As occupiers adjust policies to navigate remote working and attract employees back to the office, new research quantifies the impact of higher-quality workspaces on office building occupancy.
According to Cushman & Wakefield’s Rethinking Australian Offices 2024 report and based on an analysis of 250 leasing briefs in the Sydney and Melbourne CBDs in the past 12 months, 45% of tenants changing offices within the CBD moved into a higher-grade space.
Alongside movement by building grade, tenants are seeking better access to amenity in prime locations. This has supported a recentralisation trend with a significant proportion of tenants moving closer to the city core. In Sydney, one-third of the tenants relocating from western and midtown precincts moved into the city core.
While the ‘flight to quality’ among office occupiers has been gaining momentum over the past two years, Cushman & Wakefield modelling can now reveal the impact of an uplift of building quality on tenant demand, taking into account the site, structure, services, spaces and scenes.
According to Cushman & Wakefield’s research team, the NABERS rating forms the most suitable proxy for building quality across these five dimensions due to its coverage of a large sample of Sydney and Melbourne CBD buildings and close correlation to building grades.
After controlling for several factors including location, grade and amenity value amongst others, the new research finds that increasing a building’s within-grade quality from standard to above average corresponds to a 5% decline in vacancy and a 7% increase in net effective rents. Even modest upgrades produced yield benefits, with a 2% vacancy decline and a 3% rent increase.
The research confirms that the uplift in rents is due to higher face rents rather than tighter incentives, suggesting landlords can at least partially pass on the costs of investments in building upgrades. The occupancy and rental benefits from investing in quality were seen equally across the Sydney and Melbourne CBDs, with difficult-to-lease areas, such as lower floors, seeing the greatest positive impact.
Sean Ellison, National Economics & Forecasting Manager, Cushman & Wakefield, said: “As many occupiers gravitate to higher quality buildings as they adjust to flexible working, landlords tend to have one primary lever in response - upgrading their assets.”
“Our research confirms the significant impact of quality on a building’s performance when you isolate it from other factors. While the impact was seen evenly in Sydney and Melbourne, we found that rents appear more sensitive to grades in Sydney and the same for amenity values in Melbourne.”
Maria Russo-Fama, Director – Client Services, ANZ, Cushman & Wakefield, said: “Investing in upgrades is not just a smart move but a necessary one for landlords who want to stay ahead as the ‘flight to quality’ trend continues to dominate Australia’s office market.”
“Whether it be through more efficient and flexible office layouts, energy efficiency, or events and pop-up installations that engage tenants, our analysis demonstrates that building quality can attract tenants and yield long-term financial benefits that outweigh the initial investment.”
About Cushman & Wakefield
Cushman & Wakefield (NYSE: CWK) is a leading global commercial real estate services firm for property owners and occupiers with approximately 52,000 employees in approximately 400 offices and 60 countries. In 2022, the firm reported revenue of $10.1 billion across its core services of property, facilities and project management, leasing, capital markets, and valuation and other services. It also receives numerous industry and business accolades for its award-winning culture and commitment to Diversity, Equity and Inclusion (DEI), Environmental, Social and Governance (ESG) and more. For additional information, visit www.cushmanwakefield.com.
