Tighter office markets reflect a stronger economy

As demand for CBD office space grows for the seventh straight period, Australia’s tightening office markets reflects a strengthening economy, finds the Property Council’s latest Office Market Report.

Vacancy across Australia’s office market fell from 10.2 per cent to 9.6 per cent over the six months to January 2018.

Vacancy dropped in three quarters of the office markets tracked by the report, with positive demand for office space and some supply withdrawals driving the results.

The Property Council’s chief executive, Ken Morrison, says the nation’s tightening office markets provides a “window” into a strengthening economy, and the results are “certainly encouraging”.

“Around the country we see Melbourne surging, Sydney tightening, Perth rebounding and Brisbane slipping,” Morrison says.

“The Melbourne and Sydney markets – representing over half of Australia’s CBD office space – are both now extremely tight, with vacancy rates at just 4.6 per cent.”

 

New South Wales

The Sydney CBD office market posted the lowest vacancy rate in almost 10 years, falling from 5.8 to 4.6 per cent due to market withdrawals and positive demand. The withdrawal of buildings for future redevelopment and the new metro line were influencing factors.

“NSW had five of the top ten markets with the lowest vacancy rates in Australia,” notes the Property Council’s NSW executive director Jane Fitzgerald, adding that this underscores the state’s success in “fostering emerging commercial office markets”.

In Parramatta, the vacancy rate fell from 4.3 per cent to 3 per cent. A Grade office space continues to have a vacancy rate of zero.

Macquarie Park has rebounded, with vacancy dropping from 8.4 to 6.0 per cent. The A and B Grade segments recorded positive net absorption, which indicates strengthening demand.

North Shore didn’t fare as well, with the aggregate vacancy rate increasing from 7.9 to 8.4 per cent, largely due to negative demand. North Sydney’s vacancy rate rose from 6.4 to 7.9 per cent, while Crows Nest/St Leonards recorded a considerable drop and Chatswood vacancy marginally declined.

The vacancy rate in Wollongong’s office space decreased from 11.2 per cent to 10.6 per cent, a strong indicator of a growing economy.

Meanwhile, positive demand and withdrawals in Newcastle drove down vacancy from 10.3 per cent to 9.0 per cent. Over the period, 1,2sqm of office space was added indicating there is still strong supply.

 

Victoria

Melbourne’s office market has strengthened over the past six months, reflecting Victoria’s strong population growth and robust confidence levels. Victorian executive director Sally Capp says the overall vacancy rate has improved from 5.9 per cent to 4.6 per cent.

“Melbourne has experienced the largest drop among Australian CBDs and now boasts the equal-lowest vacancy rate among all of Australia’s CBDs,” Capp says.

“Across the next three years, Melbourne CBD will supply over 4,000sqm of new stock. Pre-commitments for this future stock sit at over 54 per cent.”

 

Queensland

Vacancy across Brisbane’s CBD has increased over the last six months from 15.7 to 16.2 per cent. Chris Mountford, the Property Council’s executive director in Queensland, says contraction in tenant demand for lower-grade stock across the CBD has contributed to the vacancy increase.

“With 47,700sqm of space due to come online in 2019, and several office building proposals being mooted, 2018 will be a critical year for new tenant demand growth,” Mountford says.

On the Gold Coast, vacancy rates fell from 11.3 to 10.6 per cent off the back of positive market demand and building withdrawals. “The Gold Coast office market is now performing considerably stronger than the Brisbane CBD,” Mountford adds.

Despite healthy demand for office space on the Sunshine Coast, the vacancy rate rose from 6.9 per cent to 15 per cent. Mountford says the result – influenced by the completion of new office developments in 2017 – conceals strong new tenant demand.

 

Western Australia

In Perth, vacancy is down as business braces for economic bounce back, says executive director Lino Iacomella.

The overall vacancy rate in the Perth CBD decreased by 1.3 per cent to 19.8 per cent (from 21.1 per cent), in the six months to January 2018. This follows 12 months of positive demand for CBD office space. Iacomella attributes the stronger demand to a recovering state economy, slowing supply of new office space and tenants’ “flight to quality”.

 

Australian Capital Territory

Canberra’s results emphasise the disparity between demand for new and old office space, says ACT executive director Adina Cirson. Canberra’s overall vacancy rate has increased from 11.6 per cent to 13.1 per cent – due to greater supply of 51,364sqm. Cirson says more incentives are needed convert “tired and lower performing” office spaces.

 

South Australia

Adelaide’s CBD recorded a slight decrease in vacancy levels, from 16.1 to 15.4 per cent, while fringe vacancy increased from 10.1 to 11.4 per cent. But South Australian executive director Daniel Gannon says “we shouldn’t be popping the champagne corks yet”, pointing to the almost 220,000 sqm of vacant office space in the CBD. This is close to per cent higher than the historic average, and “represents more than 10 Adelaide Oval playing surfaces”.

 

Northern Territory

Darwin’s vacancy rate fell to 21.6 per cent, from 22.5 per cent the previous year. But for the third consecutive year, Darwin recorded the highest vacancy rate across all office markets tracked. Ruth Palmer calls for a “jobs and population plan” and “more long-term projects” to “bolster” the economy.

 

Tasmania

Hobart CBD’s office market vacancy rate has declined slightly to 8.1 per cent over the six months to January 2018. Brian Wightman notes the steady result while welcoming the significant increase in supply. More than 15,000sqm of new office stock has been added to the market, the most in 25 years. This is “extremely positive”, Wightman says, although “decreasing demand for B, C and D Grade office stock highlights the need to incentivise inner-city investment and development”.

 

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