How a ‘great withdrawal’ will help drive Australia’s office market recovery

A CBRE report forecasts a significant reduction in Australian CBD office space, led by Sydney, over the next five years, dubbed "the great withdrawal." Sydney's CBD could see 241,336 sqm (4.6% of existing inventory) withdrawn by the end of the decade due to conversions to alternative uses like apartments and hotels, coupled with temporary withdrawals for new construction, potentially decreasing vacancy rates from 12.8% in 2024 to as low as 5.4% by 2032, depending on the extent of withdrawals realized, which will disproportionately impact lower-grade assets and could drive up rents.

Analysis

A significant trend, dubbed "the great withdrawal," is poised to reshape Australia's office market, particularly in Sydney, over the next five years, according to a CBRE research report. This withdrawal involves substantial office space being removed from Central Business Districts (CBDs), with Sydney potentially seeing 241,336 sqm, or 4.6% of its existing office inventory, taken offline by the end of the decade. This reduction is driven by two primary factors: permanent withdrawals for conversion to alternative uses like apartments and hotels, primarily in Sydney's Midtown, Western Corridor, and Southern precincts, and temporary withdrawals for sites earmarked for new office tower construction, typically in the CBD Core or northern Midtown. CBRE forecasts indicate a stark shift, with new Sydney CBD supply anticipated to decrease by 61.2% over the next five years compared to the previous five, while withdrawals are expected to surge by 92.6%. This dynamic is projected to significantly lower vacancy rates; Sydney's CBD vacancy could fall from 12.8% at year-end 2024 to a base case of 9.1% by 2032, or potentially as low as 5.4% if all identified withdrawals proceed. The report highlights that a 50,000 sqm withdrawal equates to an approximate 1.0% tightening in the vacancy rate. This trend is expected to particularly impact lower-grade office assets, potentially driving up rents for B-Grade and lower A-grade stock as observed in previous cycles, with CBRE already noting increased enquiry in Midtown and the Western Corridor from value-seeking tenants. The overall sentiment from associated data signals is strongly positive, suggesting a favorable outlook for office market recovery driven by these supply-side adjustments.

Key Decisions for Investors

• Investors should assess opportunities in Sydney CBD office assets, particularly lower-grade properties in Midtown, the Western Corridor, and Southern precincts, which are likely to benefit from reduced competition and potential rental growth as inventory is withdrawn.
• Closely monitor the actual volume and timing of office space withdrawals against CBRE's forecasts, as the realization of the projected 241,336 sqm reduction in Sydney is a key catalyst for the anticipated significant decline in vacancy rates and market tightening.
• Consider diversifying into or increasing exposure to property sectors such as residential, hotel, education, and data centres, which are identified as having stronger fundamentals and are likely recipients of capital and space from converted office assets.