A race for space is underway in Sydney’s office market, with limited supply and strengthening tenant demand pushing rental growth to a two decade high.
CBRE’s new Australian Office MarketView report highlights that Sydney’s CBD office market is on track to record its third consecutive quarter of growth and strongest year in more than two decades.
In the three months to September 2016, prime rents lifted by 2%, while secondary rents increased by 8.3% - putting Sydney on track to match or exceed rental growth pre-GFC and its highest level of rental growth in more than 20 years.
CBRE Advisory & Transactions – Office, Regional Director Andrew Tracey said Sydney CBD remained Australia’s most competitive office market – as demonstrated by the strong gains in rental growth year on year.
“The Sydney CBD remains fiercely competitive, underpinned by a real shortage of quality A and B grade alternatives and strong rental growth,” Mr Tracey said.
“The fact that Sydney remains tightly held due to redevelopment of assets into alternative uses also continues to support rental growth.”
The report shows Melbourne was the only other office market nationally to record growth during the quarter, with prime rents lifting 0.5% in the period and 4.2% year to date. Meanwhile, secondary rents grew by 1.2% and 3.5% in the same timeframe.
Mr Tracey said Melbourne’s office market had witnessed rental growth off the back of strong employment levels and space absorption of 121,291sqm in 2015.
“Rental growth in Melbourne has been assisted by withdrawal and sale of non-core secondary assets for future residential development site use and real growth in business,” Mr Tracey said.
“This is combined with the attractiveness of continued relative rental affordability compared to alternative markets, with the city seeing the highest annual net absorption average nationally over the past 10 years.”
Vacancy rates in Melbourne’s office CBD currently sit at 7.0%, however this is expected to rise to 8.0% by the end of 2016 with the completion of new supply.
CBRE Associate Director, Research, Felice Spark, said vacancy was expected to contract however off the back of strong tenant demand.
“Looking ahead, Melbourne is forecast to see healthy levels of demand in the medium term, which will see vacancy ease to sub 6% by 2019. This in turn will see a continued outlook of rental growth,” Ms Spark said.
The report highlights that almost four years of yield compression has pushed Sydney’s CBRE office yields to a historical, pre-GFC low – with potential to fall further.
In Q3, Sydney CBD core prime office yields reached a nine-year low of 5.2%, while secondary yields are 20 basis points off their pre-GFC low of 5.9%.
Sydney
Sydney’s investment fundamentals remain compelling, with vacancy currently at 5.6% and expected to fall to 3.3% by 2018. In tandem, prime growth is running at a 23% annual rate, which will further underpin growth in the market.
Ms Spark said the strong rent growth could provide another leg to yield compression in Sydney.
“This, however, may be tempered by the mood in global property markets should interest rates tighten in the US and other countries over the course of the next year,” Ms Spark said.
Melbourne
Despite falling vacancy in Melbourne’s CBD office market over the past six months, vacancy is expected to rise to 8% over the remainder of the year – driven by the completion of 110,000sqm at Walker Corporation’s Collins Square development in Docklands.
With only 8,000sqm of new supply due in the second half of 2017, vacancy is expected to return to circa 7% levels by the second half of 2017.
Further yield compression was witnessed in Q3, with prime yields now sitting at an indicative 5.6% and secondary yields at 6.2%.
Ms Spark said there was growing sentiment among investors that yields were likely to stay lower for longer.
“Buyers who had previously held off purchasing under the assumption that we were at the peak of the cycle are re-emerging,” Ms Spark explained.
Brisbane
Brisbane’s CBD office market is showing some signs of improvement, with net absorption returning to positive take-up in the six months to June this year.
This activity has been largely driven by State Government expansion, a modest number of tenant relocations from the Near City to the CBD and the steady filling of backfill space created by tenant moves to 480 Queen Street.
Yields remain firm off the back of strong demand from offshore investors for prime assets. The looming sales of Green Square South Tower and 324 Queen Street are expected to highlight the ongoing influence of offshore capital in the market.
Perth
A shift is underway in Perth’s office leasing market, with a rise in the number of tenants relocating from fringe and suburban locations – something not seen since before the mining boom.
While rents continued to decline over the quarter, the rate of contraction appears to be slowing.
Prime rents fell just 0.4% during the quarter, while secondary rents fell 1.2% during the same period. By comparison, incentives remained unchanged at 47.5%.
Office vacancy increased from 16.6% to 21.8% in the 12 months to June 2016.
Ms Spark expects the second half of 2016 represents the peak of the vacancy cycle.
“A positive for Perth’s CBD office market is that the major supply shock has now passed,” Ms Spark explained.
Adelaide
Challenging demand conditions, as well as the completion of two major office refurbishments, saw office vacancy rise to 15.8% in July 2016 – the highest level in 15 years.
Rising vacancy has underpinned a decline in rents, with prime rates down 5.1% year on year and secondary rents down 4.4%.
Ms Spark said despite the softer occupier conditions, investor demand for assets remained strong.
“Over the past 12 months, prime yields have sharpened to 7.2%, while secondary yields remained steady at 8.9%,” Ms Spark said.
“The past several years have seen greater yield compression for prime grade stock as investors seek out higher performing assets which carry lower vacancy risk.”
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 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.
