The recently published January 2011 Office Market Report was accompanied by a media release headed “New research shows subdued recovery for Australia’s office market underway”. The Property Council of Australia’s CEO Peter Verwer went on to say “Demand has returned to Australia’s office market as business sentiment has recovered.....over the six months to January 2011, the lift in demand for office space was strong enough to produce the first vacancy decrease in the Australian office market for three years” Australia’s office vacancy over the six months to January 2011 fell from 10% to 9.5%.
The property cycles always lag somewhat behind the economic cycle, being slower to respond so the fall in vacancy seen now is encouraging. Encouraging in that if the property market is picking up it means the economy is performing well and we should all benefit from the consequences. On the other hand it does mean that we will see an increase in occupancy costs filter through as the supply side contracts and incentives diminish.
The performance of the respective markets as reported in the Office Market Report vary across the country reflecting the tail end of GFC and other more specific local economic factors. Looking at the four major CBD’s centres we see the following trends:-
Vacancy rates fell over the six months from 8.5% in July 2010 to 8.2% in January 2011. Demand is reported to have returned to pre GFC levels. In the premium end of the market demand was particularly strong with vacancy reducing from 4.8 to 3.1%. Of the 186,555 sqm of office stock entering the market in 2011 58% is pre-committed and concerns have been expressed about the development pipeline being able to cater for future demand.
Sydney still has a bountiful supply of B grade office space available to lease leaving tenants with a large choice and very attractive incentive being offered,
Vacancy fell from 11.2 to 9.4% over the six month period resulting from strong demand over triple the city’s 20 year average fuelled in particular by the resources sector. Growth in the mining and LNG are expected to see strong demand for space over the coming year. The recent floods are only likely to have a minor and temporary affect on the fringe office sector.
Perth experienced a fall in vacancy from 9.9% to 9.5% despite an additional supply of 30,115 sqm over the past six months. The Office Market Report shows Perth will receive new supply of office space over the next two years with 68,000 sqm and 88,000 sqm becoming available in 2011 and 2012 respectively. No major office projects are planned beyond the completion of the current projects and some concerns have been expressed over the potential for shortages occurring in the long term.
Of all the capital cities Melbourne is experiencing the lowest overall office vacancy falling from 6.5 to 6.3% over the six months to January 2011. A total of 40,149 and 100,374 of new stock is due to enter the market in 2011 and 2012 respectively of which 50% is pre-committed.
Melbourne has seen strong demand and unless there is a significant wave of new development will witness major issues in the foreseeable future. This is particularly the case for companies seeking to secure new environmentally rated large contiguous floor plates.
In normal economic cycles when office vacancy dips below 6 or 7% this will normally trigger a spate of new development to address any future supply shortages. Unfortunately with the drought of available capital and financial institutions caution towards lending, little new development is likely to happen until there is a significant change in market sentiment.
Looking briefly at the other capital centres Hobart (4.6%) and Adelaide (7.3%) were the only sectors to see a slight increase in vacancy with Darwin and Canberra rates at 7.2% and 13.4%.
If you are looking for a deal then there will be a number of owners who will be more than pleased to hear from you in Chatswood and on the Gold Coast where some of the highest vacancy rates have been recorded of 18 and 24% respectively. Overall general sentiment seems to be improving. However with vacancy rates still being on the high side developers and owners are continuing to have to offer attractive rental and incentive packages to tenants to secure long term lease commitments.
Chris Goodwin is the Principal of Goodwin Property Advisory whom specialise in the provision of independent real estate advice to tenants and occupiers of commercial and industrial premises.