Sydney was the standout in this year’s Property Council of Australia Office Market report, with better than expected annual net absorption of 157,150sqm in 2015.
CBRE’s Australian Head of Research, Stephen McNabb said the national results had been very much in line with CBRE’s expectation, with few surprises in the 2H 2015 statistics.
However, the notable exception was Sydney, with 96,745sqm of net absorption in the second half alone – an outcome that was even stronger than anticipated.
“There is a significant divergence between the below long run average vacancy rates in Sydney and Melbourne and the higher levels of vacancy in Perth and Brisbane and this divergence is set to continue through 2016,” Mr McNabb said.
“In general we are seeing the stronger economic performance in NSW and Victoria supporting demand in these markets, with Sydney showing a stronger demand recovery after near zero growth between 2008 and 2013.”
Mr McNabb added that the effect of this was that Sydney and Melbourne were closer to the bottom of the rent cycle, with Sydney having recorded some growth in effective rents in 2015 while rents in Melbourne had stabilised.
On the other hand, Mr McNabb said that while the worst falls in rents had already occurred in Brisbane and Perth, CBRE anticipated “a little more downside” in these markets in the short term.
CITY BY CITY COMMENTARY
Sydney CBD – Jenine Cranston, Senior Director, Office Services
Sydney’s impressive net absorption of 150,000sqm in 2015 demonstrated very strong tenant engagement. To give this some context, the total enquiry we recorded was marginally lower than 2014, but transactions were up over 40% on the previous year.
Demand came from professional services firms, both large and mid-tier, the finance sector and a broad range of IT firms – mature firms and new starters. Almost across the board, IT firms showed strong growth in size due to head count growth. They no longer want space on the fringe of the city but remain focused on space in the CBD’s heart, with Martin Place as the epicentre.
Enquiry during the year was very lumpy, but the year ended very positively with a very strong final quarter. The growth in transactions came from the mid-size market, which showed a tripling of the deals we transacted in the size range over 1,000 sqm.
We saw pockets of decent rental growth, but it certainly wasn’t uniform. A-grade and B-grade suites and small floors were the star performers. Rent showed an increase and we saw a reduction in incentives due to a lack of options. In the broader market, incentives have stabilised ahead of an increase in stock options during the next 12 months.
The large end of the market is currently very tight with fewer than a dozen options for tenants over 10,000sqm. This will ease during the next 12 months, but there could be an interesting jockeying for space in the interim.
Sydney North Shore – Peter Flint , Head of Office Services, NSW & ACT
2016 looks to be building on 2015’s strong finish. A couple of major factors are at play here, that are changing the market dynamics in the precinct. Firstly, the NSW Government acquisition of three buildings on Miller Street by Government (181 Miller Street, 189 Miller Street and Tower Square) for the new Metro railway will remove around 20,000sqm of occupied space from the market as tenants are given formal notice over the next few months. These tenants are already in the market.
Secondly, the decision by DEXUS, as the new owner of 90/100 Mount Street, to activate the development of this site, and serve notice on the occupiers, has put a new group of tenants into the market searching for space. These groups join the ranks of displaced tenants already committed to relocate as a result of development activity in St Leonards and on the North Sydney fringe. Whilst these groups will not necessarily gravitate towards A Grade options, their searches are creating a knock-on effect for demand at the top end of the spectrum. Space here is very limited; 177 Pacific Highway, set to become the largest building on the north shore, is all but spoken for now, with practical completion scheduled the third quarter of this year.
Pressure on space will continue to drive down vacancy rates and we believe that there will be scope to recalibrate rental expectations, particularly at the top end of the market.
Parramatta – Stephen Panagiotopoulos, Director, Commercial Sales & Leasing
Parramatta’s office market has strong fundamentals with vacancy continuing on a downward trend and A-Grade vacancy continuing to be the tightest in the country. The market also recorded strong rental growth around 4.5% year-on-year substantiating the attractiveness of commercial investments in Parramatta. This limited vacancy is providing few quality options for tenants, with only seven buildings providing whole floor options and only two buildings with vacancies above 2,000sqm
We are expecting vacancy to further tighten over the next three years given that no large supply additions are expected. The only other variables to impact vacancy over the short-medium term could be sub-lease space coming to market or additional residential conversions, which would put further downward pressure on the already tight market.
At present, the only commercial development under construction is 1PSQ which is a 26,000sqm office building leased to Western Sydney University. This adds to net supply but does not provide any direct vacancy relief to the market.
Adelaide – Andrew Bahr, Director, Office Services
Incentives in the Adelaide CBD hit an all-time high in 2015, being above 35% in some instances. The early signs in 2016 are that hat this pressure on landlords is not going to stop. Lack of demand and a number of good quality offerings in the market has put tenants in the driving seat, shopping around for some of the best incentive deals seen on record. This being said, tenants are still willing to commit to and pay the right rental for the best quality space seeing face rentals hold in most instances.
First impressions and quality of presentation is as important as it has ever been and tenants will only consider options that “tick all the boxes” from the first inspection. Being “willing” to refurbish to suit is not enough with the number of quality options available in the market at present and those owners who are proactive and are willing to lead the market at the ones that will secure the tenants. Signs for the year ahead indicate this trend will continue with increasing pressure on the secondary market expected as tenants relocate into better quality offerings with big incentives on offer.
Melbourne CBD/Docklands – Marc Mengoni, Director, Office Services
The Melbourne CBD office market has maintained positive momentum into 2016 as white collar employment figures improved and the recent trend of tenants relocating from suburban locations to the CBD continued. The latest vacancy figure of 7.7% represents a further tightening from 8.1% in mid-2015 and down from 9.1% almost 12 months ago. Absorption is also expected to remain positive for the foreseeable future in line with white collar employment data.
