From divergence to convergence: CBRE forecasts 2018 to be a more balanced year for Australia's major office markets
From divergence to convergence: CBRE forecasts 2018 to be a more balanced year for Australia's major office markets
| 1 February 2018
Following another year of outperformance from Australia’s southeast office markets of Sydney and Melbourne, CBRE Research is forecasting that the outlook for 2018 will be more balanced.
Commenting on the latest Property Council of Australia office vacancy statistics, CBRE Associate Director, Research, Feliice Spark said 2018 would see the beginning of a trend away from “divergence to convergence” as vacancy rates began to accelerate their decline in the resource-based markets, particularly in Brisbane and Perth.
“We expect all CBD office markets will record vacancy declines in 2018 and a return to either stable or positive effective rental growth is predicted across all markets,” Ms Spark said.
“In Sydney, over 100,000sqm of withdrawals during a year of no new supply contributed to the substantial decline in vacancy in 2017. A continuation of negative net supply additions in 2018 will place further downward pressure on the vacancy rate, which we forecast will reach a record low of 3.4%. Rental growth will likely remain robust in 2018, although more subdued than the previous two years.”
In Melbourne, 2017 represented a year of very limited net supply additions to the market. In conjunction with continued strong demand, the vacancy rate fell significantly.
However, Ms Spark said that - unlike Sydney - Melbourne had a significant supply pipeline over the next few years with circa 580,000sqm of new supply being added to the market.
“This will result in rental growth being more subdued this year, but still positive, as strong demand is expected to drive vacancy below 4.5% by the end of 2018,” Ms Spark said.
In Brisbane, return to growth was slower than expected during 2017, Ms Spark noted, with overall negative net absorption for the year. This was reflected in rising incentives and a slight decline in overall effective rents during 2017.
“Nevertheless, we expect the vacancy rate to decline in the Brisbane CBD prime office market, resulting in a return to net effective rental growth, predicated by positive economic indicators, stronger demand and no new supply,” Ms Spark said.
“Brisbane has now become the second fastest growing white collar employment market in the country, second only to Melbourne, with vacancy forecast to fall to circa 14% by the end of 2018.”
Turning to Perth, Ms Spark said the market had bottomed following a year of strong absorption in 2017. With limited new supply on the horizon, the decline in the city’s vacancy rate would accelerate over the next few years.
She forecast that net effective rental growth was expected to remain flat over 2018 before starting to improve from 2019 as incentives began to decline.
CITY BY CITY AGENT COMMENTARY
Sydney CBD - Jenine Cranston, Senior Director, Office Leasing
The Sydney market will continue to be acutely affected by a lack of stock in the year ahead. We are in unprecedented territory with respect to low long-term vacancy. And while other markets have in the past provided a release valve, right now, the suburban markets provide no such relief.
Tenants seeking 5,000 – 10,000sqm have no more than half a dozen options available for occupation during 2018.
Trading terms will continue to tighten, and we are forecasting net effective rental growth of double digits again across the CBD, Parramatta and North Sydney markets, with the exception of prime CBD stock, which is forecast at a respectable 9.5%.
B Grade net effective rental growth is forecast be a healthy 13%. This would see the third year of double digit rental growth and a cumulative growth of 65%. This will continue to provoke developers to re-evaluate residential conversion in the CBD and suburban markets.
While talent ‘gain and retain’ is still the central theme in the CBD, there will be a flow on effect from the banking sector consolidations announced in late 2017. We may see sublease space increase on the back of this although visibility is always a challenge with the sublease market.
Our advice is to ensure good advice and early action to avoid costly disappointments.
Melbourne– Marc Mengoni, State Director, Office Leasing
Melbourne’s continued population growth is driving strong white-collar employment, which will help underpin a record low office vacancy across Melbourne’s CBD over the next six to 12 months. During this period, we should expect vacancy to drop to levels not experienced since prior to the Global Financial Crisis, when vacancy dipped to 3.1% - the lowest on record. This will make securing office accommodation difficult for some organisations seeking to expand or relocate.
In the second half of 2017 competitive situations were already beginning to arise on several key listings and this will continue as stock levels drop and strong population growth sees Melbourne’s workforce grow exponentially. In turn, this demand will drive significant rental growth across all markets and see incentives reduce to levels not seen in the past decade.
Tenant demand is being driven largely by government, IT, education and particularly the professional services sector, which has ignited the latest development cycle of over 500,000sqm of new office accommodation for Melbourne.
Brisbane – Chris Butters, State Director, Office Leasing
The negative net absorption trend continued in H217 but was overstated by the withdrawal of the Health and Forestry buildings and the absorption of the public service employees
into existing occupied government space.
Whilst the Brisbane CBD vacancy level has risen slightly, CBRE is forecasting the rise to be short term and largely due to the reintroduction of an asset to the market, classed as vacant, but believed to be 50% pre-committed.
A downward trajectory in vacancy is expected over 2018, with the market still offering upside via further occupier moves to the CBD from non-CBD markets and a strengthening general demand profile. There will be no net additions in 2018 and CBRE is forecasting positive take-up resulting in overall vacancy tightening to~14% by the end of 2018.
