Melbourne and Sydney have the tightest office market vacancy rates in history at less than 4 per cent, according to the Property Council Australia's latest report.
Melbourne's CBD office vacancy was at a record-low rate of 3.2 per cent with almost 400,000sq m expected to come onto the market in 2020—the biggest annual increase in three decades—and almost 90 per cent pre-committed.
Office vacancy in Sydney’s CBD increased slightly to 3.9 per cent mainly due to significant relocations to Parramatta and tenant consolidations.
Major opportunities were also expected for Sydney with a large pipeline expected to come onto the market in the next few years, including 150,000sq m this year.
The best performing non-CBD markets were east Melbourne with 2.4 per cent vacancy, followed by Parramatta (3.2 pc) and Chatswood (3.7 pc).
However, other capital city markets including Hobart, Canberra, Darwin and Perth reported declines in vacancy rates.
Property Council of Australia chief executive Ken Morrison said Melbourne and Sydney have remained super tight.
“While the Australian economy has been growing more slowly, the underlying fundamentals of our office markets appear strong,” he said.
“Net tenant demand actually fell somewhat in Sydney and Melbourne over the past six months, but in such tight markets it is difficult for existing businesses to grow or for new businesses to find space.
“Through 2020 over 680,000sq m of new office space will come onto CBD markets, with 80 per cent of this in Sydney and Melbourne where we need it most.
“The Melbourne CBD will account for 57 per cent of the new space coming online in the CBD markets over 2020, making it our biggest expanding CBD office market in the country.
“Almost a quarter of the new supply for non-CBD markets over 2020 will be delivered in Parramatta and setting a new record for tenant absorption of office space in that market.”
CBRE director Caitlin Murdoch said they witnessed significant net face rental growth of 6.9 per cent year-on-year in Melbourne.
“Melbourne’s East End had the tightest vacancy in the CBD and remains a strong preference for banking, government and professional services ,” she said.
“The city fringe office market remains of interest for large corporations, with a number of mooted developments fighting for tenants, however we are yet to see a major CBD tenant relocate to a fringe location.
“BHP, Sportsbet and Origin Energy were among the companies that looked closely at relocating to Richmond last year, but ultimately all decided the CBD was still their best option given current market conditions .”
Savills state director Mark Rasmussen said Melbourne rents were gradually moving upwards.
“The lack of choice in the market and increasing costs have resulted in many tenants choosing stay put in their current premises and look to increase efficiencies,” he said.
“The steady demand has come from a wide range of sectors with business services, IT, education and co-working being the leading lights.
“Melbourne’s new Silicon Valley, the Richmond [and] Cremorne markets, have consolidated further with Bunnings, Uber and Afterpay likely to join Reece, Seek, REA, Domain and MYOB to establish the area as a preferred alternative to the CBD. Effective rents achieved for these tenants has been comparable to CBD transactions.
“St Kilda Rd, Southbank, and Docklands markets have also delivered solid performances during 2019. It should be noted the low cost Docklands supply pipeline has ended, effectively removing the glass ceiling off CBD and other fringe market rentals."
Savills state director Tom Mott said a number of factors influenced the Sydney rates including co-working disruption to the 100sq m to 500sq m market, a lack of attractiveness around deals enticing tenants to move, owners renewing leases well in advance of expiry and a sense of uncertainty around the economy.
“There were however a number of significant leasing deals, those included Deloitte who secured 32,000sq m in AMP Capital’s development Quay Quarter Tower (50 Bridge Street), WeWork at 320 Pitt Street where they will occupy 11,000sq m and Lend Lease has secured Salesforce to anchor 24 floors of its 53 floor $1.9 billion Circular Quay development.
“The outlook for 2020 is strong for our clients, we are forecasting 3 per cent vacancy in the Sydney CBD, we have also seen strong qualified demand in the early parts of the year and anticipate leasing deal volumes to increase.”
CBRE director Stefan Perkowski said they also saw momentum in many of their Sydney CBD occupiers moving into north Sydney.
“The likes of Microsoft, Nine Entertainment Corporation and Ooh Media staked their claim on new office space in North Sydney in deals totalling more than 50,000sq m throughout 2019,” he said.