Vacancy numbers still lead every office market report, but the metric is losing its predictive power. A building can sit at 15 per cent vacancy with strong tenant covenants and rising rents, or the same 15 per cent with short-term tenants on incentive-heavy deals about to roll off. The headline number hides the difference.
Industry research now points to three alternative measures that reveal more about actual demand and future income: utilisation rates (how much leased space tenants actually use), lease renewal activity (whether sitting tenants are staying or shrinking), and tenant quality (creditworthiness, lease length, sector mix). Each one tells you something vacancy cannot: whether the building is genuinely wanted, whether income is stable, and whether the next 12 months will tighten or loosen.
Why vacancy alone misleads
Vacancy is a stock measure. It tells you what percentage of a building or precinct sits empty today, but not how that space became empty, whether it will fill quickly, or what rent it will command when it does. A tower losing a single large tenant in one quarter can jump from 5 per cent to 25 per cent vacancy overnight, even if every other floor is fully committed and demand for the grade remains strong.
The inverse is also true. A building can report low vacancy while sitting on a pipeline of lease expiries in the next 18 months, with tenants already signalling they will downsize or walk. Vacancy lags the actual shift in tenant sentiment by six to twelve months, which is too slow for capital allocation decisions.
The metrics that close the gap
Utilisation data tracks how many days per week leased floors are actually occupied. Hybrid work has decoupled leased area from actual use, and landlords with access to swipe or sensor data can see whether a tenant paying for 1,000 square metres is using 400. That gap drives the next lease negotiation. If utilisation across a precinct is running at 60 per cent, expect tenants to push for smaller footprints on renewal, even if headline vacancy looks contained.
Lease renewal activity is the forward indicator vacancy is not. If 70 per cent of tenants rolling in the next 12 months are renewing early or on similar terms, that building has pricing power. If renewals are stalling or coming with heavy incentives, the vacancy rate will catch up later. Track the renewal pipeline, not the current snapshot.
Tenant quality separates income risk from headline risk. A building at 10 per cent vacancy anchored by government and ASX-listed tenants on 7-year leases is a different investment to the same vacancy filled with startups and coworking operators on 2-year terms. Weighted average lease expiry (WALE) and tenant credit mix tell you whether the income stream is stable or about to reprice.
What this means for capital decisions
If you are assessing an office asset or fund, ask for these three data points before you look at vacancy. A portfolio with rising utilisation, strong renewal momentum and long-WALE tenants can absorb higher vacancy without income stress. The reverse – low vacancy propped up by short-term tenants in under-utilised space – is a value trap.
For listed office REITs, check whether management commentary discusses utilisation and renewals or just points to headline vacancy. The former signals they are managing the actual risk. The latter suggests they are hoping the market does not ask the next question.
Key numbers
- Hybrid work has pushed average office utilisation below 70 per cent in most CBD precincts
- Lease renewals with tenure above 5 years indicate tenant confidence and building quality
- Tenant credit mix and weighted average lease expiry (WALE) determine income stability
- Vacancy can lag actual demand shifts by 6 to 12 months
Red flags in the next 12 months
Watch for divergence between vacancy and incentives. If vacancy is falling but incentives (rent-free periods, fitout contributions) are rising, landlords are competing harder for the same tenant pool. That points to weak pricing power, even as the headline number improves.
Also track portfolio-level disclosure. If a fund or REIT reports blended vacancy but does not break out by building or tenant type, assume they are smoothing over problem assets. The best-performing office portfolios publish utilisation and renewal data building by building.
The trade-off no one talks about
Utilisation and renewal data are harder to get than vacancy figures. Most public market reports still lead with vacancy because it is simple to calculate and compare across cities. That creates an information asymmetry: institutional buyers with direct building access can see utilisation and renewal pipelines, while smaller investors and REITs are stuck trading on lagging vacancy numbers.
If you are investing in office exposure without access to these metrics, you are making a capital decision on incomplete information. The gap is not small.
What to do next
If you hold office REITs or are considering office exposure, request utilisation data and renewal schedules in the next investor update. If management cannot or will not provide them, that is a signal in itself. For direct asset buyers, make utilisation reporting and tenant quality a condition of due diligence, not an afterthought.
For a clearer read on how capital is shifting across property sectors, track how retail and construction risk is repricing in the same environment. Office is not moving in isolation.
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General info, not financial advice.
