The Office sector has proven to be resilient through the pandemic. Capital values have remained unchanged the last 12 months, a reflection of how Australia handled the COVID-19 pandemic generally, which ultimately increased investor confidence in the office sector.

After occupier demand collapsed in 2020 as a direct result of the pandemic, 2021 saw the green shoots of a recovery in demand as lockdowns and covid-19 related restrictions have lifted. This trend is expected to continue into the second half of 2021 as workers continue to return to work. Canberra appears to have been the most resilient market throughout the pandemic. Due to its high exposure to Government occupiers, the market is more impacted by Commonwealth Public Service tenant demand rather than purely from economic drivers. In a year which was forecast to be challenging due to the large supply side additions, particularly in Melbourne and to a lesser degree in Sydney, the impact of the fall in demand from occupiers has magnified the imbalance.

From a capital perspective, following an extended period of yield compression over the last 2-3 years, average A grade office yields across the nations CBD’s remained stable throughout H1 2021.

Going forward, we expect to see benchmarks reflect property specific income risk which in turn will highlight the differences in quality of asset and particularly quality of tenant covenant. Quality, prime grade assets, with long WALE’s backed with high quality tenants will continue to be at the forefront of investor attention, and we anticipate that secondary yields will suffer as a consequence of this.

After a year of record highs in 2019, 2020 saw office transaction volumes fall drastically with some pending sales not proceeding and other properties not being brought to the market as expected following the uncertainty that surrounded office values since the pandemic. The 12 months to June 2021 saw $10.97 billion of office transactions nationally ($5m+), which was a 43% decrease on the $19.3 billion in the previous 12 months. Positively, transaction volumes have picked up in the last two quarters as workers begin to return to the CBD’s and sentiment around the asset class starts to lift. With a significant spread between property yields and 10-year bonds being maintained, and the cost of debt remaining at historical low levels, an argument is presented for further cap rate compression for core, defensively posited assets.