Has Working from Home Killed Commercial Real Estate?

The pandemic significantly disrupted Australia’s commercial real estate market, particularly for commercial office space. With the rise of working from home and hybrid models, businesses across the nation have been reassessing their office needs, causing shifts in vacancy rates, property values, and tenant demand.

Office Vacancy Rates on the Rise

Australia’s office vacancy rates are at their highest in almost 30 years. By early 2024, the national vacancy rate had climbed to 14.8%, up 50% from historical averages. Cities like Sydney and Melbourne saw significant increases, with Melbourne’s CBD recording a vacancy rate of 16.4%, its third consecutive period of negative demand.

This surge is largely driven by a combination of expiring leases and the increasing trend towards flexible working arrangements, which have reduced the need for large, permanent office spaces.

Secondary office markets, in particular, are feeling the impact. The vacancy rate for secondary office spaces across Australia’s CBDs hit 14.5%, compared to 12.9% for prime office spaces. This reflects a growing divergence between high-quality, centrally located office buildings and older, lower-grade stock, which is becoming increasingly difficult to lease.

The Flight to Quality

As businesses reassess their office requirements, a "flight to quality" is occurring. Companies are moving from older, less efficient offices to newer, premium office spaces that offer better amenities, flexibility, and environmental credentials. This is particularly true in Sydney, where the prime office vacancy rate was 12.5%, despite a higher overall CBD vacancy rate. The most sought-after spaces are those that are modern, ESG-compliant, and located in core CBD areas.

For example, tenants are increasingly interested in prime office towers like those in Barangaroo, where high-quality leases remain in demand. However, outside core CBD locations, even prime buildings are struggling, and incentives to attract tenants have risen sharply.

Pressures on Older Office Buildings

Older buildings and those located in less central areas are bearing the brunt of the WFH shift. These lower-grade office spaces are seeing vacancies rise significantly as tenants vacate for better-quality premises.

In many cases, these properties are likely to remain empty unless significant redevelopment or repurposing occurs. This trend is being seen across most major cities, where B-, C-, and D-grade office buildings are becoming candidates for

conversion into residential or mixed-use developments as their value drops low enough to make such projects feasible. Despite the challenges for secondary office spaces, the supply of new office buildings continues to enter the market, adding pressure to existing vacancy rates.

A Shifting Market

While working from home has not completely destroyed demand for office spaces, it has accelerated long-term trends. Physical occupancy rates in CBD offices have slowly improved, with figures reaching 70% of pre-COVID levels by the end of 2023. However, many businesses are still navigating the balance between remote work and in-person office attendance, leading to uncertainty about future demand for office space.

Ultimately, the shift to WFH has created a significant divergence between premium and secondary office spaces.

While top-tier buildings in prime locations remain relatively insulated from the worst effects of the downturn, older, less flexible properties face growing vacancies and declining values.

As businesses continue to evolve in response to changing work patterns, the commercial real estate landscape in Australia will likely continue to see shifts, with the potential for more repurposing of office buildings and a focus on quality over quantity in the years to come.

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