Perth leads for rental growth and Melbourne piggybacks off strong white collar employment growth
Perth leads for rental growth and Melbourne piggybacks off strong white collar employment growth
| 1 August 2019
Perth has emerged as Australia’s stand-out CBD office market for office leasing growth, with Melbourne continuing its March towards an unprecedented vacancy rate of less than 3% and Sydney moving into a state of flux ahead of new office supply coming on stream.
These were some of the observations from CBRE Associate Director Research, Ben Martin-Henry as the Property Council of Australia today unveiled its latest office vacancy statistics.
Mr Martin-Henry said Perth’s declining vacancy rate had underpinned face rental growth for the first time since 2013, with rents surging 10.2% in the 12 months to June 30 – making Perth Australia’s number one performing market.
“This is in stark contrast to its performance in recent years as the economy has struggled to bounce back from the decline in the mining sector,” Mr Martin-Henry said.
“Signs that this turnaround won’t be short-lived are encouraging as both vacancy and incentives have declined significantly as demand for prime office space picks up. Since peaking at 55%, incentives have now seen three consecutive quarters of declines coming in at 47% halfway through the year with further declines expected.”
White collar employment growth of 6.4% has been the driver for the Melbourne market, which topped Australia for net effective rental growth in Q2, 2019, recording a 3.5% rise off the back of increased tenant demand. Further increases are expected in the latter half of the year as prime office space becomes increasingly scarce.
“Landlords are doing well to take advantage of the strong conditions before the supply glut hits the market in the next few years which will undoubtedly put pressure on vacancy and rents,” Mr Martin-Henry said.
In Sydney, Mr Martin-Henry noted that the leasing market appeared to be in a state of flux as tenants delayed relocation strategies ahead of new supply entering the market in the next two years.
“This has resulted in more lease renewals as opposed to new lease deals and has meant that rental gains have been more muted than in previous years,” Mr Martin-Henry said.
“Whilst rental growth has remained positive and vacancy rates under control, landlords have struggled to achieve better terms resulting in incentives remaining flat at 18% and net effective rental growth of 1.2% in Q2, 2019.”
In the latter half of the year, Mr Martin-Henry forecast that a divergence in vacancy between prime and secondary stock would be one trend worth watching on a national basis.
“Markets such as Brisbane, Perth and Canberra are experiencing significant flight-to-quality conditions as tenants seek to take advantage of the opportunities on offer before they dry up,” Mr Martin-Henry said.
“Thanks to historically low vacancy rates Sydney and Melbourne are experiencing less of a divergence but expect this gap to widen as they year progresses.”
CITY BY CITY AGENT COMMENTARY
After a period of moderate demand at the start of 2019, second quarter enquiry showed an uplift in 3,000sqm users. Professional services occupiers continue to outpace financial and insurances services in the uptake of space and are expected to become the biggest users of office space in the Sydney CBD by the end of 2019.
We continue to see tenants evolving their usage approach in the market, with more considering flex space as a portion of their accommodation mix driving demand for office space by coworking groups. While there is expected to be some further prime rental growth in 2019, we have evidenced a decrease in secondary effective rentals due to incentive growth.
Vacancy remains low at close to 4%, though we have seen an increase in sublease options entering the market with over 40 new subleases becoming available in Q2 2019 adding to supply. Over 60% of current sublease opportunity is available in prime stock, with almost half of these options having a term that exceeds three years.
As Melbourne’s CBD experiences the lowest office vacancy in its history, opportunities for future development along the traditional Collins Street and Bourke Street corridors will also remain scarce.
CBRE Office Leasing expect to see new opportunities arise alongside the new Metro Rail Station’s including Arden Station and Anzac Station in the popular St Kilda Road office precinct. “Melbourne’s population continues to swell, which means many workforces reliance on these public transport hubs to commute will remain critical in the relocation decisions of major occupiers”. In future development cycles, major occupiers will consider relocations to previously ‘non-traditional’ locations which will continue the CBD’s ongoing expansion.
This continued demand for Melbourne office amongst a tightened vacancy will continue to drive growth in face rents for the remainder of 2019, which in some cases increased by between 10-20% throughout the past 12 months.
A renewed sense of optimism is gathering momentum amongst office landlords in Brisbane as conditions continue to improve within the prime sector of both the CBD and the metropolitan office markets.
Gross face rentals have been steadily increased throughout 2019 as vacancy rates tighten, particularly in the top end of the market, with only two assets in Brisbane’s ‘golden triangle’ offering over 5,000sqm of contiguous space in the next 12 months (12 Creek Street, Annex and 175 Eagle Street). Post the Federal election we have noticed a significant uptick in resource related requirements, co-working commitments and occupiers relocating from the CBD fringe and suburbs into the CBD.
CBRE forecasts that the next six months will see further improvement as active occupiers absorb the last remaining banks of available prime office accommodation.
With limited supply forecast for the next eighteen months, conditions will continue to improve, and major office occupiers will need to move swiftly to secure preferred outcomes.
General market activity and demand have remained consistent over the previous 2-3 years, particularly in the A and B grade markets, where we have witnessed a steady and gradual reduction in vacancy. However, this has not been adequately reflected in the total vacancy figure, which has increased slightly as the C and D grade markets continue to perform poorly.
Many of the tenants in this category have undertaken a flight to quality to provide better staff amenity as well as a stronger client interface and image. Landlords in the A and B grade market have supported this movement through the provision of strong incentives (20-25%) which assist tenants through fitouts and rental abatements.
In addition to these mechanisms, many of the A grade landlords have invested in speculative fitouts for small suites of 100sqm-250sqm, which has been the most active sector of the market. This has left the C and D grade markets with increasing vacancy and declining rents. Until significant capital investment is undertaken by landlords to improve the quality and offering to tenants this will continue for the short to medium term.
