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Economy to support improved demand in office leasing market

6 April 2014
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Sydney, 6 April 2014- Favourable economic conditions in the second half of 2014 should provide the basis for the return of tenant demand, according to a new report.

CBRE’s Office Marketview for Australia, reports that improvements in the consumer, housing and export sectors is expected to remove some pressure from tenants’ business top-line performance from late 2014.

However, the report comments that due to a strong supply pipeline, market vacancy will likely rise over the next 2-3 years.

In the investment market, sales totaled $4.26 billion in the fourth quarter, up from $3 billion in Q3 and a 127% increase on the same period in 2012.

Co-author of the report, CBRE’s Associate Director of Research, Claire Cupitt, said that it was widely recognized that 2013 was a historical low point for tenant demand across Australia, with the eastern seaboard markets most overexposed.

“In an attempt to preserve valuations, net face rents were largely sustained. However, soft leasing activity, higher vacancy and record levels of sublease space on the market saw incentives rise across the board and effective rents fall,” said Ms Cupitt.

“The key to improved occupier markets is a growing employment base, which we expect to see concentrated in the second half of 2014. Directionally we are about to turn the corner, but the improvement will be slow.”

The strong supply in the CBD markets is the most concerning aspect for the office market. Over the next three years supply is set to outweigh demand which despite the improving demand, will still have a pronounced effect in Melbourne and Perth, followed by Sydney and Brisbane.

“Given the supply/demand imbalance, our assessment of effective rents remains to the downside with further increases in incentives offered in order to support face rents on the eastern seaboard. In contrast we expect Perth CBD incentives to peak above 27% in 2015.”

Demand and Supply average p.a. 2014-2016

 


Leasing market

Andrew Tracey, Regional Director Office Services Pacific comments “ Nationally we are seeing leasing markets starting to get more active with more enquiry and tenants starting to make decisions rather than just sitting on their hands, the penny has dropped and they are taking advantage of the market.”

In the Sydney leasing market, employment has been weak providing challenges for the over 2013. Over 365,000sqm of new office space is forecast to enter the market in the next four years, 142,000sqm in 2015 (largely Barangaroo). Prime net face rents are likely to remain relatively steady over 2014, following no change in Q4, 2013.

Melbourne’s CBD vacancy rate fell from 9.8% in July 2013 to 8.7% in January 2014. This was largely due to withdrawals of stock for refurbishment or residential conversion rather than a recovery. The Docklands precinct performed well, with 97,961sqm of net absorption over the year. This was due to several corporate companies consolidating their operations including NAB, Marsh Mercer and CBA.

Brisbane saw net absorption of negative 98,800sqm over 2013, its worst result on record. The next major building in the CBD will not be finished until 2016 however (1 William Street), which should allow for some of the existing space to be leased.

Perth’s CBD vacancy rate rose from 6.9% in July 2013 to 9% in January 2014, with negative net absorption of 33,938sqm over the last six months. Engineering companies that are heavily reliant on resources sector contracts have placed a considerable amount of sublease space back onto the market.

Office markets in Adelaide offer a degree of stability with less volatility in absorption, vacancy and rental growth than the eastern states. New supply is forecast to remain contained over the next 2-3 years. The next major addition, 50 Flinders Street, is currently under construction and due for completion in 2016.

Investment market

Prime assets are still favoured by investors in the Sydney CBD, although secondary assets are beginning to gain traction. Despite a weak occupier market, both foreign and domestic investors have been attracted to the relatively high yields compared to other major global office markets. Throughout Q4, Sydney saw over $250 million worth of office sales in the CBD. Strong sales activity also continued in North Sydney in Q4, as investors looked outside the crowded CBD market. ARA Asset Management purchased 177 Pacific Highway, North Sydney for $413.2 million in November.

Melbourne CBD saw total sales of $1.1 billion in the fourth quarter, which included 735 Collins Street to CIMB-TCA for $279 million and 367 Collins Street to Mirvac for $228 million. Competition for good quality investments was high with sales volumes transcending that of the 2010 high. Interest still remains high in the St Kilda Road market, with one large transaction in the quarter – 420 St Kilda Road which sold to Chip Eng Seng for $45.3 million.

Q4, 2013 was a strong quarter for investment in Brisbane, with sales volume totalling $1.1 billion. CBD assets selling in the quarter included a 50% share in 1 William Street for $396.7 million and 179 Turbot Street for $172.3 million. Major sales in the near city included 15 Green Square Close for $110 million and 154 Melbourne Street for $71.5 million. Annual sales volumes reached a record $2.5 billion in the CBD and $787 million in the near city/suburban market.

Investor interest was strong in Perth in 2013, with sales in the CBD totalling $1.3 billion for the year. Only five transactions were recorded, however, two became the highest office sales on record – Raine Square for $458 million to Charter Hall and Kings Square for $434.8 million to DEXUS. Prime yields average 7.95% as of December 2013, tightening by five basis points during Q4. This was the first move in 12 months and due to considerable demand from investment funds for premium assets with long term leases in place.

Adelaide showed a solid demand for quality stock in the tightly held market. Major sales in the office market totalled $178.4 million in 2013 and included 45 Pirie Street for $87 million and 101 Grenfell Street for $43.1 million. Prime CBD yields tightened by 50 basis points to 8.25%, while secondary assets also tightened. Yields have tightened consistently year or year in the last four years.

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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 at www.cbre.com.au.

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