Prime office rents set to outperform secondary assets by 2025, research shows

Simon Hunt, the managing director of office leasing at Colliers, revealed that investors and tenants are now increasingly prioritising premium workspaces that will not only attract top talent but also offer environmental, social, and governance (ESG) credentials. 

“Investors and tenants are willing to pay more for ESG in particular, which they consider essential post-COVID,”  he commented. 

Interestingly, he noted that the shift towards bigger spaces and prime business destinations is not driven by the end goal of making employees get back to the office full-time.

“With flexibility in the workforce now being a given, the focus is not on 100 per cent of the workforce being in the office 100 per cent of the time, but on how the office brings the workforce together to collaborate, promote company culture and how it is used to offer a different and beneficial experience to working that cannot be created elsewhere,” he stated. 

And this strong appetite for prime-grade offices is now translating into tangible figures. Data showed that out of the 14,000 square metres of positive net take-up across the Sydney central business district over the first half of 2022, approximately 13,100 square metres, or 71 per cent of net change in area, was observed in prime-grade assets.

The increased demand has also led to an increase in rents. Data showed the average annual face rent of premium-grade office spaces in Sydney’s CBD rose from $1,153 per square metre per annum in June 2019 by 5.9 per cent to $1,218 per square metre per annum in June 2022. 

Further growth is seen in the prime assets’ cards, with Colliers estimating a further 16.6 per cent increase in rents to $1,421 per square metre by June 2025. 

According to Mr Hunt, this future spike in rental prices is expected as the next generation of office supply enters the market and provides new benchmarks for office rents. 

Melbourne’s CBD is also positioned for the same upward trend, with Colliers noting that the average annual net fact rent of premium-grade office space increased by 7.5 per cent from $749 per square metre per annum in June 2019 to $815 per square metre per annum in June 2022. 

These figures are seen to increase by a further 11.8 per cent to around $911 per square metre per annum by June 2025. 

While the outlook is bright for prime assets, it’s a different story for secondary assets, which are seen to lag behind their more premium counterparts. 

“While we expect to see continued strength in deal activity emphasising prime-grade stock as the flight-to-quality theme continues, lower quality B-grade assets in non-core locations are expected to lag with higher vacancy levels,” Mr Hunt stated. 

He also warned that property owners who are set in their ways would likely take a hit in demand and income. “Landlords that are choosing not to upgrade their buildings to meet the demand for quality and higher environmental ratings are likely to be left behind,” he said.

In Sydney, the average annual net face rent of B-grade assets increased by 5.4 per cent from $778 per square metre per annum to $820 per square metre per annum over the two-year period to June 2022.

By June 2025, Colliers estimated an increase of 7.6 per cent to $882 per square metre per annum for the asset class. 

Similarly, secondary assets in Melbourne are seen to have weak growth prospects compared to prime offices. Over the 24-month period to June 2022, data showed an increase of 6.7 per cent in the average annual net face rent of B-grade office space from $485 per square metre per annum to $517 per square metre per annum. 

Looking ahead, rents for the asset class are estimated to rise by just 3.3 per cent by June 2025 to $534 per square metre per annum. 

Colliers national director of research Joanne Henderson said that despite rent values across the country still around 17 per cent below pre-pandemic level, the rebound in uptake and rents bodes well for continued improvement in underlying demand fundamentals of the office market. 

“Renewed strength in the leasing market is giving owners the confidence to increase face rents, which, when coupled with stability in incentives, ensured net effective rents saw the first positive year-on-year growth since the onset of the pandemic, at the end of H1 2022,” Ms Henderson said. 

She added that with uncertainties brought on by the pandemic receding into the background, occupiers are now more confident about current and future workplace strategies — allowing them to move forward with their leasing decisions. 

“We expect to see vacancy levels moderate for prime stock by the end of year,” she predicted.