Sydney has the view, Melbourne has the bigger office
Sydney may have the views of the Harbour, but Melburnians opt for bigger office space.
And while there has been a contraction, the size of office space leased per square metre is still higher in Melbourne, as revealed in new research by independent corporate office strategists, ResolveXO.
In the past, the average office was about 2000 square metres but in some cases up 4000 per square metres which accommodated large-scale businesses such as banking, legal and accounting/insurance companies. There were even in-house money market and share market trading floors.
Tenants are now looking for smaller office sizes but in high-quality buildings.Credit: Steven Siewert
But with the onslaught of the global pandemic and changing work practices, companies are opting for smaller office footprints from between 500 square metres to 1500 square metres. Many are also decreasing the number of floors they want when the lease is up for renewal.
Kristina Mastrullo, head of research and property strategist for ResolveXO, said recent analysis reveals significant shifts in the Australian CBD office markets over the past four years, driven by the influence of the COVID-19 pandemic.
‘The volatility in office size categories is expected to persist.’
ResolveXO head of research Kristina Mastrullo
Mastrullo said the Sydney CBD has maintained a consistent pattern of reducing office space over the past three years. Demand for the smaller size categories, specifically those under 1000 square metres, has increased.
In contrast, the Melbourne CBD has seen an average growth of 3 per cent in office size in the 2023 calendar year to above 1000 square metres. This positive shift is a stark contrast to the 2022 scenario, where a substantial 31 per cent reduction in size across all categories was recorded.
The southern state has, on average, larger offices such as in Docklands where companies wanted campus-style properties. It was also hard hit by enforced lockdowns during the pandemic.
“As organisations grapple with economic uncertainties, headcount fluctuations, and the structural changes brought about by the rise of working from home practices, the volatility in office size categories is expected to persist,” Mastrullo said.
The research group’s data also shed light on the prevailing theme of the flight to quality. More companies are taking advantage of rent deals being offered to entice companies to relocate to upgraded premises. Incentives being offered can be free office fit-outs and car spaces, among other deals.
This has led to a number of older assets sitting empty and the pressure is now on landlords to refurbish their sites to offer smaller, high-end office space to attract tenants.
But if too costly they will have to sell the asset to a developer who has the cash to undertake the extensive work needed to bring the building up to a premium level.
Mastrullo said on a national basis, tenants have consistently sought the opportunity to upgrade their office space.
She said the so-called “stranded assets” are a growing concern as vacancy remains elevated and largely concentrated within secondary grade due to shifting working models; changes in industry needs with technological advancements; outdated buildings lacking modern amenities and efficiencies and alack of energy efficiency features or environmental, social, and governance considerations.
“While cost implications may play a role in these decisions, the ongoing market dynamics suggest that the flight to quality will gain more consideration as businesses stabilise in the coming years,” she said.
One such deal was by the Seven Network which is relocating its Melbourne operations, including workplace and broadcast studio, to Lendlease’s latest development, Melbourne Quarter Tower, in early 2025.
Relocating from 160 Harbour Esplanade, Docklands, Seven Network will occupy 4500 square metres across levels three and four of Melbourne Quarter Tower, the precinct’s flagship commercial building that is currently under construction.
Seven’s new headquarters will feature a state-of-the-art workplace and high-tech news broadcast studio that will support the network’s digital future.
Renders of One Melbourne Quarter, Two Melbourne Quarter and the Melbourne Quarter precinct being developed by Lendlease.Credit: Greta Costello Photography
Located on Collins Street and opposite Southern Cross Station, Melbourne Quarter Tower will span 34 levels and is scheduled for completion by mid-2024. It will be the final commercial building delivered in the Melbourne Quarter precinct.
Tom Mackellar, managing director, development, at Lendlease said the relocation of Seven Network reflects the “growing demand we’re seeing for premium, mixed-use office precincts like Melbourne Quarter that enhance the workplace experience, support productivity, and help companies to attract and retain talent”.
In its latest credit rating report, Moody’s Ratings also said landlords with well-located and good quality assets will continue to outperform those with secondary assets.
It has forecast that office rental income in Australia will grow at modest levels in 2024, supported by built-in annual rental escalations of 3 [per cent to 4 per cent.
“Market vacancy levels have increased above historical averages, and we expect further increases in the next 12 months as more supply comes online,” the report said.
It added that the higher credit-rated companies will see their vacancy levels remain stable at around 5 per cent on average, reflecting the high quality of their asset base.
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