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Sydney and Melbourne Office Space in Demand Due to Restricted Supply: Colliers

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A hold on supply coupled with consistently strong demand is pushing rental growth in Sydney and Melbourne.

Other CBD markets, while not seeing the same growth rates, are experiencing improving conditions, according to Colliers International’s latest CBD Office research and forecast report.

Population growth in New South Wales and Victoria was identified as a key catalyst in the market’s conditions, with migration figures well above their 10-year averages in both states.

Throughout 2016, 72,013 local and overseas migrants moved to New South Wales and 92,038 migrants moved to Victoria, which was 38 per cent and 45 per cent respectively above 10-year average migration levels in those states.

Colliers International National Director of Research Anneke Thompson said office supply for the next 12 months was even more ominous.

“We’re forecasting the Sydney CBD office market to contract by 50,000 sq m throughout the year to July 2018, and the Melbourne CBD to reduce by circa 5,000 sq m, based on the supply that we know will enter the market and forecast withdrawals,” she said.

“This is at a time when Deloittes Access Economics expects an additional 5,600 office-based workers to require space in the Sydney CBD, and 6,121 workers in the Melbourne CBD.

“Based on a conservative estimate of 11 square metres per office employee, this is about 60,000 square metres of demand in Sydney and about 65,000 square metres of demand in Melbourne.

"It’s only natural that face rental growth will increase," she said.

In Sydney, demand is still exceeding supply and vacancy is sitting at 5.9 per cent, down from 6.2 per cent in January. As a result, face rental growth is still trending above historical averages, with premium-grade net face rents exceeding $1,000 per square metre.

In the next three years to June 2020, average prime-grade net face rental growth is expected to increase by 8.2 per cent year on year, while incentives are expected to reach their lowest by December 2018, as the lack of new supply and ongoing withdrawals place downward pressure on vacancy.

In Melbourne, a stronger supply pipeline is catering to the pent-up demand, with the CBD experiencing the strongest net absorption across the nation at 128,389 square metres in the past 12 months, and net supply of 109,640 square metres for the same period. This has resulted in vacancy decreasing from 7.1 per cent in July 2016 to currently sit at 6.5 per cent.

In Brisbane, green shoots of leasing recovery are appearing across the CBD, with a solid level of premium and A-grade office deals completed throughout the first half of 2017. In line with this comeback, the vacancy rate is forecast to decline to 13-14 per cent by January 2019.

Vacancy is starting to fall in Adelaide, with the market recording its highest net absorption figures since January 2014. Net absorption in the six months to July 2018 was 4,624 square metres, while the annual figure was 6,016 square metres. This has seen vacancy fall ever so slightly to 16.1 per cent, down from 16.2 per cent in January 2017.

This small decline in vacancy can be partially attributed to the remainder of the recently refurbished 1 King William Street being added back into supply.

Stability is emerging in Perth’s office leasing market, with vacancy falling to 21.1 per cent. Net absorption is being driven by tenants’ flight to quality and new investment spend into increasing Western Australia’s output capacity of iron ore.

 

Image: 200 George Street, Sydney

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Article originally posted at: https://theurbandeveloper.com/articles/restricted-supply-sydney-melbourne-office-space-demand