Australia’s south-east office markets continue to firm while the country’s weaker markets reached peak vacancy at the end of 2016 according to CBRE’s analysis of the latest Property Council of Australia (PCA) office vacancy statistics.
CBRE’s Australian Head of Research, Stephen McNabb, said the PCA figures were consistent with CBRE’s expectations, highlighting that tenant demand had risen at similar paces in Sydney, Melbourne, Canberra and Perth.
“Vacancy in Perth and Adelaide edged lower, while Brisbane sustained an improving trend, despite a small uptick in 2017 and a paring back in net absorption following a surprisingly strong 2016,” Mr McNabb said.
“All up, the PCA figures are likely to reinforce the case for investors to look for further diversity in their approach to Australia’s office markets; moving beyond preference for south east markets.”
Notwithstanding that, CBRE’s head of office leasing for Pacific, Andrew Tracey, forecast that the Sydney and Melbourne markets would tighten further given the current outlook for tenant demand on the eastern seaboard.
“We are dealing with real increases in interest in driving more efficiency in operations against a background of rapid technological change,” Mr Tracey said.
“Forward thinking organisations are also identifying the physical office as the means to lift levels of interaction and communication. High levels of amenity and better working environments are the differentiator in the race to employ the best talent and the office of today has more of the feeling of a quality boutique hotel than that of a sterile office tower.”
Mr Tracey also noted that more flexible offerings such as co-working environments were clearly on a growth path - both internationally and in Australia.
“In core markets with increasingly tight vacancy rates, these co-working environments will act as a useful alternative for occupiers seeking more flexible lease arrangements, such as start-ups and businesses in rapid expansion mode,” Mr Tracey said.
He also forecast that a scarcity of stock would be a key issue in Sydney and that this would impact the cost base of businesses significantly in the next few years.
CITY BY CITY COMMENTARY
Sydney CBD - Jenine Cranston, Senior Director, Office Leasing
From a deals’ perspective, we have tracked an 18% improvement in activity versus the same period last year.
We have also witnessed a 10% fall in A and B grade incentives, from 33% to 23% in A-grade stock and from 31% to 21% in the B grade sector.
B-grade stock accounted for about half of CBRE’s transactions in the first half of the year off the back of strong Sydney Metro related activity and stock withdrawals.
While we are seeing rental growth slow following a very strong 2016, the trend of contracting incentives means that net effective rentals will continue to fare well.
Melbourne– Marc Mengoni, State Director, Office Leasing
Melbourne's vacancy continues to tighten as white-collar employment drives tenant relocations and expansion, whilst trendy inner suburbs, including Richmond continue to push new rental levels to be higher than that of the CBD in some instances.
This next 12 months will continue to see competitive tension between occupiers as they vie for the remaining quality options in the market, with little to no new supply coming online until late 2019.
Occupiers with a pending lease expiry would find it beneficial to consider options sooner rather than later, as a vacancy rate of 6% or lower sways conditions in favour of it being a landlords’ market. Melbourne's positive economic outlook also favours a continued contraction in the city’s office vacancy rate.
Brisbane – Mark Curtain, Regional Director, Office Leasing
Whilst the Brisbane CBD vacancy level has risen slightly, CBRE is forecasting the rise to be short term and somewhat of an anomaly.
We anticipated 80 Ann Street (14,500sqm) would have been withdrawn from supply as it has been vacated, is under option for redevelopment and is not being actively marketed for lease. If 80 Ann Street had been excluded, the level of vacancy in the Brisbane CBD would have dropped below the December 2016 figure of 15.3%.
The market is experiencing solid levels of transactional activity and there is a strengthening demand profile.
We are confident that market activity will continue to gather momentum with a limited pipeline of new supply until the addition of 300 George Street in 2019. On the demand side of the equation, there is a migration of tenants from the near city into the CBD, as well as activity from a number of sectors, including the Queensland Government, IT, education, co-working and serviced office occupiers, all combining to drive take up levels.
Gold Coast – Nick Selbie, Associate Director, Office Leasing
The top line statistics show vacancy dropping to 11.3% overall, but with a very slight positive net absorption result for the six months of 164sqm. The vacancy drop was largely caused by removal of a building for further development and refurbishment which contributed to 4,319sqm of stock withdrawal.
