Demand surges in Brisbane as the Perth market continues to weaken
Demand surges in Brisbane as the Perth market continues to weaken
| 4 August 2016
Brisbane has surprised on the upside while market conditions have deteriorated more quickly than expected in Perth according to CBRE’s analysis of the latest Property Council of Australia office vacancy numbers.
Looking at the overall picture, CBRE’s Australian Head of Research Stephen McNabb said the office markets had played out broadly as expected in 1H 2016.
“Sydney and Melbourne sustained positive net absorption and maintain the tightest level of CBD vacancy nationally, at 5.6% and 7% respectively,” Mr McNabb said.
“Both cities are benefitting from growing economic activity and higher demand from the services sector, which is underpinning rental growth.”
One of the surprise packets was Brisbane, which had previously been one of the weaker state capital city markets.
“We have seen an improvement in demand in Brisbane, which was firmer than expected after a large migration into the Brisbane CBD during 1H 2016, which accounted for half the growth in demand,” Mr McNabb said.
“This confirms our view that the Brisbane office market is stabilising in line with a number of economic indicators such as population growth.”
On the flipside, demand in Perth contracted at a higher than expected rate and Mr McNabb noted that there were still some economic headwinds to deal over the next 12 to 18 months with mining investment activity slowed.
CBRE’s head of office leasing for Pacific, Andrew Tracey, noted that rental growth was quick to follow in markets where the overall vacancy rate was 7%or less – as was the case in Melbourne and Sydney.
“The Sydney and Melbourne markets are now well and truly back on the growth trajectory from a rent perspective,” Mr Tracey said.
“There is significant demand in both of these markets for better quality, contemporary stock and the good options are now limited. We’re also finding that big and small businesses are fighting just as hard to gain an edge in the battle for talent.”
Mr Tracey added; “Companies want value – and by that I don’t just mean the best rent. The value they’re seeking involves better places to work that drive better business outcomes. The discussions we are having every day are now about the workplace and the enablement of businesses to take their space and use it as a multiplier for their output.”
Sydney’s first half enquiry volume has been very strong, comparing favourably to 2015 with an increase of just over 50% in total. Notably, there has been an unprecedented level of large enquiry with AMP, CBA and NAB all coming to the market in Q1.
To put this in to some context – in the three year period between 2013 and 2015, there were only three enquires over 30,000sqm in size. We have had this many alone year to date and a total of 128,000sqm of demand.
At the other end of the size spectrum, there was also a near 80% increase in the number of small tenants in the size range of 100-500sqm. This size sector has always been the bell weather for the general health of CBD leasing and an informal indicator of small business confidence.
Enquiry from tenants in assets acquired for the Sydney Metro has been concentrated in this size sector. Most of these tenants are seeking options close by their existing locations and few have moved to date, with a visible slowdown in the transaction process off the back of State Cabinet’s budget questions on the project. We anticipate enquiry will gain momentum in the second half as all CBD tenants are now understood to have received notice to vacate.
The only loser this year has been the 1,001 – 3,000sqm size category where there was a near 9% drop in the number of enquiries. We anticipate this will normalise again in the coming quarters and some of the drop off can be attributed to tenants moving early to capture favourable market deals or tenants coming to the market early, provoked by the competitive tenant rep environment.
Net effective rental growth has been visible in both the prime and secondary markets in the first half. CBRE Research puts this at 12.6% and 12% respectively - impressive for a market that has been languishing for some time.
The market is changing faster than tenants anticipated and we have had some tenants miss out on more than a couple of options as terms tighten in the favour of owners. We expect this to continue as vacancy continues to contract.
Sydney North Shore – Stefan Perkowski, Head of Office Services, North Sydney
The strong momentum experienced in Q12016 is set to continue which will culminate in one of the strongest finishes to a calendar year that we have seen for a long time.
We are still yet to see all of the tenants affected by the NSW Government acquisition of three buildings on Miller Street by Government (181 Miller Street, 189 Miller Street and Tower Square) resolve solutions for their office accommodation. This acquisition alone will remove around 20,000sqm of occupied space from the market as tenants are given formal notice over the next few months. Many of these tenants are being driven towards the B grade market which has led to a significant increase in rents with evidence now at $700 gross psqm and incentives in the 10-15% range. All of this, and we are only beginning to now see CBD tenants that are also being displaced now exploring options in the North Sydney market.
A grade space across the North Shore continues to be very limited; 177 Pacific Highway, set to become the largest building on the north shore, is all but spoken for now, with practical completion scheduled the third quarter of this year. A ramification of this has been many large North Shore occupiers are now looking at office accommodation options well ahead of their lease expires, as supply looks to tighten further in 2017 and even constrict further in 2018 with no new supply projected until Q4 2019.
