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Office Markets Finding Balance as Supply Dries Up

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Vacancy rates in the Australian office market fell slightly in the first half of the year with supply of new stock coming to market continuing to slow, according to the Property Council of Australia's Office Market Report.

The Australian CBD office vacancy rate fell over the six months to July 2017 from 10.9% to 10.5%. It continues a four-year run in the 10% to 11% range. The total non-CBD vacancy rate decreased from 9.7% to 9.5% over the last six months due to withdrawals.

While national demand is positive, it is also less than the historic average. Net absorption was 60,075 sq m for the six months to July 2017 which is less than half the historic long-term average of 162,801 sq m.

“Positive tenant demand for office space has been the big driver of office markets around the country over the last six months, and this will continue with limited new supply on the horizon,” said Ken Morrison, Chief Executive of the Property Council of Australia. “We saw positive demand for office space in every CBD except Brisbane, and across a number of the non-CBD markets.

“While vacancy rates remain high in some centres, they are no longer facing significant new office supply coming on to the market.

“Almost three quarters of the new CBD office supply over the next two and a half years is coming in Sydney and Melbourne, the cities which are best placed to handle it. In aggregate terms, Australia’s CBDs will receive half the historic levels of new supply over the next two and a half years.

“We continue to see great divergence between the non-mining state office vacancy rates of Sydney CBD (5.9%) and Melbourne CBD (6.5%) and the capitals in the mining states Perth CBD (21.1%) and Brisbane CBD (15.7%).”
What the experts say:

National

Rob Dickins, Savills National Head of Office Leasing

“On a national level we are starting to see an improvement in the resource dominant states of Perth and Brisbane whilst the larger Eastern seaboard states continue to see strong demand, diminishing supply and a constrained development pipeline for the next 2-3 years.

“Dominant sectors in these active markets continue to be IT and Co working sectors. The smaller markets of Adelaide and Canberra continue on a rather stable demand / supply equation."
New South Wales

Alastair Dunlop, Savills Director of Office Leasing, Sydney

“Scarcity of occupier options is starting to become a factor in certain sectors across the market. In particular the sub 200 sq m suites market and larger contiguous options greater than 1,500 square metres.

“This is being compounded by the Tech sector which continues to produce non-expiry driven demand and a flow of new market entrants.

"Moving into a period of reduced supply for the next three years occupiers may be forced to make some compromises when resolving their accommodation needs."
Victoria

Mark Rasmussen, Savills State Director of Office Leasing, Victoria

“The Melbourne CBD is in for a wild ride with vacancies tipped to continue the downward trend, the supply pipeline is limited until 2020, demand continues to be strong.

"Tenants can expect higher rentals, lower incentives and lack of options, particularly in late 2018 and 2019.”
Queensland

Peter Dodd, Savills Director of Office Leasing, Queensland

“We are seeing a short term blip in vacancy. We expect this to drop substantially due to continued recentralisation, as evidenced by recent major commitments by Expedia, Allianz Global Assistance and Origin Energy.

"Owners of B Grade assets have seen a gap in the market and as such are repositioning their buildings to offer turnkey workspaces to small and medium sized businesses.”
South Australia

Adam Hartley, Savills Director of Office Leasing, Adelaide

“Vacancy rates have held firm over the past six months, with net absorption pushing into positive territory.

“Recent SA Government leases and the introduction of new companies to South Australia supporting the defence industry and mining have reduced the prime grade vacancy rate, broadening the gap between prime and secondary vacancy rates”.
Western Australia

Shelley Ritter, Savills Director of Office Leasing, Perth

“Vacancy rates in the Perth CBD and West Perth are declining due to positive demand and we are seeing strong leasing enquiry for prime office space.

“There is limited new supply in the pipeline but we are experiencing a two tiered office market, due to the flight to quality of tenants. Pricing is stabilising and incentives will reduce before we see any face rental growth.

“Looking forward, we expect to see continued migration of tenants from suburban and West Perth markets into the CBD."

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Article originally posted at: https://https://theurbandeveloper.com/articles/office-markets-finding-balance-supply-dries