Sydney, 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.
However, hurdles remain, the main being an expected imbalance between supply and demand, which will drive vacancy rates higher over the next three years.
While 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.
“In 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.
“While 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 slowdown.
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.”
OUTLOOK BY CITY
Sydney
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 accommodation.
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.
Melbourne
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.
Brisbane
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.
Perth
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 year.
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.
Adelaide
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,
Canberra
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
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