_Canberra office market remains the most resilient in Australia

The latest Canberra Office Market Report found above-average demand due largely to government tenants consolidating headquarter locations had helped strengthen the city’s office market during COVID-19 and would continue to do so moving forward.

“Reflecting its resilience to the effects of the pandemic, Canberra is the only CBD office market in Australia to not record an increase in its vacancy rate during 2020, holding stable at 10.1% in the six months to January,” said Knight Frank Associate Director of Research & Consulting Katy Dean.

“In contrast to Sydney and Melbourne where sublease availability rose substantially during 2020, there has been no material change to sublease vacancy since the onset of the pandemic.

“Despite an influx of new supply, Canberra was the only CBD to record higher than average demand over the six months to January, with 50,144 square metres of positive net absorption. This is the highest rate of net absorption over a six-month period since 2008.

“All other capital city CBD markets recorded negative net absorption.”

Knight Frank Partner, Office Leasing Nicola Cooper said the high rate of net absorption had been assisted by government demand for newer office space.

“The Commonwealth Government had leased almost all the new supply that came online during the six-month period to January, which was more than 63,000 square metres,” she said.

“Government demand for office space, with specific sustainability targets and building amenities, as well as mandates to consolidate work groups into a single location, has contributed to this wave of new supply and above-average absorption rates.

“Three new developments reached practical completion at the tail end of 2020, including the Capital Airport Group’s Constitution Place two-building project and the former Dickson Motor Vehicle Registry site, all of which were fully pre-committed by government and private sector tenants.

“An earlier easing of COVID-19 restrictions than other states and territories has also helped to keep vacancy rates stable when other markets have experienced an increase.”

Ms Dean said with no significant new supply anticipated to come online until 2022, this may impact tenant expansion and relocation plans to the already tightly held A-Grade sector in the near-term.

“As a result, we expect the headline vacancy rate to remain close to its current level during 2021. Face rents are expected to hold but secondary incentives could soften in the short-term.”

Knight Frank Partner, Head of Agency ACT Daniel McGrath said the year ahead looked somewhat positive with an expectation that vacancy will remain stable.

“In addition, the Canberra sublease market has experienced very little volume in comparison to other markets in the wake of the pandemic,” he said.

“This is not only due to the large Government volume in leased accommodation but also the satellite nature of the private sector office market, where a focus has been reducing works points in the core markets of Sydney and Melbourne. 

“The pending outcomes of various larger briefs in the market with lease expiries from 2022 onwards will play a determining factor on any market shifts and vacancy rate in the following market cycle, noting also that there will likely be an election prior to this.”

The Knight Frank report found that face rents in the Canberra CBD office market had stabilised but secondary incentives could soften in the short term as landlord’s seek to maximise occupancy.

Civic and Parliamentary Precinct average prime incentives increased slightly from 18.8% to 19%, with A-grade rents rising 1.5% year-on-year to $492/sq m.

Average rents and incentives across all other precincts are unchanged in the 12 months to January 2021.

Investment volumes fall to 10-year low

The Knight Frank Canberra Office Market Report March 2021 found that investment volumes in the Canberra CBD office market had fallen to a decade low, reflecting the impact of lockdown measures, with a lack of prime-grade investment stock available.

Total investment volumes of $10 million-plus declined to $80.6 million in 2020, less than 10% of the total transacted in 2019 ($761 million).

Knight Frank Partner and Head of Institutional Sales in Canberra Sean North said there was a lack of activity in the second half of 2020, with most deals transacting in the first quarter, but greater activity was expected for 2021.

“The recent easing of restrictions in most states and territories is now allowing for greater levels of domestic travel between cities and this will assist in increasing investor interest to divest or acquire assets in Canberra throughout this year,” he said.

“Volumes are expected to rise back to above pre-COVID-19 levels, with Canberra considered a somewhat safe haven and more resilient market.

“Average prime office yields in the Canberra CBD market have remained stable since the onset of the pandemic, with prime yields holding at 5.88 per cent over the 12 months to January 2021.

“Prime and secondary yields have traded below their 10-year averages since 2015, which reflects sustained buyer depth for prime assets across the broader Canberra market.”.