THE amount of spare office space in the city centre has declined since the start of the year.
But the underlying theme is that companies are still making staff redundant and if it wasn't for the lack of new supply, conditions would be worse. In Sydney's central business district, the commercial office market has stabilised after a period of weak demand and rising vacancies, according to the Property Council of Australia's latest Office Market Report.
The vacancy rate across the CBD fell from 9.7 per cent to 8.3 per cent in the half-year to last month, driven by a combination of demand and stock withdrawals. But the construction of commercial towers at Barangaroo South will shift the balance of supply in the Sydney office market in coming years.
''Demand has returned to normal levels, with net absorption totalling 45,309 square metres over the six months to July,'' said the executive director of the Property Council NSW, Glenn Byres.
An independent real estate analyst, Kevin Stanley, said the global financial crisis and ongoing instability of the European financial system had wreaked havoc on Australian business confidence.
''This has led to a very weak office leasing market, particularly in the Sydney CBD, where the exposure to tenants from the finance industry is at a national high,'' Mr Stanley said.
''As a result, the expectations for the Sydney CBD office market were not very high in this July 2012 survey.
''Yet, in this context, the Sydney CBD has surprised on the upside, with the biggest drop in vacancy of the 21 office markets reported in the PCA survey.''
The national director of research at Knight Frank, Matt Whitby, said the absence of fresh supply (no new developments completed in the first half of this year), combined with the withdrawal of stock for refurbishment, had been the dominant drivers of the fall. ''In the past six months, 48 Martin Place was the largest withdrawal (it is being completely refurbished for Macquarie to occupy from 2015) and parts of 1 O'Connell Street, 52 Martin Place and 363 George Street were also withdrawn for refurbishment,'' he said.
''These properties will be progressively returned to the market over the next six to 12 months, which will compound the effect of further soft demand on vacancy.''
Mr Whitby said other large site withdrawals would include 20 Martin Place and the Red Cross Building at 159 Clarence Street, as refurbishment works began on those buildings. ''In addition, there is a reasonable likelihood of at least a further 50,000 square metres of office space being converted to alternative uses over the next few years, as market rents remain below economic rents,'' he said. ''For example, 115 Bathurst Street, 1 Alfred Street, 50-54 Park Street and 161 Clarence Street are all slated for residential development. Additionally, 34 Hunter Street, which was bought by a Malaysian developer last year, is mooted for redevelopment into a hotel. This will assist in cushioning the impact of below-average demand levels over the next 12-24 months.
''Interestingly, sublease space almost halved over the first half of 2012, which is completely at odds with what we are finding on the ground. We expect the availability of sublease space in Sydney will increase during the balance of 2012 as a lag to the recent job cuts and persistently weak sentiment in the macro environment.''
The senior director of office services at CBRE, Jenine Cranston, said companies were looking to drive down occupancy costs; flexible fitouts including activity-based workplaces (ABW) are topical but only part of the story.
''The advent of ABW and other, more flexible workplaces, we believe, is a long-lasting trend as the workplaces are desirable and will aid in the attraction and retention of talent,'' she said. ''While there has been a good deal of legal inquiry, there is a trend in legal and across the board for companies to drive their costs down through demanding more value.''