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Office Markets Pass Supply Surge - New Report

Australia’s office markets have passed a supply surge with vacancy rates steady, and strong tenant demand in Melbourne and Brisbane, according to the Property Council’s latest Australian Office Market Report.

The Australian CBD office vacancy rate remained steady over the six months to January 2017 (falling from 11.0 per cent to 10.9 per cent) with the national vacancy rate masking a significant divergence in performance between the states.

Demand for office space grew over three and a half times the historical average in Melbourne and over five times the historical average in Brisbane; with Sydney, Canberra and Perth recording small declines in demand and other capital cities remaining flat.

Sydney and Melbourne CBDs (with vacancy rates of 6.2 per cent and 6.4 per cent respectively) continue to demonstrate strong office market performance, reflecting the broad strength of Australia’s two largest cities.

“Australia’s divergent office markets are about to be hit with a super-cycle of low supply”, said Ken Morrison, Chief Executive of the Property Council of Australia.

“Australian CBD markets are due to have only 462,000 sqm of space come online over the next three years. This is just half the amount of new supply CBD markets have experienced over the last 18 months.

“With supply such a minor part of the picture in coming years, demand will drive vacancy rates down across our CBDs.

“For cities like Sydney and Melbourne it is likely to mean pressures on rents, and in cities like Darwin and Perth which have extraordinarily high vacancy rates, it will mean a welcome reprieve for property owners.

“This data reflects the patchiness of Australia’s economic trajectory. We continue to see low and stable vacancy rates in Sydney and Melbourne CBDs, but in Adelaide (16.2 per cent), Darwin (22.5 per cent) and Perth (22.5 per cent), CBD vacancy rates continue to languish. Brisbane has improved over the past six months, but a vacancy rate in excess of 15 per cent is nothing to trumpet.

“The pace of change in the office market has been dramatic. In the last six months, we have seen 505,866 sqm added to the market which is almost 60 per cent above the historic average. As well, we have seen 373,335 sqm withdrawn over the period which is more than double the historical average (152,421 sqm).

“However, this pace will not continue during 2017 and 2018. We expect the amount of additional office space across Australia during 2017 and 2018 to be less than half the historic average (293,697sqm in 2017 and 268,798sqm in 2018).”

Sydney continues to have the lowest vacancy rate of all capital cities despite an increase from 5.6 per cent to 6.2 per cent in the six months to January 2017. While NSW has five of the top ten lowest vacancy rates in Australia, the state is experiencing negative demand which is a concern.

Strong employment growth in Melbourne has fuelled a reduction in the vacancy rate from 7.0 per cent to 6.4 per cent. Future supply remains a concern for the city with only 40,246sqm of new stock due to enter the market this year and 51,400sqm forecast in 2018.

The Brisbane vacancy rate has fallen from 16.9 per cent to 15.3 per cent over the past six months. This fall occurred despite the addition of 1 William Street to the Brisbane skyline and reflects broader positive demand.

The Perth vacancy rate continues to climb, rising from 21.8 per cent to 22.5 per cent. The lack of new office supply in the pipeline will help to stabilise the CBD market during 2017. We expect construction activity in 2017 to focus on building upgrades and re-adaption as older buildings face the pressure of high vacancies.

The Adelaide vacancy rate has hit an 18-year high. The deterioration is the result of supply additions and negative demand.

The fall in the Canberra vacancy rate is largely the result of the withdrawal of stock.

Low demand growth has resulted in a further deterioration in Darwin’s vacancy rate from 20.7 per cent to 22.5 per cent. Alongside Perth this is the highest vacancy rate in the nation.

Hobart’s vacancy rate has held steady at 8.2 per cent over the past year. During 2017, 19,290 sqm of office space is due to come on line, much of which is from the completion of Parliament Square.

For more information or to purchase the January 2017 Office Market Report, click here.

Media contact: Paul Ritchie | E pritchie@propertycouncil.com.au