Challenging Conditions, Selective Opportunity

The Australian CBD office sector finds itself at a crossroad. Amid rising interest rates, shifting tenant behaviours, and growing operational costs, market sentiment has soured. Yet, beneath the headlines of falling values and surging incentives, there are pockets of resilience and opportunity, particularly for active managers with local insights and hands-on strategies.

Rather than declaring a broad-based structural decline, we believe the current environment calls for a nuanced approach. Yes, there are real challenges, especially in oversupplied or policy-unfriendly regions. But there are also meaningful opportunities for long-term investors willing to engage actively with their assets.

Supply, Demand, and the Flight to Quality

Let’s start with the macro picture. CBD vacancy rates nationally have pushed higher, with Melbourne currently over 18% and Sydney at 13.3%. Substantial new supply in recent years has coincided with evolving work-from-home patterns and cost-conscious tenant behaviour, resulting in a tenant’s market across many grades.

However, this trend is not uniform. Premium-grade assets in core locations continue to attract tenants seeking high ESG ratings, modern infrastructure, and attractive amenities. The “flight to quality” is real, and while incentives remain elevated, net effective rents in top-tier assets are beginning to stabilise.

In cities like Brisbane and Adelaide, leasing volumes remain robust, with net absorption in 2024 surpassing 10-year averages. Perth is experiencing improved leasing outcomes due to lack of new supply, and the Canberra market remains supported by government tenancy.

Operational Headwinds: Incentives and Fit-out Costs

One area where pressure is building across the board is in incentive structures. Landlords are offering generous inducements, often above 35%, to secure long-term tenants. These incentives, combined with rising fitout and compliance costs, are squeezing net returns.

This is particularly acute in older, secondary-grade buildings requiring capital upgrades to meet ESG or tenant expectations. For assets lacking a clear repositioning strategy, value erosion is real and continuing.

That said, modern, well-located assets with proactive management teams are weathering the storm better. Incentives may remain high in nominal terms, but they are increasingly being deployed strategically, to accelerate leasing, secure renewals, or support tenant co-investment.

Government Policy: A Double-Edged Sword

Governments, especially in Victoria, have introduced land tax increases, foreign ownership levies, and council rate escalations that are beginning to bite. These policy settings are deterring offshore capital and undermining feasibility for new projects.

The system for land valuation, often opaque and seemingly disconnected from market dynamics, is amplifying the challenge. In many cases, assessed land values have climbed despite falling rents and capital values.

On the flip side, several state and local governments are actively supporting CBD revitalisation initiatives, including transport infrastructure, residential conversion incentives, and planning reform. These initiatives could pave the way for medium-term demand uplift and value recovery in well-positioned precincts.

Valuations: Realignment Underway

Across the market, asset values have already reset significantly. Valuation write-downs of 10–25% are common, particularly in B-grade and fringe assets. Yet, this correction is creating new entry points for investors willing to navigate complexity.

Importantly, yields in some markets are beginning to stabilise. Buyers with longer investment horizons, especially those with build teams and refurbishment capability, are starting to re-enter the market. These investors recognise the value in acquiring well-located assets at a discount to replacement cost, with the ability to reposition for the next cycle.

Tamim’s Perspective: Active Over Passive, Strategy Over Sentiment

At Tamim, our approach to office property is pragmatic and selective. We’re not blindly bullish but nor are we writing off the sector. Our experience managing office assets underscores the importance of:

• Local knowledge: Understanding tenant demand and council planning priorities
• Hands-on management: Working closely with leasing agents, tenants, and build partners
• Capex discipline: Prioritising spend where it drives returns or de-risks leasing
• Valuation rigour: Challenging assumptions around land values and return on investment

We see value in certain metro and fringe CBD locations, especially those well-connected by transport, benefiting from infrastructure upgrades or migration tailwinds.

TAMIM Takeaway: Repricing Reveals, It Doesn’t Destroy

Yes, Australia’s CBD office sector is under pressure. But it is not homogenous, nor is it structurally broken. The challenges, supply, incentives, and policy, are significant but not insurmountable.

Actionable insights for investors:

• Focus on location, tenant profile, and building quality—not just rental yield.
• Be cautious in Victoria, where policy settings remain highly unfriendly.
• Look for assets trading at material discounts to replacement cost with repositioning upside.
• Avoid passive strategies, success in this cycle requires operational skill and real estate IQ.
• Assess land valuations critically and be ready to challenge assessments through review.

This is a market for investors who build, manage, and engage, not those who buy and hope. For the right assets, managed the right way, this repricing phase may ultimately prove to be an opportunity, not a crisis.