare experiencingeven strongerconditions, with only one new office buildingunderconstruction,

The negative effectof the work-from-home trend is minimal in the Perth marketand is heavily outpaced by the dominanttheme of expandingtenants.

Movingforward, with sharply reduced vacancy rates in the suburban markets, we expectagrowingnumberof tenants, especially largerspace users, to relocate to the CBD from the suburbs.”

The first half of 2023 saw a mixed bag of occupier depth across various sectors of the market. The fitted suite SME market of sub 300sqm across the CBD and Parliamentary Precincts was the most active.

New Commonwealth requirements were subdued howeverthis was supplemented by healthy activity fromlargercorporates of 1,000sqm+ with the likes of Maddocks, Adecco, Optus and BAE Systems comingto the market. Vacancy is reducing, with occupiers having feweroptions than they did 12 months ago, especially in the larger end of the market. We expectthis to continue as we conclude H2 with several transactions due to be announced.

There is genuine appetite from occupiers to relocate to betterquality accommodation, creatingbetter workingenvironments fortheirstaff to draw them back to the office. Itis consistently asignificant pressure pointforoccupiers. On the flip side, decisionmakinghas still leanttowards renewals orshort-term holdovers takingthe ‘easy, conservative option’ if there is no immediate physical need to relocate.

The Commonwealth’s work-from-home policy has caused concern across the marketbutto date, we have notseen a directimpacton physical occupancy size.

The time transactions are takinghas resulted in lower volumes than in 2022 howeverwe expectanumberof deals to be announced in H2 leadingto astrongfinish for the market.”

For Further Information

Mark Curtain

SeniorManagingDirector Advisory and Transactions, Pacific mark.curtain@cbre.com.au

Rachel Vincent ManagingDirector

North Sydney rachel.vincent@cbre.com.au

Andrew Bahr

National Director, Office Leasing

South Australia andrew.bahr@cbre.com.au

Tom Broderick

Head of Office Research Australia tom.broderick1@cbre.com

Ashley Buller Head of Office Leasing

Victoria ashley.buller@cbre.com

Andrew Denny SeniorDirector, Office Leasing Western Australia andrew.denny@cbre.com.au

Tim Courtnall State Director, Office Leasing New South Wales tim.courtnall@cbre.com

Chris Butters Brisbane ManagingDirectorand Queensland State Director, Office Leasing chris.butters@cbre.com.au

Troy Markos State Director, Office Leasing Australian Capital Territory troy.markos@cbre.com

Mark Martin Director, Office Leasing

Western Sydney mark.martin@cbre.com

Tania Moore

SeniorDirector, Office Leasing

Gold Coast tania.moore@cbre.com

© Copyright 2023 All rights reserved This report has been prepared in good faith, based on CBRE’s current anecdotal and evidence based views of the commercial real estate market Although CBRE believes its views reflect market conditions on the date of this presentation, they are subject to significant uncertainties and contingencies, many of which are beyond CBRE’s control. In addition, many of CBRE’s views are opinion and/or projections based on CBRE’s subjective analyses of current market circumstances. Other firms may have different opinions, projections and analyses, and actual market conditions in the future may cause CBRE’s current views to later be incorrect. CBRE has no obligation to update its views herein if its opinions, projections, analyses or market circumstances later change

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