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A new report forecasts “watered-down sentiments” will shape trends in the Asia-Pacific region’s market office in the initial months of 2023 — with the odds remaining in favour of tenants.
Knight Frank’s Asia Pacific Q4 2022 Office Highlights report stated that while the previous year started on an optimistic note hinged on hopes of post-pandemic recovery, the positive outlook turned to clouded uncertainty toward the year-end.
“Macroeconomic headwinds [murked] the outlook and the year concluded with many uncertainties and challenges. Many markets had their full-year GDP growth forecasts revised downward against the backdrop of more monetary policy tightening,” Tim Armstrong, Knight Frank’s global head of occupier strategy and solutions, stated.
As such, he stated the last quarter of 2022 seemed to foreshadow how the initial months of 2023 will play out — watered-down sentiments.
The office market was also upended by an unexpected outcome, as record-low unemployment did not translate into higher leasing activity as anticipated.
On the contrary, Mr Armstrong noted that businesses were looking to tighten their belts and brace themselves for another market downswing.
“This then forced landlords to cut their expectations to ensure competitive rents. This is vital to attract and retain occupiers, especially when there is an abundance of supply currently,” the expert commented.
The report’s Prime Office Rental Index recorded a 1 per cent decline over the three-month period to December. Compared to the same period last year, average office rents in the region are only up by 0.8 per cent.
“The pace of rental growth has already slowed, and demand will continue to soften as businesses prioritise spending on necessities,” Mr Armstrong said.
He also expects the prevalence of shadow spaces — which are leased spaces but not currently utilised by a tenant — will lead to expansion in vacancy rate.
Office vacancy rates across the Asia-Pacific region also grew for the second consecutive quarter in December, up 0.8 per cent. The report noted this was due to three factors, namely, stock coming online during the period, weak leasing demand, and retirement of spaces.
“Market conditions in 2023 will continue to favour tenants as more highly amenitised buildings with sustainability credits will be ready for occupancy,” the expert stated.
While Knight Frank gave a “cautious” outlook for the region’s office market in 2023, Mr Armstrong offered some silver linings for commercial investors.
“Despite the current economic challenges, rental and occupancy levels continue to be strongly supported by steady demand and limited supply. We expect growth in office rents to moderate as occupiers continue to adopt more flexible strategies and be more prudent with their spending.
“The trend towards flight-to-quality buildings with sustainable features and varied amenities will continue to gain momentum as businesses work towards their ESG goals,” he explained.
Focusing on the Australian market, the report noted the country’s office sector possesses all the right ingredients to deliver strong results in the months ahead as the global economy shifts to the first gear.
The report attributed the sector’s resilience in the previous year to the Australian economy’s “solid economic growth”.
“The Australian economy grew solidly in Q4 and closed 2022 on a generally positive note. Unemployment remained low, which helped wage growth pick up,” the report stated.
It also credited the country’s low unemployment, wage growth, strong occupier demand, no new supply completion, and stable vacancy rates and rents for the Australian office sector’s resilient performance during the year.
During the period, Knight Frank also highlighted that four Australian cities — Sydney, Melbourne, Brisbane, and Perth — recorded steady occupier demand.
On Knight Frank’s 2023 office market pendulum — which determines who will be favoured between landlords and tenants based on a 12-month rental outlook — the Perth and Sydney office markets were considered to be balanced, while Melbourne and Brisbane office markets were in favour of tenants.
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