Gold Coast – Nick Selbie, Associate Director, Office Leasing
The Gold Coast market has entered its 9th year in a row of positive absorption and slow but steady decrease in vacancy. This trend has been assisted by very limited supply and small withdrawals from the market for refurbishment.
Our research suggests that the biggest mover has been the A-grade sector which looks to have almost halved in vacancy since 2016 - down to close to a third of the vacancy rate from four years ago. Buildings such as GDI’s 50 Cavill Avenue in Surfers Paradise and CorVal’s ‘Corporate Centre’ at Bundall have both experienced significant absorption on the back of refurbishments.
The supply pipeline remains very tight and, with strong enquiry throughout the start of 2018, we expect the vacancy rate to dip below the 10% mark in the very near future for the first time since 2007. The C and D grade sectors still offer opportunity for cost sensitive tenants however those looking for good quality space and greater than 500sqm will find themselves in a very competitive environment and will need to act quickly.
Perth – Andrew Denny, Senior Director, Advisory & Transaction Services - Office
The recovery in the Perth market is continuing and we expect that the positive sentiment which first took hold in Q4 2017 will continue throughout 2018.
The noticeable differences are sharply higher enquiry and transaction levels. Many tenants, particularly those in the mining, engineering and co working sectors, are now seeking larger tenancies, an occurrence which rarely happened before mid-2017.
CBD net absorption for 2018 is forecast to be 52,000 sqm, the highest total since 2012, and a huge difference from the average minus 21,000 sqm absorption Perth has experienced for the past five years.
While this improved sentiment and positive net absorption has not yet translated to better terms for building owners, we can expect to see this in 2019/20 and the consensus is that incentive levels have now peaked.
The vacation of 240 St Georges Terrace by Woodside in November 2018 will have less impact on the market than previously predicted given that around 33% of this 46,000 sqm building is already leased.
Adelaide – Andrew Bahr, Director, Office Leasing
Adelaide has recorded positive net absorption, which has led to a decrease in vacancy from 16.1% to 15.4%.
This followed the finalisation of several larger deals toward the end of 2017, some of which had been in the market for 18 months or more.
The tightening in the market has predominantly been in the prime sector, with the secondary market still under pressure.
We expect the flight to quality to continue, which will lead to a further tightening in the prime market and may result in a reduction in incentives towards the end of 2018.
The market is being supported by continued confidence in the defence and health sectors, with the resources sector also gaining confidence and engineering companies gearing up – providing signs of cautious optimism.
Canberra – Zoe Ferrari, State Director, Office Leasing
Canberra’s city sky line is changing with the demolition of the Civic Quarter site to provide a new 18,000sqm prime office building now well underway. The development will see some much needed A Grade office space hit the Canberra market in mid-2019 and provide an opportunity for larger corporate occupiers to make a move into state-of-the-art office accommodation. This will be one of the first new office towers since 2010.
Vacancy rates continue to tighten in the prime end of the market and CBRE research is predicting a continuation of rental growth and tightening incentives throughout 2018. Mid 2018 will see circa 9,000sqm of refurbished space hit the Parliamentary Tringle market, which will be the only contiguous offering of this size at this point in time. With EG’s recent purchase of 42 Macquarie Street in Barton we are confident we will see a repositioning of that asset take place with some excellent quality office space coming on line in Q2 2018.
The trend of speculatively fitted out offices continues to gain momentum in the Canberra market with an extremely strong finish to 2017 for Centuria finalising more than six city deals in Q4.
Whilst CBRE Research is predicting a slight increase in total office vacancy across all markets moving into mid-2018, we are still experiencing strong demand for Prime office spaces and refurbished B grade stock across all major town centres. With a modest development pipeline, we forecast vacancy to trend down over the next five years.
Sydney North Shore – Stefan Perkowski, Director, Office Leasing
With a continuation in 2018 of constricted supply and a robust NSW economy, vacancy rates are set for historic lows by the end of 2018. We had another extraordinary year of rental growth during 2017. Most Sydney markets posted double-digit net effective rental growth with incentives trending down to five-year lows.
We saw several significant moves both from the north shore to the CBD and vice versa during 2017. This included Clemenger moving from St Leonards to Walsh Bay and Pfizer splitting its manufacturing and office operations in Ryde to take up 4,600sqm at 151 Clarence St. Likewise, North Sydney witnessed the NEC commitment to 1 Denison Street and Allianz consolidated several of its CBD operations to take up 5,600sqm in 101 Miller Street.
While occupancy cost continues to be an important factor in lease discussions, many companies are now placing retention and attracting talent as a key priority when making lease decisions, with real estate is regarded as one of the key weapons.
Western Sydney – Stephen Panagiotopoulos Director, Office Leasing
Parramatta’s vacancy rate continues to tighten as strong interest from tenants looking at relocating and decentralising in the pursuit of capturing talent from to western Sydney’s residential growth areas.
Interest in all size ranges remains strong with a focus on A and refurbished B grade stock. With limited supply due in 2018 and 2019, we are forecasting excellent rental growth and continued yield compression.
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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 2016 revenue). The company has more than 75,000 employees (excluding affiliates), and serves real estate investors and occupiers through more than 450 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.