Approximately 130,000sqm of new office supply was completed in 2015 at 313 Spencer Street, 699 Bourke Street and 567 Collins Street. Due for completion in 2016 are Towers 2 and 4 of Walker Corporation’s Collins Square development, which combined will bring circa 110,000sqm to the Docklands precinct. This will see major tenants KPMG, AECOM and Maddocks relocate to the Docklands, which is a positive step in the CBD’s evolution. Other major occupiers in the market in 2016 include the likes of Seek, Minter Ellison and HWT reviewing potential new headquarters ahead of pending lease expiries, which all bode well for the ongoing strength of the Melbourne market.
In the past 12 months, the strongest enquiry for Melbourne CBD office accommodation has been from the professional services, finance and insurance, and IT sectors. From this enquiry, we have continued to see a strong trend from a large portion of these tenants to facilitate flexibility in their leases, including growth opportunities and the ability to tap into hotel style amenity such as co-working spaces. This will be an interesting area to watch evolve as many of our clients adapt their buildings to suit these trending requirements.
Perth – Andrew Denny, Senior Director, Office Services
With the highest office vacancy rate in Australia, the Perth CBD remains highly challenging for building owners, but full of opportunity for tenants. 2016 will continue to see highly attractive terms available.
With all the new supply now completed and in the market, we are likely to see the bottom of the cycle in 2016. Any recovery is likely to be slow and gradual. Tenant demand is steady with the increasing trend of relocation from the suburbs to the CBD. Factors such as proximity to clients, obtaining better quality buildings, a vibrant location and excellent public transport are all driving this increasing trend.
There is a significant trend towards a flight to quality with a high percentage of transactions now occurring in high quality buildings.
Brisbane – John Walklate, State Director, Office Services
The Brisbane CBD vacancy rate has remained stable at 14.9% over the 2nd half of calendar year 2015. Whilst Brisbane’s CBD has experienced negative net absorption for a 3rd consecutive year, the market appears to be levelling out with only 1,300sqm of negative net absorption in the six months to January 2016. CBRE expects that positive absorption will return in 2016 in spite of a spike in vacancy levels due to the addition of three new prime towers to the stock base. The impact of the new stock will also be partly offset by the demolition of several existing buildings to make way for the new Queens Wharf project. The A Grade sector had a solid end to 2015 with 8,500sqm of positive net absorption and vacancy dropping to 11.3%. The leasing market continues to be active with occupiers moving to take advantage of what they see as attractive terms to lock in new leases and move to higher quality premises. The total amount of sublease space available in the market has reduced to 35,000sqm which is the lowest level recorded since mid-2013.
Near City vacancy has also remained steady and the prime market has continued to experience strong take up with circa 26,000sqm of positive net absorption during 2015 pushing vacancy in that grade to 10.1%. We are forecasting Near City vacancy to tighten in the short term with a lack of new supply and continuing secondary stock withdrawal for conversion to alternative uses.
Queensland’s economic outlook remains mixed. While GSP growth for the period to June 2015 was weak at just 0.5%, increased export volumes from LNG as production kicks into higher gear in 2016 will push GSP higher. The lower AUD is benefitting areas such as tourism and student education. For the domestic economy, however, positives being generated by residential construction and household spending are yet to counteract the negatives from the drop off in the key areas of private new capital expenditure spending as major resource projects move out of their construction phase into production and public infrastructure spending. Queensland’s population growth rate at present is also low, having dipped just below national growth. It appears that a strengthening in these key drivers will be gradual, which correlates with our expectations of a gradual improvement to tenant demand in Brisbane’s office markets.
Gold Coast – Nick Selbie, Associate Director, Office Services
Net absorption over the year to January 2016 totalled 7,816sqm. This was the fifth consecutive year of positive take-up on the Gold Coast, with the market absorbing almost 52,000sqm of space in this period. Net take-up during 2015 was split relatively between prime and secondary stock with 3,995sqm of net absorption in prime stock and 3,821sqm of net absorption in secondary stock.
Vacancy continued to edge lower, dropping to 13.6% at January 2016 (down from 14.8% mid-year and 15.2% at the start of 2016). Current vacancy compares with the market peak of 24.1% recorded at the start of 2011. The 64,300sqm of vacant space in the market is at its lowest level since mid-2008.
There was little net change to stock during 2015 with the addition of City Pods 3 and 4 in Robina (1,400sqm) offset by a small amount of stock withdrawal in Southport. Proposed new development remains subject to pre-commitment with the market not yet at a level where speculative development can be supported.
While the Queensland state economy is facing headwinds at present, business conditions on the Gold Coast have strengthened with several key drivers providing support, particularly to office occupiers. This includes the first stage of the Gold Coast Light Rail (which commenced operation in mid-2014) and general planning and development in the lead up to the Commonwealth Games. Development sites continue to be sought after, particularly for residential projects, and office space demand from development and associated companies has been strong; and
Canberra – Andrew Stewart, ACT Managing Director
We would expect that the market will tighten over the next two to three years, with no significant stock increases, as most of the buildings developed in Canberra are pre-committed to the Federal Government and the current focus under project Tetris is on backfilling already leased accommodation rather than committing to new space.
We would expect that project Tetris would have run its course over the next three years and there may in fact be a shortage of A & B grade stock in Canberra’s CBD, with the current direct vacancy for A & B grade stock in the CBD being around 6%.