Not all ‘doom and gloom’ for the office sector

While the impacts of hybrid work on the office sector have dominated headlines, portfolio managers say it’s a matter of knowing which asset grades to invest in.

The office sector, both domestically and globally, is no stranger to the structural challenges of ‘working from home’ environments.

Real estate investment trusts (REITs) focused on office properties have dropped nearly 25 per cent from the onset of 2022 to 30 June 2023, data from Dimensional reported. 

At large, the Australian commercial property market recorded the slowest quarter in Q1 2023 in over a decade with transactions at just $5.3 billion, a year-on-year decline of 73 per cent.

Justin Pica, lead portfolio manager of the UBS CBRE Global Property Securities Fund, recognised the capital expenditure costs that the office market has been suffering from as buildings are being updated to attract more tenants.

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“We are definitely seeing a bifurcation between asset grades. People have been far more discerning about how they consume their office demand at present,” he told Money Management.

JLL’s Australian office market report found the national CBD vacancy rate rose marginally to 14.4 per cent in Q2 2023 from 13.4 per cent in December 2022. This is due to negative absorption alongside the completion of new office stock.

Positively, four out of six of Australia’s CBD markets recorded positive net absorption over the quarter.

Premium grade offices with high-quality buildings, CBD location and the highest ESG and sustainability credentials are now essential considerations for businesses, Pica said.

Justin Blaess, principal and portfolio manager at Quay Global Investors and winner of this year’s Global Property Securities Fund of the Year at the Money Management Fund Manager of the Year Awards, also noted the higher demand for A- and B-grade properties, which have seen higher vacancy rates.

Better quality properties are still seeing good tenant demand as people use the market weakness to trade up to better quality space, he said.

“It’s not all doom and gloom for all office landlords,” Blaess commented.

Overall, office occupancy levels have shown greater stabilisation as the market absorbs the oversupply built prior to COVID-19 lockdowns.

Damon Mumford, a Dexus Core Property Fund manager, observed that occupancy rates for premium buildings are at 98 per cent on Dexus’ listed portfolio, highlighting the flight to quality.

The occupancy of premium offices in Sydney’s CBD core precinct is the highest of the four precincts at 90 per cent, he found.

“Importantly, supply of new office buildings within these core CBD locations is likely to be restricted going forward due to a lack of available sites and higher building and financing costs impacting the viability of new development. This makes existing prime assets more attractive,” Mumford said.