Demand to strengthen, but national office vacancy will rise in 2015
Demand to strengthen, but national office vacancy will rise in 2015
20 January 2015
21 January 2015 – Green
shoots are emerging in the national office leasing market, with net absorption
expected to return to near long run averages by the end of this year according
to a new research report from CBRE.
CBRE’s Australia Office Q4 MarketView highlights
that national net absorption was positive in 2014 at an estimated 42,190sqm – a
key positive in an environment of persistently weak business conditions and
below average business investment.
hurdles remain, the main being an expected imbalance between supply and demand,
which will drive vacancy rates higher over the next three years.
the national office vacancy rate was stable in Q4 at circa 11%, CBRE Associate
Director, Research, Claire Cupitt said net additions to CBD office stock were
expected to peak this year at 423,000sqm - 60% higher than the annual average
over the past 15 years.
line with our view on the national economy, office occupying industries should
experience improved conditions from the second half of 2015, driving momentum
in labour markets and encouraging net absorption back to near long-run averages
by the end of the year,” Ms Cupitt said.
this should aid in improving the imbalance between supply and demand, the next
supply cycle remains a key threat to rent outcomes and a sustained improvement
in vacancy over the next three years.”
CBRE Regional Director, Office
Services, Andrew Tracey said this would be more of an issue in market such as
Perth and Brisbane, where tenant demand had been impacted by the resources
However, Mr Tracey noted that tenant
demand and lease conversion levels had improved in most markets in the second
half of last year, with main driver for tenants being a continued search for
great efficiency – both spatially and financially.
“Tenants in most markets now
understand that the deals on the table are as good as they will get and they appear
to have the confidence to start making decisions about the future rather than
simply sitting in their hands,” Mr Tracey said.
“We are seeing fewer short term
renewals and, significantly, more new long term commitments across the country,
particularly on the Eastern Seaboard. The exceptions to this are mining related
entities and government tenants which are budget constrained.”
Net absorption improved to 58,600sqm
in 2014 and this, combined with low net additions to stock, resulted in the CBD
vacancy declining from 8.4% in Q3 to 7.9% in Q4. Vacancy is expected to remain
relatively balanced during 2015, despite large supply additions, but will begin
rising to an expected peak of 10% in mid-2016 before declining in the second
half of that year. Secondary vacancy is expected to remain below prime vacancy
over the course of this supply cycle given numerous stock withdrawals and
relatively buoyant tenant demand for well-priced and located, upper B grade
Prime net face rents grew by just 0.5%
in 2014, with landlords maintaining rents by offering a range of incentives.
CBRE’s report forecasts that incentives will be sustained at current levels in
2015, restricting effective rental growth.
Some 173,700sqm of new space is
expected to be added to the CBD by 2016. While 69% of this space is
pre-committed, the remaining available space will help push the city vacancy
rate higher to an estimated peak of 10%.
A positive for the market has been the
estimated 1% growth in white collar employment in the Melbourne CBD during
2014, with growth and enquiry being strongest from Information Media
/Telecommunications and Rental Hiring / Real Estate Services groups. Education
is also again on a clear growth path.
An increase in tenant enquiry and activity
was noted during 2014, however net absorption remained subdued at an estimated
-6,500sqm given moves by Ventyx and the Bank of Queensland to the Near City
(accounting for some 18,000sqm of space). The CBD vacancy remains elevated at
over 14%, with most of the CBD activity in 2014 generated by tenants with
upcoming lease expiries taking advantage of competitive face rentals and
incentives to reset or upgrade their occupancy.
Gradual improvement in tenant demand
is forecast for 2015/16, although CBRE is forecasting that vacancy will spike again
in the second half of 2016, potentially to near 17% as new supply completes.
This may be tempered slightly, depending on whether some sublease space
currently available is absorbed by tenants or remains on the market.
A sharp decline in the resources sector
has impacted the market through negative net absorption, rising vacancy (which
recently hit an estimated 10-year high of 15%) and declining rents. CBRE’s
report highlights that the decline in Perth CBD prime net face rents
accelerated in Q4, contributing to an overall dip of 8.9% for the year, back to
2011 levels. Prime incentives have also increased, resulting in a significant
decline in net effective rents over the year. A further decline in net face
rents is expected over 2015, with incentives expected to peak by the end of the
White collar employment is expected to
turn positive this year, driving improved net absorption. However, a supply
cycle is also expected to commence which will drive market vacancy to an
expected peak of 19.5% in 2015.
Office occupier demand contracted in
2014, with 15,360sqm of negative net absorption. Impacting demand for office
space was the decline in non-mining business investment and contractions in
public administration, the largest employment group in the Adelaide CBD.
Vacancy rose slightly over Q4 to 14%, up from 13.8% in Q3. Vacancy is expected
to remain steady over 2015 and 2016 before rising further with expected new
supply in 2017.
While the leasing market faces
continued challenges, levels of enquiry did rise throughout 2014, albeit off a relatively
low base. Current tenants are attracted to the numerous options in the market
on more favourable terms, leading to a flight to quality in the CBD,
Uncertainty in relation to government
department staff requirements continue to impact the market, with occupiers
reluctant to sign long-term leases or commit to more space. This soft occupier
demand has been reflected in high levels of vacancy since 2012, with vacancy
estimated to have crept up to just under 15% in 2014 on the back of low net
absorption and the completion of new supply. There is also potential for
sublease availability to steadily increase as a result of government restructures.
Prime net face rents experienced a
slight decline in 2014 and incentives remain at historic highs as landlords
look to maintain headline rents in an environment of weak demand
For Australian/international news or global stories, follow us on Twitter.
About CBRE Group, Inc.
CBRE Group, Inc. (NYSE:CBG), a Fortune 500 and S&P 500 company headquartered in Los Angeles, is the world’s largest commercial real estate services and investment firm (in terms of 2013 revenue). The Company has approximately 44,000 employees (excluding affiliates), and serves real estate owners, investors and occupiers through more than 350 offices (excluding affiliates) worldwide. CBRE offers strategic advice and execution for property sales and leasing; corporate services; property, facilities and project management; mortgage banking; appraisal and valuation; development services; investment management; and research and consulting. Please visit our website atwww.cbre.com.au.