The secondary office market is facing a critical crossroad as the pivot to premium accelerates across Australia's major office markets. This structural shift, driven by evolving tenant demands and intensifying ESG pressures, is creating an unprecedented challenge for B-grade and lower quality assets, with many facing potential obsolescence without significant capital investment.

Corporate Australia's focus on workplace experience and sustainability credentials has transformed from a 'nice-to-have' into a non-negotiable requirement. Major tenants are increasingly bound by corporate ESG commitments and reporting obligations, forcing their hand in relocating to buildings with superior environmental ratings. This flight from secondary stock has seen vacancy rates in B, C and D-grade assets push beyond 20 per cent in several submarkets, while prime-grade vacancies are slowly improving.

If future take up of space echoes results seen in the post pandemic era, vacancies for secondary assets across all Australian markets will reach 22 per cent (from current 15.9 per cent) in the next five years, even considering consistent withdrawal of stock. Prime markets however will continue to thrive, vacancies will move downward from the current 13.7 per cent to 5.4 per cent by late 2029, opening up potential for new development.

Further compounding this issue is the capital expenditure required to bring older assets up to modern standards. Basic refurbishments no longer suffice – tenants demand end-of-trip facilities, sophisticated air conditioning systems, smart building technology, and high NABERS ratings. Given the high cost of upgrades in the current market, this cost may not be recoverable through rental uplift in the current market.

The financing landscape further stresses these challenges. Lenders are increasingly cautious about exposure to secondary assets, particularly those with significant vacancy or requiring substantial capital expenditure. This credit squeeze is forcing some owners to consider alternative uses, with conversion to residential or mixed-use becoming an increasingly attractive option in markets where planning regulations permit.

Our forecasts suggest the bifurcation between prime and secondary assets is expected to widen further as the market's pivot to premium continues. While premium grade assets benefit from competitive tension among blue-chip tenants willing to pay for quality, secondary assets face a shrinking tenant pool and declining rents. This dynamic is particularly evident in suburban markets, where the lack of scale often makes substantial upgrades economically unviable.

Therefore, the secondary office sector faces a turning point. Buildings unable to meet rising environmental standards and tenant expectations risk becoming stranded assets. The market is likely to see an increase in opportunistic investors targeting these assets for conversion or redevelopment, particularly in locations where alternative uses can unlock greater value. For secondary assets without viable conversion potential, the future appears increasingly challenging as the pivot to premium reshapes Australia's office landscape.