Pressure on space will continue to drive down vacancy rates and we believe that there will be scope to recalibrate rental expectations, particularly in the B Grade market throughout 2016 and the A grade market throughout 2017.
Parramatta – Stephen Panagiotopoulos, Director, Commercial Sales & Leasing
We are experiencing the tightest market since the early 90’s with a vacancy of circa 4.5% with 0% A-Grade vacancy.
There has been a strong push by the state government with circa 30,000sqm leased since January 2016 with major deals in 105 Phillip Street, 130 George Street and 56 Station Street, Parramatta. This demand is expected to continue into the 2nd half of the year and should see vacancy continue to trend downward into the 3% range.
With no A-Grade vacancy, B-Grade buildings are experiencing a strong uplift with tenants now considering other suburban locations as the last good quality options dry up.
Melbourne CBD/Docklands – Marc Mengoni, Director, Office Services
Despite the mid-year Federal election, Melbourne’s CBD has continued to see a steady flow of enquiry and deal transactions in all sectors of the market. Large commitments from Deloitte at Mirvac’s 477 Collins Street and Minter Ellison joining King & Wood Malleson’s commitment at 447 Collins Street have underpinned market confidence and will see another prominent office tower join the next development cycle for 2019/2020.
Overall, the decrease in vacancy from 7.7% in January, 2016 to 7.0% flat at July 1, 2016 has been driven by sharp declines in the Western core from 11.6% to 9.9% and Docklands tightening further from 5.0% to 3.4% to hold the lowest vacancy of all the CBD precincts.
We continue to see strong enquiry from the IT and Technology sector as new businesses see Melbourne as an attractive hub for creative spaces, offering good access to public transport and relatively low rents compared to other states.
Other major transactions in the first half of 2016 included Maurice Blackburn’s Lawyers committing to 8,146sqm at 380 La Trobe Street, Salmat to 8,400sqm at 485 La Trobe Street, Arup to circa 5,000sqm at Lend Lease’s Melbourne Quarter and Guild Group to 3,192sqm at 171 Collins Street. Further announcements are pending with IAG active in the market for up to 25,000sqm, Seek for 12,000sqm and Tabcorp for 10,000sqm which bode well for a strong level of activity in the second half of the year.
Net absorption in the Brisbane CBD has surprised on the upside in 2016, with positive take-up of 42,700sqm over the first half of the year. This is the first positive result since H212 and the third strongest six months in the past decade. While occupier demand is originating from a broad base, the State Government, mid-tier professional services firms and education providers appear most active. The six month result was only 8,000sqm below that of the Sydney CBD and ahead of all other markets monitored by the PCA, covering CBD and non-CBD markets.
The Queensland State Government has been a big contributor to demand in H1, including occupying 8,233sqm at AM60, with a related move by Worley Parsons to 3,200sqm at 12 Creek Street.
More generally, flat rents and elevated incentives, are encouraging a ‘flight to quality’ amongst CBD tenants, while there has also been some moves back into the CBD from Near City locations. The Tatts Group commitment at 180 Brisbane has provided a significant 18,000sqm boost to the numbers.
Moves to 480 Queen Street and some of the shuffling with backfill/sublease space as a result, has generated good levels of take-up in Prime stock. In fact, around 10,000sqm of backfill space has already been occupied or is under offer.
With the completion of 180 Brisbane and 480 Queen Street, however, CBD vacancy has risen from 14.9% at January 2016 to a new high of 16.9% at July. Prime vacancy jumped to 15.7% with secondary vacancy eased slightly to 18.3%. Although still at record levels, vacancy has not quite reached the levels that had been expected given the strong net absorption numbers.
Premium grade net absorption for the six months has totalled 17,600sqm, although vacancy has jumped from 9.6% to 22.1% with the addition of 480 Queen Street (55,561sqm). It is in this grade where most of the backfill take-up has been evident, given most of the tenant moves to 480 Queen Street originated from other Premium grade buildings.
Grade A net absorption for the six months has totalled 24,500sqm, although vacancy has jumped from 11.3% to 13.9% with the addition of 180 Brisbane and 155 Queen Street (59,573sqm net). Grade B also generated positive take-up (6,400sqm), although overall secondary vacancy was largely unchanged with negative take-up in C and D grade stock. This would suggest a flight to quality is evident from C/D to B as well as from secondary to prime.
Annual take-up for 2016 now looks like it will be positive for the first time since 2012, although vacancy will remain elevated with completion of 1 William Street and the Flight Centre move to South Brisbane both to occur.
