Divergence in Australia’s CBD office markets unprecedented: Colliers
GUEST OBSERVER
The CBD office markets of Australia are in the midst of an unusual dynamic.
Sydney and Melbourne are in full rental growth and vacancy decline mode, while the other CBDs have low or negative rental growth, and vacancy rates in the double digits.
This is the first time since records began that the office markets have diverged to such an extent, and is reflective of the wider demographic and trends being felt in each state. That is, strong migration growth and employment growth in Sydney and Melbourne, and slowing population growth in the other states.
Sydney
The Sydney CBD office market is transitioning and opportunistic landlords have aggressively increased rents and reduced incentives as available office space diminishes. Almost 150,000 sqm of space will be withdrawn from the market by the end of 2017, as a result of the Sydney Metro project, as well as residential conversions. Over the short term tenant demand will outweigh net supply, maintaining downward pressure on vacancy rates until 2019.
Adelaide
Despite the weakness in the Adelaide leasing market, there are signs that there is a pick-up in demand over the next 12 months. Enquiry has begun to improve and we are heading into a period of several large lease expiries which may be the catalyst for tenants to move. Access Economics are also forecasting an improvement in white collar employment during the first half of 2017. Most of which is likely to be through growth in small to medium enterprise.
Perth
The rise in vacancy in the Perth CBD – from 16.6 per cent in June 2015 to 21.8 per cent in June 2016 – combined with soft demand, continued to put pressure on landlords to reduce rents and offer higher incentives. Despite these efforts by landlords, net absorption remains subdued. This is a reflection of depressed business confidence and white collar labour market conditions. However, greater affordability has underpinned growth in demand from CBD and suburban tenants aspiring to migrate to a CBD address. This is expected to have a positive impact on net absorption going forward.
Canberra
Investor appetite in the Canberra CBD has improved, with a greater mix of investors generated by a high proportion of new entrants to the market. Recent lease deals indicate a slight shift of bargaining power toward landlords as tenant choice has decreased in some areas and sub markets. An increase in leasing activity and net absorption has placed downward pressure on vacancy and we expect vacancy levels to fall from 13.0 per cent currently to 11.0 per cent by July 2017.
Unusually for Melbourne, there were no new developments completed in the rst half of 2016, which resulted in the vacancy rate tightening by 80 basis points to 7.0 per cent during this period. Tenants looking for quality assets will have limited options over the next three years, given that the new wave of CBD core supply is only expected to come through in 2019/2020. Nearly all new supply being completed over the 2nd half of 2016 is spoken for by pre-committed tenants.
Brisbane
It is expected that Brisbane will continue to be a tenant’s market for the foreseeable future given the volume of vacant and sublease space available. The State Government has been increasingly active taking advantage of the favourable leasing conditions. Leasing enquiry has remained soft in the CBD market however, despite the soft leasing conditions, institutional investors have been active over the last 12 months, fiercely competing for prime stock when it has been brought to market.
This article by Anneke Thompson appeared as part of Colliers International's CBD Office Research & Forecast Report H2 2016. She is the national director of Research and can be contacted here.
