Business confidence and softer employment growth impact CBD vacancy rates

​ Sydney, 7 February 2013 - Softening employment growth has taken a toll on Australia’s capital city office markets, with vacancy rates rising in all but one of the country’s major CBDs in the second half of the year according to the latest Property Council of Australia statistics.

An analysis of the PCA figures by CBRE shows that Sydney was the only major capital city to buck the trend of increasing vacancy rates, with the city’s vacancy rates falling from 8.2% in July 2012, to 7.2% as at January 2013.

However, CBRE’s Head of Research for Australia, Stephen McNabb, said it was a stock withdrawal led reduction in Sydney rather than a strong, demand led improvement.

Nationally CBD vacancy increased from 7.3% in July 2012 to 8.1% as at January 2013, with the six monthly net absorption number of 27,000being well below the historical (2000s) average of closer to 150,000 per half year. 

“That softer demand outcome is consistent with the trends emerging in a range of underlying drivers such as softer employment growth in office service industries, with contracting job numbers evident in NSW, Victoria and Queensland over the last year and a slowing in growth evident in Perth,” Mr McNabb said.

“In addition to this we have seen ongoing weakness in business confidence and appetite for expansion by business remains low, which is evident in soft credit growth.”

Mr McNabb said conditions in Sydney remained subdued, despite the 1% fall in vacancy in the second half and the overall 2.5% point fall over the full 2012 calendar year.

“Withdrawals accounted for much of the improvement with the pace of absorption at 8,500sqm in the half year well below the long run average of 26,000sqm per half,” Mr McNabb said.

In Melbourne, conditions turned abruptly, with 5,300sqm of net absorption in the half year to January 2013 compared to the longer run average of 43,000sqm per half.  This led to the CBD vacancy rate increasing from 5.6% in July to 6.9% as at January (above the 2000s average of 6.7%).

“The rate of change in drivers underpinning Melbourne, such as office employing industry growth, is working its way through to property demand at a time when levels of net supply (65,000sqm in the six months to January) have been well above the longer term average of 36,000sqm,” Mr McNabb said. “The latter is expected to intensify over the remainder of 2013 and 2014.”

Brisbane’s vacancy rate rose to 9.1% in January from 7.9% in July. While levels of net supply have been close to average, Mr McNabb said the much weaker demand outcomes had been the main cause of the vacancy increase.

“There was only 2,500sqm of net absorption in the half which is much softer than the 2000s average of 22,000sqm,” Mr McNabb said.

“Reductions in public sector employment have had a large impact on the Brisbane market as this sector had been a key determinant of growth over the preceding decade.”

Net absorption in Perth was negative and vacancy lifted from 4.2% in July to 5.7% in January. This was associated with a sharp, 1%+ rise in sub lease vacancy.

“That reflects a pause to growth plans in the light of an emerging peak in investment construction activity, softening in growth in office employing industries and the fall in commodity prices which affected business confidence in the second half of the year, although prices have improved in the last 2 months,” Mr McNabb said.

“The key issue for Perth and for short term reads on the commercial property market will be the impact on jobs and tenant mix in the transition from the construction to production phase of the mining boom. Overall, we think the WA economy will continue to outperform the national economy and growth in broader services to support the economy will provide strong medium term performance in Perth.”

City by City Outlook

The general fundamentals in terms of net face rents and vacancy read well for the Melbourne market; however it was demand that was the cause of the lackluster results in 2012. This is reflected in the facts that transaction levels for new tenants in the prime grade market over $450psqm net and over 1,000sqm are at their lowest levels in the last three years and tenant representative enquiry was down by over 100,000sqm from 2011’s figures.

That said the enquiry levels are improving with CBRE recording over 65 enquiries for December 12 to January 13 in the Melbourne CBD alone.

Many owners reset rents in the last quarter of 2012 in order to reposition their properties for 2013 with discounting of up to 20% in those precincts where vacancy has remained high, some B grade properties are now being marketed at $240/sqm gross.  In addition to rental reductions some owners of B & C grade properties are undertaking refurbishment programs whilst their properties have high vacancy levels in order to support leasing strategies to attract new tenants.    Tenant demand is predominantly in the 150sqm and under user.

There are a number of large multi-million dollar infrastructure projects expected to be announced and/or commenced in 2013 including Commonwealth Games Athletes Village, Broadwater Marine Project and the Gold Coast Aquatic Centre and this will assist with job creation and therefore in turn office space requirements should be driven from these projects. 

The first one has been the continual bleed onto the market of sublease stock, reflected in the increase in sublease stock in most markets. If you scratch below the surface of any of the very best buildings across the market you will find high-quality space available for sublease from tenants looking to defray costs. In many instances the space has only recently been fitted out, usually to a very high standard.

This is turn has highlighted the other interesting market factor: the adoption of activity-based working practices by most major tenants (particularly those with a US parent) in any move. This drive to reduce costs has a real impact on the appeal of stock left behind – if it’s not easily adaptable to ABW then it can linger on the market.