Public sector growth feeds intense demand for office space

Public sector hunger for quality offices is driving the lowest vacancy rate in Canberra for 14 years.

New data from JLL Research shows a March quarter vacancy rate of 5.5 per cent, down from 5.7 per cent in the previous quarter and a prime vacancy rate of 2.8 per cent, down from 3.6 per cent.

Canberra’s office market remains the tightest in the country, but also one of the most stable thanks to quality assets and reliable tenants such as the Australian Government and top national companies.

The national CBD office market vacancy rate fell by 0.2 percentage points to 13.5 per cent in the March quarter.

An additional 12,600 square metres of office space was taken up in the first quarter of 2022, after 35,800 sqm in 2021, most of which was in prime-grade space (33,000 sqm).

The ACT Government occupied the pre-leased space at 15 Constitution Avenue (9000 sqm) and 3 Constitution Avenue (7500 sqm), where renovations were completed in this year’s first quarter.

Defence Housing Australia vacated 4300 sqm at 22 Brisbane Avenue, Barton, and relocated to Gungahlin, and Services Australia vacated 1500 sqm at 13 Lonsdale Street in Braddon and merged into Gungahlin and Belconnen service centres.

A switch to residential development meant the loss of 220 Northbourne Avenue’s 7900 sqm to supply but 161,000 sqm of space is under construction across eight developments, including the refurbishment at 5 Constitution Avenue (12,000 sqm).

The first of these expected to be completed – 6 Brindabella Circuit (21,000 sqm) at Brindabella Business Park – is due this quarter.

Morris Property Group’s One City Hill project on Section 63 is the largest office development in the pipeline with 40,000 sqm of office space under construction.

The new owner of Lovett Tower in Woden has dropped already approved plans to convert the mothballed office building to a Build to Rent operation and will now refurbish its 25,000 sqm of office floorspace to A-Grade standard.

Total stock increased by 8700 sqm to 2.1 million in the second quarter.

JLL’s head of Office Leasing – ACT, Andrew Balzanelli said leasing activity had been quite solid based on a growing public sector and more outsourcing.

“There’s been growth in key areas of the Department of Finance, Defence, security and cyber security,” he said.

“So there’s lots of growth industries and that’s creating demand for office accommodation, particularly in small tenancies sub-500 square metres. Then, larger organisations are always looking for better efficiencies and quality.”

These included better floor plate design to accommodate more people in more effective working environments.

“Since COVID, people want to be in better quality offices, offering better services and amenities, a better ability to have a working environment that is not a chicken coop-type environment,” Mr Balzanelli said.

“That is continually placing demand on good quality, be it refurbished office buildings or brand new buildings.”

He said competitive owners had to continually upgrade their accommodation and ensure the quality of amenities and services, including cafes, end-of-trip facilities and natural light.

That was pushing up rents. Prime net effective rents increased 0.5 per cent for prime offices and secondary net effective rents 1.2 per cent.

Mr Balzanelli said offices were also becoming more flexible post-COVID but talk of their demise due to the number of people who took to working at home was premature.

“Many organisations were suggesting they would halve their office accommodation because we just didn’t know what it was going to be like,” he said.

“It’s taught us we can work remotely, but collaborating with your colleagues, brainstorming, coming up with innovative ideas is very hard to do over Teams.

“It’s a lot easier to do when you’re together in an environment that offers a safe, friendly work area.”

Mr Balzanelli said the election would temper demand in the second quarter of 2022 but it would pick up again in the second half of the year.

JLL’s Office Leasing director, Aaron Green said the supply pipeline was forecast to be strong for the remainder of 2022, with developers focused on creating new precincts and hubs.

The Canberra vacancy rate was projected to rise given the amount of office projects expected to finish in 2022.

“However, the capital city will remain Australia’s tightest CBD office market over 2022, given the remarkable resilience of the Canberra market,” he said.

“JLL Research projects the headline vacancy rate to remain in the single-digit territory over the next three years.”