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Cushman & Wakefield have released their quarterly update on office markets across Sydney, Melbourne, Brisbane and Canberra.
In Q2, Melbourne experienced above average rental growth, while Sydney recorded its second consecutive quarter of modest growth. Lack of available CBD stock in Canberra saw a combination of face rent uplift, while the recovery in Brisbane is slowly gaining traction.
Highlights include:
Below average new supply expected across CBD markets;
Melbourne's future office supply pipeline becoming clearer, with pre-commitments and construction progress;
Tight vacancy to maintain 'landlord favourable' conditions in Sydney and Melbourne;
Limited stock availability moving Canberra toward 'landlord favourable' conditions;
Tenants in Brisbane are becoming more willing to act earlier on forthcoming lease expiries.
NSW economy slows but still positive
Economic growth remains strong in New South Wales, although the pace is slowing. State final demand growth, which in average annual terms was solid at 3.8%, slowed to zero over the March quarter. The labour market remained strong with the March unemployment rate declining to a relative low of 5.0%. However, with a slowdown in service sector employment growth, further declines may be limited. Despite momentum slowing, multiple infrastructure investment projects should support the NSW economy.
Smaller lease deals dominate
In Q2 2017, smaller, typically single-floor or part-floor transactions dominated leasing activity. Transactions over 4,000 sq m were limited, but with a number of larger requirements now nearing agreement, Q3 2017 is expected to see an increase in larger transactions. The B-grade market remained strong as tenants competed for limited available stock.
Rental slowdown continues
After strong growth in 2016, Sydney CBD prime gross effective rent growth slowed, but remained in positive territory. Rent growth in Q2 2017 stood at 0.4% Q-o-Q, reflective of a $4 rise to $902 per sq m, with prime gross incentives remaining at 22%. Although B-grade gross effective rents tracked negatively, the fall was marginal, and they remained in positive territory at $726 per sq m. B-grade incentives stayed at circa 19%.
Victoria
Strong pre-commitment activity continues
Melbourne is currently experiencing strong pre-commitment activity. A number of 10,000+ sq m office requirements remain active, indicating that strong leasing demand in Q3 will follow on from H1 2017 demand. Activity in H1 2017 was capped by NAB pre-committing to 66,000 sq m at 405 Bourke Street, following on from ANZ, Australian Unity, and ExxonMobil which have all pre-committed to new developments in Q1 2017.
Landlord-favourable conditions drive rental uplift
Limited supply additions and moderate tenant demand supported landlord-favourable market conditions in the Melbourne CBD. As a result, the compression of prime net incentives to 31% drove a rental uplift of 1.8% quarter on quarter ― taking prime net effective rents to $371. B-grade net effective rents moved 1.4% higher quarter on quarter to $265 ― due to a 100-basis point drop in net incentives, which now sit at 30%.
Downward vacancy trend expected to continue
Victoria’s above-trend state final demand growth has supported service sector demand for CBD office space. Despite some tenants holding out on relocations until backfill boosts supply from mid-2018, residual demand from both new and existing tenants is anticipated to support a downward trend in the vacancy rate. Vacancy is expected to have declined below the 6.4% recorded in December 2016.
Queensland
Queensland economy remains resilient
Queensland’s state final demand was flat in Q1 2017, but remained positive in annual average terms at 1.1%, the strongest result in almost three years. While coal and wholesale price increases were positive drivers of the state economy in Q1 2017, these were offset by weaker coal and sugar exports due to cyclone Debbie, along with a decline in dwelling construction.
Leasing market continues to recover
Brisbane’s CBD office market has continued its recovery, though tenants maintained the upper hand in negotiations. The 'flight to quality' remained at the forefront of relocation strategies, as tenants took advantage of attractive rents and incentives offered across the prime market. Tenants have become more proactive and have initiated leasing option discussions further out from their current expiry. Equally, landlords were keen to secure or retain tenants in a high-vacancy market.
Rents edging upwards
In light of ongoing improvements in market sentiment, average prime gross effective rents increased 1.9% year-on-year to $446 per sq m. While this increase has partly been a result of new supply entering the market, landlords have also started to push face rents upwards. It is anticipated that further, modest rental growth will occur over the medium-term.
ACT
Strong economic growth
In Q2 2017, Canberra’s market conditions tipped in favour of landlords, as strong economic growth of 6.5% (Q1 2017 annual average) ― the highest in the country ― supported sustained tenant demand. In light of this, Canberra’s prime vacancy rate is seen likely to have continued its downward trajectory from December’s 9.8%.
Rental uplift trend
Prime gross effective rents moved higher in Q2 2017, supported by both increasing face rents and incentive compression. Prime gross effective rents rose to $350 per sq m over the quarter, representative of 5.2% year-on-year rental growth, and highlighting an upward trend. Economic strength and near-term supply constraints support the potential for future rental growth. Strong fundamentals have allowed landlords to reduce incentives, as evidenced by a 100-basis point compression, to now sit at 20%.
Speculative fit-outs producing ‘B+’ stock
Limited opportunities for prospective tenants within the A grade market has motivated B-grade landlords to invest in speculative fit-outs of their assets, marketing them as turnkey solutions. Benefits for the landlord include the flexibility to “split and fit”, the possibility of earning a higher rental return, and the ability to fill vacant space.
