Low office supply ahead

Low office supply aheadWhile the national CBD office vacancy rate remains steady, it is about to be hit with a “super-cycle of low supply”, according to the latest Australian Office Market Report.Covering around 4,0 office buildings in more than 30 office markets around Australia, the Property Council’s bi-annual report includes historical data since January 1990 for total stock, vacancy, supply, withdrawals and net absorption.The latest report, released last week, finds national vacancy rates fell just 0.1 per cent – from 11.0 to 10.9 per cent – over the six months to January 2017.Demand for office space grew by more than three and a half times the historical average in Melbourne and over five times the historical average in Brisbane.Sydney, Canberra and Perth recorded small declines in demand and other capital cities remained 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. Property Council chief executive Ken Morrison says Australia’s “divergent” office markets are “about to be hit with a super-cycle of low supply” which will drive down vacancy rates across CBDs.Just 462,000 sqm of new stock is expected to come online over the next three years – half the amount of new supply that CBD markets have experienced over the last 18 months. In Sydney and Melbourne, this is likely to place more pressure on rents. Meanwhile in cities with high vacancy rates, like Darwin and Perth, it will “mean a welcome reprieve for property owners”, Morrison explains.The data also reflects the “patchiness” of Australia’s economy.While low and stable vacancy rates continue in Sydney and Melbourne, vacancy rates continue to languish in Adelaide (16.2 per cent), Darwin (22.5 per cent) and Perth (22.5 per cent). Brisbane has improved over the past six months, but a vacancy rate above 15 per cent is “nothing to trumpet”, Morrison adds.The Perth vacancy rate continues to climb, rising from 21.8 per cent to 22.5 per cent, but the lack of new office supply in the pipeline will help to stabilise the CBD market during 2017, Morrison explains. Low demand growth has resulted in a further deterioration in Darwin’s vacancy rate from 20.7 per cent to 22.5 per cent, while the Adelaide vacancy rate has hit an 18-year high. The fall in the Canberra vacancy rate is largely the result of the withdrawal of stock, while Hobart’s vacancy rate has held steady at 8.2 per cent over the past year. The rapid pace of change in the office market has been “dramatic”, Morrison says, “but this pace will not continue in 2017 and 2018”.In the last six months, 5,866 sqm has been added to the market – almost 60 per cent above the historic average. At the same time, 373,335 sqm has been withdrawn – more than double the historical average of 152,421 sqm.But around 293,697sqm will be added to the market in 2017 and a further 268,798 sqm in 2018.”We expect the amount of additional office space across Australia during 2017 and 2018 to be less than half the historic average.”Purchase the January 2017 Office Market Report online.