The 12-month take-up was still strongly positive (10,252sqm) with eight consecutive years of positive take up averaging 7,789sqm per annum.
There is appetite but few options for good quality and A grade stock and with limited new supply on the horizon a sub 10% vacancy level is foreseeable by the end of the year.
Perth – Andrew Denny, Senior Director, Advisory & Transaction Services - Office
The Perth CBD market has turned the corner with vacancies expected to continue to fall for the foreseeable future. The recovery will be stronger in the premium and high A grade part of the market.
Sublease availability has now declined for six quarters in a row, and is now 42.4% below its peak in December 2015. This is a reduction of 41,633sqm, with a contributor being the withdrawal of sublease space by the resources sector.
Face rents have held steady for the six months to 1 July 2017 – marking the first time in 4.5 years face rents have not fallen. CBRE expects to see face rents hold for the next two years.
A key factor moving forward will be the strength of the movement from the suburbs and fringe CBD locations to the core CBD. We expect this to accelerate given the attractive terms that will remain available to tenants, which will lead to a more rapid fall in vacancy rates than expected.
Adelaide – Andrew Bahr, Director, Office Leasing
There is a continued flight to quality in the Adelaide market, with vacancy in the A Grade market expected to tighten into 2017 as a number of large requirements secure accommodation. Indications show that there is some 50,000sqm-60,000sqm of obsolete stock in the C and D grade sectors that is becoming increasingly hard to lease.
Taking this into account, Adelaide’s vacancy when it comes to leasable stock is in the order of 10-11%, with tenants focusing on the best space to attract and retain employees.
The supply outlook remains stable, with only the new GPO Exchange building expected in the short to medium term – with 12,000sqm of the 24,000sqm of space already pre-committed to the State Government.
There is also a continued focus on B grade refurbishments, with high NABERs ratings and end of trip facilities being the norm rather than the exception. For landlords, it’s clear that proactivity is key and first impressions are more important than ever.
Face rents are holding steady as are incentives, albeit these are at all-time highs.
There is no issue of over-supply in Adelaide, rather we’re seeing a more constrained market and cautious demand.
Canberra – Zoe Ferrari, State Director, Office Leasing
Prime grade vacancy rates continue to tighten in the Civic and Barton markets, pushing rents north and putting downward pressure on incentives.
With two new Civic located buildings to be completed in 2020 we anticipate a shuffle of movement in our A & B grade markets with A Grade tenants likely to make the jump into the new stock, freeing up space in this market that has not been previously available.
We are still hopeful to see more Federal and ACT Government requirements come to the market in the coming months with the wrapping up of Project Tetris. This government initiative has now absorbed most of the large sublease spaces previously available providing more opportunity for any new Government growth to result in positive net absorption of space.
White collar employment is still very strong and recording growth each quarter.
We are also seeing more revitalisation of C & D grade stock via refurbishments and repositioning and there is a continued trend for most industry sectors to become increasingly aware of reducing their NLA foot print by seeking buildings that offer third spaces and by moving towards ABW style fitouts.
Sydney North Shore – Stefan Perkowski, Director, Office Leasing
The North Sydney market is set to tighten, with over 40,000 sqm of enquiry yet to make a decision over their long-term office accommodation requirements. Fuelled with the lack of supply, we believe that this should lead historically low vacancy rates in 2018.
Western Sydney – Stephen Panagiotopoulos Director, Office Leasing
Parramatta has seen a reduction in vacancy, with major transactions occurring during the past three to six months.
Most of the vacancy is in B and C grade stock, with the largest contiguous area being circa 1,200sqm. This is driving up rents and providing excellent opportunities for lessors with upcoming expiries over the next 12 – 24 months
Demand remains strong, however with the lack of opportunities tenants are looking further afield or staying put.
The next development cycle is gaining good momentum with many owners exploring future potential not only in Parramatta but also in Bankstown, Liverpool, Penrith and the inner west areas, which are all attracting tenant demand.
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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 (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.
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 (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.
