Author: Sam Lipshut, Head of Middle Markets & Portfolio
During the pandemic years, the suburban office asset class was hit hard – in part because of lockdown-induced working from home requirements. Since then, many have speculated on the future of work and its impact on the value of office assets.
Research by the Australian HR Institute shows hybrid working practices have stablised in recent years and remain the dominant flexible working model. In turn, this trend – combined with lowering interest rates – has helped to stablise the market for sub-$25m office assets.
Recent Property Council data highlights that the national non-CBD vacancy rate for office buildings has remained stable, albeit at an elevated level of 17.3%. The same report shows office vacancies fell in Melbourne and Adelaide due to low supply of new offices.
This stability is resulting in businesses starting to gravitate towards quality office buildings in key suburban-hub locations. Tenancy interest has helped to stablise the market for these assets, as has owner-occupier acquisitions. For example, owner-occupiers remain the most active buyers of suburban office assets across Melbourne. Within that buyer pool, many run professional services and IT businesses.
Opportunistic private investors are also showing some interest in this market segment as the gap narrows between their interest levels and vendor expectations. These investors are often then upgrading office properties with the expectation of realising capital growth in the mid-term.
The assets performing most strongly in this category are newly constructed or repurposed buildings that appeal to workers. Typically, these are close to transport and other amenities, and offer features such as good end-of-trip facilities, lots of natural light, wellness areas and cafes.
A recent Australian Government Office Occupancy Report highlighted that there was an overall increase in the proportion of tenancies meeting the NABERS target from 13.6% (2023) to 14% (2024). Although not the same extent as CBD office buildings, ESG-related tenancy demands have become a factor in the suburban market, putting pressure on some assets outside of the CBDs.
The market for secondary office assets is performing more slowly, particularly older buildings requiring upgrades.
For the sub-$25m office asset category, market sentiment is slowly improving, although, transaction volumes are still well below average levels.
With hybrid working arrangements settling, recent interest rate cuts, and incentives reducing, the rental market is stablising. As a key sign of market recovery, this is likely to continue to raise the interest of opportunistic investors in quality buildings.
Heightened construction costs will continue to put pressure on feasibility assessments for new buildings, so new stock levels are likely to remain low. In turn, the lack of new stock will help keep office vacancy levels stable and result in owner-occupiers’ continued interest in quality buildings.
sam.lipshut@opteonsolutions.com
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