In the medium to long term, there is a lack of large contiguous space in the Gold Coast A grade market and several active market briefs and requirements for greater than 2,000sqm cannot be satisfied by existing stock in the market.
Several landlords and developers have mobilised as a result and have sites ready to go with DA’s in place. Construction commencement will be based on a major pre-commitment being secured which will financially underpin a large office development. The pre-commitment will likely form 40-60% of the total NLA with developers then likely and able to speculatively construct and deliver additional space to the market.
Vacancy has fallen for five consecutive quarters in the Perth CBD after peaking in January 2017.
With no new supply forecast until 2022, which is three years away, and with continuing demand, vacancies will only continue to fall.
Expanding tenants are now a regular feature of Perth’s office market. For instance, Virtual Gaming World recently entered the market for an additional 1,000 sqm and FMG leased an additional 3,200 sqm. New tenants are also entering the Perth market with an undisclosed IT business chasing 1,000 sqm.
The move to the CBD from suburban locations is still a driving force, although this is expected to slow in the future.
Perth’s improved fundamentals are now being reflected in rents and incentive levels.
Seven CBD buildings have now increased face rents in the past eight months. Most of these are in the A grade sector of the market. The major price mover is in incentives, which in some buildings have fallen by up to 10 percentage points so far this year. In the three years to end 2021 we are expecting effective rent growth of around 50% in premium and A grade buildings.
This will make Perth the best performing office market in Australia. Perth is now not only back, it is starting to fire.
Adelaide – Andrew Bahr, Senior Director, Office Leasing
Vacancy continues to tighten, particularly in the best quality buildings in the CBD.
The vacancy in new-age buildings constructed post 2006 is now less than 3% and there is race amongst the landlords of older A grade CBD assets to secure active tenants.
Speculative office suites are also becoming more prevalent, particularly in the 100sqm-150sqm size range in B Grade buildings.
Lot Fourteen, on the former Royal Adelaide Hospital site, is gaining momentum, but where will these tenants come from? Treasurer Rob Lucas has commented that the Government as landlord at Lot Fourteen will not be competing against traditional CBD office owners for tenants.
While CBRE research data shows that leasing activity softened in Q2, we are optimistic about the second half of the year with the election over and most government departments now settling back into business as usual.
We are predicting a continued steady growth in the private sector with no obvious change to the current Government’s outsourcing policies. There is still a strong flight to quality as tenants seek more efficient floor plates, better amenity, market leading end of trip facilities and access to third spaces. We are finding there is greater demand currently for fringe locations and activity in the CBD has been quieter than usual.
There is still strong investment occurring across the office sector, with landlords continuing to focus on repositioning secondary stock to meet tenant demands. Civic Quarter remains one of the few assets to offer A grade office accommodation in the CBD. The strong rental levels being achieved across the new developments are pulling the entire office market upwards and we anticipate we will see some rental growth in established stock in the second half of the year. Incentives are likely to remain steady.
The North Sydney office market is 12 months away from a major transformation, as an additional 124,000sqm of premium grade stock attracts blue chip tenants migrating from the CBD, St Leonards, Chatswood and Macquarie Park.
It has been a case of build it and they will come, with tenants seeking to attract and retain talented staff with the lure of the new Metro Station-Victoria Cross, new restaurants, new retail, new office developments and services, which has driven strong net absorption.
Prime grade stock currently accounts for 32% of the market but by 2020 it will be over 40%. Our expectation is that North Sydney’s prime vacancy will continue to fall due to the level of demand, with North Sydney an option in current leasing briefs totaling in excess of 90,000sqm.
The demand for premium grade stock is also rising, as highlighted by last week’s announcements of Microsoft (10,655sqm) and Ooh Media (6,858sqm) committing to Winten’s 1 Denison Street and ESR’s 73 Miller Street, respectively.
The current average net face rent in North Sydney is $790/sqm, however by 2022 the North Sydney prime net face rent is forecast to grow to an average of $850/sqm. Rents in the upper floors of new Premium and A grade developments are in excess of $950/sqm net and we expect to see evidence before the end of the year of rents in excess of $1000/sqm net per annum.
The Parramatta skyline is evolving with Stage 4 of Parramatta Square close to top out and Stage 3 well on the way. The addition of 65,000sqm of office space by the end of the year and an additional 40,000sqm by July 2020 will create a 12.5% stock increase within 12 months, all which is 100% committed.
The question comes if those tenants have taken too much space and how much sublease space is likely as this might be the first real opportunity for direct / sublease rates to increase and create quality space that Parramatta has long been needing. On top of the sublease space coming to market, there is also the backfill which will come to the market with Parramatta vacancy likely to increase by as much as 200 basis points over the next 12 months.
This should see the rental growth in the A and B grade markets plateau, while sublease space should achieve a premium on current passing rents and really push into the mid to high $600’s for premium products.
At the same time, it is expected that incentives will start to slightly soften before a bounce back into the second half of 2020.
With limited availability in the sub 200sqm market, landlords with B and C Grade assets have benefited by splitting floors to accommodate the competitive demand, resulting in an uplift of rent and tightening of incentives. Asking rents in the B grade market are between $550/sqm - $600/sqm gross and between $400/sqm - $440/sqm gross in the C grade market.
Although there is potential sublease space coming from the new development project, these spaces are more for tenants looking for areas over 5,000sqm however we feel this will be less likely to affect sub 200sqm market.
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CBRE Group, Inc. (NYSE:CBRE), 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 2018 revenue). The company has more than 90,000 employees (excluding affiliates) and serves real estate investors and occupiers through more than 480 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.