National office market vacancy rate falls

Australia’s office vacancy rates continue to fall and new office supply is slowing to half the historic average, the latest issue of the Property Council Australian Office Market Report reveals.

The nation’s definitive office market report tracks more than 5,300 office buildings covering 25 million sqm of office space nationwide.

The Australian CBD office vacancy rate fell over the six months to July 2017 from 10.9 per cent to 10.5 per cent. It continues a four-year run in the 10 per cent to 11 per cent range.

The total non-CBD vacancy rate decreased from 9.7 per cent to 9.5 per cent over the last six months due to withdrawals, particularly older office stock being converted into residential accommodation.

While national demand is positive, it is also less than the historic average. Net absorption was 60,075 sqm for the six months to July 2017 which is less than half the historic long-term average of 162,801 sqm.

“Positive tenant demand for office space has been the big driver of office markets around the country over the last six months, and this will continue with limited new supply on the horizon,” says the Property Council’s chief executive Ken Morrison.

“While vacancy rates remain high in some centres, they are no longer facing significant new office supply coming on to the market. 

“Almost three quarters of the new CBD office supply over the next two and a half years is coming in Sydney and Melbourne, the cities which are best placed to handle it.”

Sydney’s CBD vacancy rate fell from 6.2 per cent to 5.9 per cent, continuing its run as the city centre with the lowest vacancy rate. The fall was due to withdrawals of office space and positive tenant demand. An extra 48,595 sqm of new stock is expected on the market in the next six months.

“New South Wales had five of the top ten markets with the lowest vacancy rates in Australia, demonstrating that our state continues to foster successful emerging commercial office markets,” says the Property Council’s NSW executive director Jane Fitzgerald.

In Melbourne, the CBD vacancy rate has remained steady at 6.5 per cent. Eastern Core and Docklands precincts posted the lowest vacancy rates at 2.6 per cent and 2.1 per cent respectively.

“Melbourne CBD stock is forecast to grow by 18,939 sqm over the second half of 2017, 92,400 sqm in 2018, and a significant 377,600 sqm from 2019 onwards,” says Victoria’s executive director Sally Capp.

Vacancy across the Brisbane CBD increased marginally from 15.3 percent to 15.7 percent over the last six months. With no new additions, and negligible withdrawals from the market over this period, the result is ascribed to a minor drop in tenant demand.

Chris Mountford says the latest results reconfirm the recent trend of decreased vacancy in higher grade stock “as tenants seek out newer and more centralised spaces”.

The effect of CBD relocations is being felt in the Brisbane Fringe office market, with vacancy increasing from 12.9 percent to 14.4 percent.

“Premium CBD office space is acting like a magnet, particularly for smaller nimble tenants in the Brisbane Fringe who are looking to take advantage of market conditions to secure new premises,” Mountford explains.

The Perth CBD vacancy rate has retreated from its peak of 22.5 per cent in January to 21.1 per cent. While this is still the highest vacancy rate in Australia, Lino Iacomella points to the positive signs.

“CBD net demand was more than three times the historical average over the six months to July 2017. It was only the second time in five years that Perth showed positive net demand,” he says.

In Adelaide, the CBD vacancy rate inched down from 16.2 per cent to 16.1 per cent, but Daniel Gannon warns the industry not to “pop the champagne corks yet”.

“There is almost 230,000 sqm of vacant office space in the CBD, which is 57 per cent higher than the historic average. Of this total vacant space, 36 per cent sits across C and D Grade office stock.

“That points to a story about transitioning this ageing and empty stock to residential offerings, and chasing tenants and residents to relocate to Adelaide.”

A similar story is playing out in Canberra. While the vacancy rate fell from 12.6 per cent to 11.4 per cent, Adina Cirson says the report emphasises the “huge disparity” between demand for new over old.

“This is the market in action, showing a clear preference for higher grade office space, and we need to act quickly to make it more attractive for investors to convert tired office spaces into refreshed, higher quality, more sustainable stock,” Cirson says.

Learn more about the Property Council Office Market Report.