Dealing on a day to day basis with office tenants and leasing agents, the tenant rep is a reliable barometer of the current status of the market. For those not intimately involved with the day to day vagaries of the office market it can be difficult to determine what is happening. One of the main reasons being, unlike the financial market, the property market is not as quick to respond to changes in economic circumstances. We do not see the same dramatic rise and fall in rental levels that can occur daily in the share market. The changes are more gradual.
So what do we surmise when interpreting the Property Council of Australia’s Office Market Report for the last half of 2011?
The Australian office market vacancy rate plummeted from 9% to 7.9% - its lowest in three years and the supply was less than 200,000 sqm (about one-third below the long term average). On a national basis the lack of stock and supply will automatically cause concern to the tenant market. Drilling down into this information the picture emerging is a little different. Australia’s two speed economy has had a great impact on the local office markets with demand for space in Melbourne and Sydney being soft whilst leasing activity in Perth and Brisbane remains strong.
Jones Lang LaSalle reported an increase by 7770 sqm in the amount of sub-lease space in Melbourne for the first three months of this year with a further rise expected with ANZ looking to sub-lease some 27,000 sqm at 55 Collins Street, AXA 10,000 sqm at 750 Collins Street. These figures will also be affected by Westpac and BHP’s moves to new Collins Street premises.
Last year in Perth and Brisbane the mining and resources related companies accounted for half the leases struck, with their expansion forecasted to require potentially over one million square metres of office space in the next ten years.
According to Colliers research all CBD office markets apart from Melbourne experienced rental growth in the first quarter of 2012.
The outlook for the four principal office centres can be summarises as follows:-
Overall office vacancy in Melbourne’s CBD stood at 5.3% as at January 2012. With slowing in white collar employment, reduced net take up, large amounts of backfill space being released onto the market and despite the lack of new construction, the outlook is for vacancy rates to increase over the next two years. Effective rents will be under pressure to reduce i.e. face rents will remain constant with incentives increasing.
Low tenant demand within the Sydney CBD commercial market and a weak NSW economy saw overall vacancy increase from 9.3% to 9.6% in the last half of 2011. Strong demand has been seen for well located A grade buildings according to Colliers with restricted choice for tenants seeking multiple floors or areas greater than 3000 sqm and no new supply in the pipeline for 2012.
In the last half of 2011 the office vacancy rate in Brisbane’s CBD fell from 7.4% to 6.2% with 10% rental growth resulting from declining vacancy and strong net absorption. The resources boom has been the main driver. However landlords are still nervous about increasing rents and are focused on retaining tenants.
Perth vacancy continues to plummet with strong rental growth of 19% per annum very much mirroring the previous boom and bust cycle. Affordability issues are of major concern to businesses not linked to the mining sector. Rents of over $900 per square metre have been achieved and agents forecast it is only a matter of time before rents reach $1000 per square metre. Current vacancy in the CBD stands at the lowest for all the centres at 3.3%.
One of the strongest characteristics across all market at present is decline in availability of quality fitted out space. Economic uncertainty, reducing incentives and credit restrictions have forced many organisations to focus on securing existing fitted out space to accommodate their expansion or alternatively stay put. This trend is likely to continue creating a challenge for fast growing undercapitalised businesses.
Chris Goodwin is the Principal of Goodwin Property Advisory who specialise in the provision of independent real estate advice to tenants and occupiers of commercial and industrial premises