Record demand for metropolitan office space in Sydney and Melbourne in 2014 is set to lead healthy activity in the sector in the year ahead.
According to Colliers International’s latest Metropolitan Office Research & Forecast Report, Dial for Demand: Enquiry for Metro Assets on the Rise, demand for office space in the non-resource exposed markets of Sydney and Melbourne reached record levels in 2014.
Just over 570,000sqm were recorded in Sydney and almost 400,000sqm in Melbourne, compared to 239,000sqm in Sydney and 278,000sqm in Melbourne in 2013.
Colliers International Managing Director of Office Leasing Simon Hunt said demand in Sydney and Melbourne over the past five years had been consistently high, reflecting the depth of the metropolitan markets in these cities as well as their much larger populations.
“It is important to note that of the above enquiries, in Sydney and Melbourne in particular, many tenants are also listing the CBD as one of their enquiry markets,” Mr Hunt said. “In 2014, just over half (53 per cent) of all Sydney metropolitan enquiries also listed the CBD as a potential office location, and in Melbourne exactly a third of metropolitan enquiries were also looking at the CBD.
“We believe this is due to tenants being shrewd in their due diligence in identifying the best commercial terms for their business by assessing both CBD and metropolitan markets.”
Historic and current metro office enquiry data provided an insight into who the future occupiers might be and what demand volumes could look like in each metropolitan office market.
In Sydney, IT firms have led metropolitan office enquiry over the past five years, accounting for 16 per cent of all enquiry, while business services (13 per cent), media and communications (11 per cent) and finance and insurance (10 per cent) rounded out the top five.
“The enquiry profile for Sydney metro office space is quite different to the other capital cities, reflecting that city’s position as a headquarters for many international firms,” Mr Hunt said. “The Sydney metropolitan office market is the only city where media and communications and finance and insurance firms made the top five.
“Sydney is the go-to city for many international technology firms such as Apple, Microsoft and Google. These firms themselves attract an entire industry of similar tenants, looking to co-locate amongst these larger groups.”
The enquiry profile for Melbourne was for more traditional metropolitan office tenants, with business services the largest category (17 per cent), followed by information technology, construction and trade and health and community services (all 8 per cent).
According to the report, historical new supply data in various state metropolitan markets suggests a lack of appropriate stock in Melbourne’s metropolitan markets – particularly the popular City Fringe and Inner East markets – which could make meeting the needs of these enquiries challenging.
Since 2001, only 250,000sqm of additional office space has been built in Melbourne metropolitan markets, compared to 640,000sqm in Sydney, and 724,000sqm in Brisbane.
Colliers International Associate Director of Research Anneke Thompson said many of these new developments in Sydney and Brisbane had converted into the prized institutional grade stock.
“Melbourne metropolitan markets have been impacted by both strong supply levels in the CBD, particularly Docklands, as well as inner city development sites being strongly sought after for residential development,” Ms Thompson said. “The tide may just be turning however, with some quality new projects currently underway in the Melbourne market, including City Place at Chadstone Shopping Centre (16,000sqm), due for completion in 2016, and 913 Whitehorse Rd, Box Hill (20,000sqm), which is due for completion this year, fully pre-committed by the ATO.”
Ms Thompson said while enquiry levels played a significant role in determining vacancy forecasts for Australia’s metropolitan office markets, the impact of future supply levels could not be underestimated.
“In Sydney, with supply levels moderate over the past two years, and this trend continuing into 2015, we expect vacancy to continue its downward trend,” she said. “Even though an increase in supply levels is forecast for 2016, we expect overflow demand levels will be significant enough to absorb this, particularly given that tenants will have been starved of any significant new supply levels for a number of years.
“Melbourne’s metropolitan office vacancy rate has dipped to the lowest level it has seen since late 2011, however increasing supply levels will play a significant factor in this city.
“A large number of completions will hit the market in 2015, and while the biggest of these buildings are wholly pre-committed, there will be significant levels of backfill space available for lease, meaning the vacancy rate is forecast to climb again.”