Why the office sector will regain trophy status – but not next year

After a difficult 2023 for the office market, property investors hoping for a bounce-back in 2024 will be disappointed, according to one of Australia's leading commercial property experts.

Ray White Commercial Head of Research Vanessa Rader said the working-from-home trend that took off during the pandemic has remained strong.

“Many of our CBD office markets remain quiet with foot traffic, public transport usage and car parking usage down, signalling reduced office vibrancy and empty desks. Low unemployment has been fuelling the continued acceptance of working from home, with some businesses having embraced the cost savings which come with downsizing their physical office space,” she said.

As a result, office values fell 9.0% during the year to September, according to MSCI, the worst performance since the GFC, when annual declines peaked at -13.9%.

“Looking across CBD and non-CBD markets in Australia, the trends are the same, with the rate of capital decline near the worst periods of GFC,” Ms Rader said.

“While we are in this period of negativity for the office market, unfortunately the outlook for 2024 is expected to show much the same. Vacancy levels across the Australian markets continue to trend upward and are well ahead of long-term averages, moving into early 1990s territory where capital returns fell to as low as -20% during a time of recession, high unemployment and inflation.”

Ms Rader said high vacancy rates were likely to continue throughout next year.

“These high rates will result in continued pressure on effective rents, however the flight to quality trend will maintain, putting a greater spotlight on the future of secondary office assets,” she said.

Despite the gloomy outlook, Ms Rader said the Australia office sector, which funds have traditionally wanted to add to their portfolio and many offshore buyers have regarded as trophy assets, would eventually rebound.

“Fundamentally, quality office assets will rebound and will again gain trophy status. The safe haven of Australia will pique foreign buyer interest once again, however at a price more aligned to market conditions and yield rates which factor in the appropriate risk rate and higher cost of finance,” she said.

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