Business confidence and softer employment growth impact CBD vacancy rates
Business confidence and softer employment growth impact CBD vacancy rates
6 February 2013
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
Melbourne has been, and will continue to be impacted by the sub lease market. This is predominantly made up from the government and banking sector who make up more than 40% of the whole floor options currently being marketed in the Melbourne CBD AND Southbank.
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.
CBRE Office Services
The latest vacancy number of 5.7% underscores the strength of the Perth office market. With a high level of new supply entering the market in 2012 of nearly 145,000sqm and a record net absorption of nearly 103,000sqm the result shows the strength of demand for office space in Perth.
The market has seen a softening in the market since September 2012 with approximately 30,000sqm of new sub lease space entering the CBD market in the last 4 months. This represents around 2% of the total CBD office market.
Most of the sub lease space is fitted out to a good to high quality standard, with mostly open plan workstation fitouts and provides an excellent opportunity for tenants requiring additional space.
Major sub lease transactions have already been concluded with Inpex sub leasing 4,600 sqm from BHP Billiton at Central Park, 152-158 St Georges Terrace, and Chevron sub leasing 2,400 sqm at Governor Stirling Tower, 197 St Georges Terrace. Indications are positive that the remaining sub lease space will lease relatively quickly.
Mr Andrew Denny Senior Director of Office Services said, “we expect the sub lease space to mostly clear by mid-2013.
The fundamentals of the Perth office market remain solid. Vacancy rates are still relatively low, and there is limited future supply in the next few years.
The sub lease space availability will mean limited to no rent growth in 2013. The key variable for the market in 2013 will be tenant demand which we expect to rebound, particularly in the second 6 months of the year,” said Mr Denny.
CBRE Office Services
The Gold Coast market continues to remain stable with a 1% reduction in vacancy following the release of the latest six monthly PCA report. Minimal activity was experienced in the second and third quarters of 2012 however a significant improvement in transactional activity was seen in the last quarter which will be reflected in the June 2013 reporting period due to tenants not occupying space whilst they completed fitout works of the Christmas/New Year holiday period.
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.
CBRE Office Services
There have been two interesting market features emerge over the PCA reporting period on the north shore.
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.
Managing Director, North Sydney
CBRE Office Services
A slowdown in resource related enquiry, coupled with a sudden reduction in the public sector workforce drove vacancy higher during the course of 2012’. He added ‘ the addition of approximately 34,000m2 of sub-lease space across 36 tenancies also came to market during the period, which has put downward pressure on face rents and upward pressure on incentives’.
Most landlords are well aware of current market conditions and are pricing their stock accordingly. This has started to encourage prospective tenants to review their requirements again and we’ve seen an increase in enquiry since the start of the year. Without doubt it’s a great time to relocate and tenants are realizing that a ‘window of opportunity’ exists at the current time to secure favorable terms.
Looking ahead, the Brisbane market has only one new supply addition in 2013 and possibly no new supply additions in 2014 and 2015. We can therefore expect the market to stabilize towards the end of this year, followed by improving market conditions from mid 2014. This is an important time for landlords to reset their leases with existing tenants and reduce their future vacancy risk, as 2016 is going to deliver over 180,000m2 of new supply. Depending upon economic conditions at the time this could have a dramatic impact on the vacancy rates.
David Prosser State Director, QLD CBRE Office Services
In Canberra the inclusion of 3,5-7 Molonglo Drive at the airport has increased the overall vacancy rate for A Grade accommodation, in Civic , however, A Grade accommodation remains tight at approximately 3.5%, as speculatively constructed stock continues to attract tenants.
Across the market the most significant increase has been in B Grade accommodation due to the relocation of a number of tenants into the A Grade accommodation, and very little movement in the move up from tenants currently occupying C-D Grade space, there is an expectation that tenants in this accommodation will soon start to move to higher quality office space.
Absorption and withdrawals of redundant C & D grade buildings will not occur without the assistance of the ACT Government in identifying and implementing incentives to assist the market particularly in the area of adaptive re-use of existing buildings.
Market sentiment is that rentals will remain static in the A & B Grade office market, with incentives likely to be pushed slightly harder, and rents for C & D grade buildings particularly outside Civic likely to come under pressure.
Whilst the forecast for new speculatively built buildings in Civic have been put on the back burner there a number of significant refurbishment, projects in the pipeline which will assist in the take up of B Grade accommodation in Civic, in precinct of Barton & Forrest adjacent to Parliament House a number of speculative buildings are currently under construction completing in the next 6-18 months which will put pressure on existing landlords within the precinct.
Andrew Stewart Managing Director, Canberra CBRE
Rise in vacancy rate not unexpected, comprised mainly of former ATO space coming physically into the market.
Should be noted that the former Workcover building at 100 Waymouth St and the new development at 70 Franklin St are not yet in the vacancy report – could see a further rise of 2% come the mid-year report if there isn’t significant take up of this space between now and then.
If you take out these buildings in isolation, generally the market is still very stable, albeit demand still remains cautious.
Originally, the pending resource boom in SA would take up much of this space before it entered the market however the BHP Billiton Olympic Dam decision last year severely affected this.
Despite the cautiousness, we still witnessed good levels of demand for office space during the past 6 months through local service providers and some smaller resource groups.
Expect 2013 to be very similar to previous year, 2014 will see some activity particularly in the CBD with a number of large lease expires.
Andrew Bahr Director CBRE Office Services
The reduction in total vacancy for Sydney CBD is an encouraging sign however it is at odds with the available space within various sectors of the market - well over 100 options available to tenants over a 1,000sqm and over a dozen options for tenants seeking over 5,000sqm.
Trends in demand continue to be associated with cost reduction efficiency and space efficiency across virtually all business sectors. The interest in ABW and flexible workspaces continues to gain momentum.
We are seeing less sublease space than anticipated and we believe there has been a trend for tenants to renegotiate longer term leases and in doing so reduced their footprint. As at December 2012, Sydney sublease space at approx. 60,000sqm well below the peak of approx. 90,000sqm seen in 2009.
Jenine Cranston Senior Director CBRE Office Services
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