Australian markets have witnessed the fastest rental growth for offices in skyscrapers

Rents for skyscraper offices in Australian cities are rising faster than those in any other global city, according to the latest Skyscraper Index from Knight Frank.

The report examines the rental performance of commercial buildings over 30 storeys across the world.

Melbourne and Sydney grew the fastest among the cities surveyed at 11.0 percent and 10.1 percent respectively in the six months to Q4 2016, amid tightening vacancies and limited new supply.

In Sydney, stock withdrawals to accommodate the new Metro line and residential conversions are reducing the overall supply, while Melbourne had the strongest level of net absorption in 2016.

David Howson, head of office leasing at Knight Frank said Sydney’s office vacancy is at 6.2 percent, and is forecast to go as low as 3.5 percent in the next two years, with the current low vacancy and prospect of even lower vacancy driving rental increases now.

“The withdrawal of stock for Sydney is a major factor, with 239,057 sqm of stock removed from the market during 2016 for either refurbishment or permanent withdrawals – largely for conversion to residential or hotel use, and recycling of sites to future office developments," he said.

"An example of this is 301 George Street, in which 11,500 sqm is being demolished to make way for the Wynyard Place development.

"The Metro project will also trigger significant withdrawals of space, mostly in 2017, accounting for some 62,000 sqm along, and this will be a major contributor to the further 102,289 sqm of Sydney CBD office stock to be withdrawn this calendar year.

"While recent new supply has been high, largely driven by the Barangaroo developments, this has been largely balanced by the withdrawals.

"The next two years of supply is only modest, and the total stock of the CBD is expected to decline over this period.

"However, there is a very strong supply cycle building for 2020 and beyond.Net absorption of office space in the CBD is also high driven by buoyant financial and construction sectors.

“In Melbourne, the vacancy rate is at 10-year lows at 6.4," Mr Howson added.

"Unusually for Melbourne in recent years, the level of new stock additions will be lower in the next 24 months at 113,242 sqm or 1.3 percent stock growth per annum.

"This is well below the long term average of 3.6 percent per year.

"The Victorian economy is currently the strongest in Australia, and is supported by high population growth into Melbourne of 2 percent, which is boosting the underlying demand for office space.

"With the vacancy rate expected to head towards 4 percent in the next year, the upwards pressure on rents will remain.

"However it should be remembered that across the market as a whole, there is still a large price gap between the Sydney and Melbourne markets with gross effective prime rents in Sydney currently at a 60% premium to those in Melbourne."

Knight Frank’s latest research shows rents in Hong Kong’s skyscrapers continue to be the highest in the world by some margin, reaching $302.67 per sq ft in H2 2016.

New York retains its second position, where skyscraper rents are currently $159.00 per sq ft.

In Europe, skyscraper rents in London have remained stable at $104.56 per sq ft in the second half of 2016.

Of the North American cities, Toronto saw the highest rental growth at 4.7 percent.

In many Southeast Asian markets such as Shanghai, Singapore and Seoul, rents have trended down by 2.0 percent, 4.2 percent and 4.8 percent respectively, highlighting heightened economic uncertainty and a cautious business outlook.

Dan Gaunt, head of Knight Frank's city agency said despite uncertainty following the Brexit-vote, rents in London’s skyscrapers remain significantly higher than those in other major European cities.

"Demand for space in the Capital’s landmark tall buildings shows little sign of diminishing and we see rents remaining at their current level through 2017,” he said.

James Roberts, Knight Frank's chief economist said the strong performance for Melbourne and Sydney reflect local market factors.

"If we set those cities to one side, the general picture from the latest Skyscraper Index is flat growth, which reflects the nervousness in most office markets in the second half of last year over political risks, like Brexit and the US election," he said.

"However, in 2017 the tone of global economic news is improving, and both Brexit and the Trump government have not had the negative impact on growth that was initially feared.

"When we compile the next skyscraper index in the summer, I expect to see more cities reporting rental growth in tower buildings.”

 Source: Knight Frank, Newmark Grubb Knight Frank, Sumitomo Mitsui Trust Research Institute          

* Excludes exchange rate effects; conversion to US$ based on 31 December 2016 rates                   

Note: Upper floors is defined as above the regular skyline, thus offering panoramic views, but excluding the very top floors.