Widening Gap In Performance Of CBD Office Markets

Sydney has emerged as the country’s standout office leasing market amid signs of a widening gap in the performance of Australia’s major CBDs.

The latest Property Council of Australia (PCA) vacancy statistics highlight that Sydney has the lowest vacancy of any of the capital markets at just 6.3%CBRE Head of Research, Australia, Stephen McNabb said, “Stronger economic growth in the south east of Australia, particularly in New South Wales, is supporting growth in demand while the drag from falling levels of mining investment continued to adversely impact Western Australia and Queensland. Vacancy is heading to over 20% in Perth and Brisbane, is mid-range for Melbourne and below average in Sydney.”

Mr McNabb said Sydney was expected to maintain below average vacancy rates over the next two - three years, despite emerging supply.

“This is now supporting some rent growth in the Sydney CBD and a stabilisation in incentive levels. Demand is being driven by IT and the finance sector, with business conditions and top line revenue growth for these industries improving. Removal of office stock for residential conversion is also helping to keep the outlook for vacancy tighter by offsetting new supply coming to the market,” Mr McNabb said.

Melbourne’s vacancy rate remained above average at 8.1%, which, in contrast to Sydney, was keeping rent growth and the immediate outlook more subdued, Mr McNabb added.

RELATED: Sydney Office Market Sees Strongest Demand In Four Years

CBRE Regional Director, Office Services, Andrew Tracey said market conditions for tenants had reached their peak on the eastern seaboard.

“Demand levels have improved significantly in the non-mining states. It appears the whistle has blown and the deals are not going to get any better for tenants in Sydney and Melbourne,” Mr Tracey said.

“The time for savvy tenants to deal is now if they want to lock in the best cost base for their businesses.”

Mr Tracey said increased supply would continue to be an issue however, for Perth and Brisbane, where the effects of the mining slowdown was still apparent.

“The story in the mining state states is a bit different. The value proposition is compelling - a business can upgrade quality but it’s a lower cost base, so the maths makes sense for more activity and that is what our teams are seeing in these markets.”

See the following CBRE commentary from Brisbane, Sydney and Melbourne CBD office markets:In the short-term, CBRE expects continued strong face rental growth and further firming of current incentive levels. Due to stock limitations, some landlords may look to refurbish buildings to higher standards in order to capitalise on strong rents and falling incentive levels.
Brisbane - John Walklate, State Director, Office Services
Off the back of forecast employment growth in Brisbane, conditions are expected to improve in the CBD office market, with absorption tipped to modestly increase over the current calendar year.

As Queensland’s economy adapts to the mining downturn, demand for office space is now originating from a broad base of industries including business and professional services, education, recruitment and agriculture.

At street level, there is increasing enquiry from tenants looking to take advantage of securing upgraded premises via attractive and compelling leasing terms. While this is stimulating leasing activity across the market, cost and efficiency remains a key focus for occupiers.

The majority of activity is centred in the prime and A-grade markets, with the secondary market continuing to face significant challenges.

The positive bias towards prime stock is expected to remain, with secondary vacancy continuing to top 20% over the five-year forecast period. The total amount of sublease space available in the market has tightened following on from solid levels of sub leasing activity in the second half of 2014.
Sydney CBD - Jenine Cranston, Senior Director, Office Services
Demand for office space in the Sydney CBD is tracking well, but the significant change in the level of tenant engagement and deal flow is the most encouraging factor at present.

Improving conditions in the NSW economy are filtering through to the office market, with transaction volumes up 25% year to date compared with the previous corresponding period. This uplift can be largely attributed to strengthening demand from small to medium businesses.

The strength of the IT sector has dropped off slightly compared with previous years, with resurgence in enquiry from the financial services and professional services industry.

While enquiry levels and demand remains at positive levels, there are still close 200 options available to users in the 800sqm – 2,500sqm range, meaning there is likely to be little change in deal terms in the short term.
Melbourne CBD/Docklands - Marc Mengoni, Director, Office Services 
Melbourne has seen a solid number of transactions across all size ranges since January 2015, which, when coupled with the completion of 570 Bourke Street and 567 Collins Street this quarter, should hopefully see the CBD vacancy remain steady.

Major suburban occupiers are continuing to consolidate operations into CBD premises. Examples of this include Vitrol (formerly Shell) taking 4,200sqm, Porter Davis 2,825sqm and NEC securing 5,636sqm - all of which relocated to 720 Bourke Street. Additionally, VECCI has taken 2,795sqm at 150 Collins Street. Education and IT services also continue to be a good news story for Melbourne adding diversity to the active tenant mix.

Across the market, major institutions have drawn the line in the sand with regards to incentives and it is positive to see that this has not hampered tenants across the board proceeding with securing new premises.

Occupiers are actively engaged in negotiations and the overall mood of the market is significantly more positive than 12 months ago.