Total vacancy on the Gold Coast edged higher during the first six months of 2016, with negative take-up of 4,500sqm pushing vacancy to 14.3% (from 13.2% at the start of the year).
This was the first six month period of negative take-up in the market since the latter half of 2009. However, most of the negative take-up occurred in the sublease market with one sub lease space of approx. 3,700sqm becoming available in Robina.
Net absorption over the year to July 2016 totalled just over 2,000sqm. This was the sixth consecutive year of positive take-up on the Gold Coast, with the market absorbing almost 52,000sqm of space in this period. Vacancy still compares favourably with the 24.1% peak recorded at the start of 2011.
CBRE expects business confidence will still be positive over the next 12 months with the residential development market active and Commonwealth Games preparations continuing. With the only significant new supply scheduled in the next 12-18mths through Robina Land Corporations (4,000sqm at The Base’) we expect to see a return to an easing vacancy trend on the back of limited new supply and positive take-up.
The economy of Western Australia continues to experience headwinds, a result of the cooling resource sector. This transition has had far-reaching impacts on the State’s economy, including rising unemployment, falling business confidence, contracting population growth and weak retail spending.
The positive of this time of transition is the substantial increase in export volumes in the iron ore sector, which will continue in the LNG sector as a number of mega-projects (including Gorgon, Wheatstone and Prelude) ramp up production. The economy of Western Australia does continue to grow, although this growth is driven almost exclusively by the transition fundamentals.
Prime net face rents continued their decline over Q2, falling a further 4% and secondary rents also contracted over the quarter, by 7%. Prime and secondary incentives increased to 47.5%, with scope for a further rise over the second half of 2016. Falling face rents and rising incentives have seen a significant decline in net effective rents. Lease terms for landlords have further deteriorated in order to generate occupier interest and CBRE believes that while there will be further softening in Perth’s office markets, this softening is beginning to taper.
The upside of the current market conditions is that tenants are beginning to take advantage of favourable lease terms in a flight-to-quality and by relocating to the CBD from fringe and suburban locations. This has been particularly evident with education and IT/media tenants, who are beginning to move into the CBD when they have traditionally been suburban occupiers.
A positive for Perth’s CBD office market is that the major supply shock has now passed. Calendar year 2015 saw a significant amount of new supply reach completion, totalling 98,862sqm. Although approximately 75% of this space was pre-committed, backfill vacancy has presented an issue. An additional 57,768sqm was completed in H116.
The slight increase in vacancy from the start of the year was not unexpected, with a few refurbishment projects coming back on line. We expect that vacancy is now close to the peak with no new development underway or expected for completion for the next few years.
Face rents are holding despite pressure from incentives, which are at all-time high levels and in excess of 35% for large deals.
The prime end of the market is only showing a vacancy of 10%, which isn’t too much of a concern. What is concerning is the lack of any real demand in the market.
The brokerage market is still active for tenants seeking under 250sqm of space, but the larger end of the market is very quiet, with tenants choosing to stay put in most instances. We are, however, seeing some increase in activity from the defence sector and associated businesses.
The Canberra office market has shown positive growth over the past 6 months. There has been increased leasing activity, particularly for A and B grade accommodation, with businesses taking advantage of market conditions and relocating from suburban locations into the CBD and the Parliamentary Triangle.
The major contributing factor to the decline in the vacancy rate, which fell from 14.9% to 13%, was the Department of Finance taking up 25,000sqm in 1 Canberra Avenue, Forrest.
Withdrawals in this period accounted for 19,000sqm of primarily C & D grade accommodation, with this number expected to increase over the next 12 months with proposed residential and hotel redevelopments of 92 Northbourne Ave and 31-39 London Circuit.
Throughout the past 12 months, fitted out accommodation in quality stock has been highly sought after and has been converted relatively quickly.
The A and B grade market is tightening and with no new stock scheduled to be introduced to the market in the next two years, we should see rentals holding and incentives dropping slightly.
As Canberra is also influenced by government outcomes we anticipate that with the Liberal party now being re-elected with the promise of jobs growth and backing small business that this will have a positive impact on demand for office accommodation in the ACT.
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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 (based on 2015 revenue). The Company has more than 70,000 employees (excluding affiliates), and serves real estate investors and occupiers through more than 400 offices (excluding affiliates) worldwide. CBRE offers a broad range of integrated services, including facilities, transaction and project management; property management; investment management; appraisal and valuation; property leasing; strategic consulting; property sales; mortgage services and development services. Please visit our website at www.cbre.com.