Australia
Strong economic conditions and office leasing fundamentals buoy CBD markets across Australia

Strong economic conditions and office leasing fundamentals buoy CBD markets across Australia

Australia’s CBD office markets have recorded a drop in vacancy rates throughout the second half of 2018, with Brisbane leading the way by falling 170 basis points, followed by Canberra falling 140 points.

The findings come in conjunction with the Property Council of Australia’s (PCA) release of its 2019 Office Market Report, with all CBD markets recording falls in their vacancy rates throughout the six months to December 2018.

Watch the video below for an overview of what the latest vacancy figures mean for office markets around Australia.


National

Commentary from Shrabastee Mallik, Director for Research & Consultancy

The drivers for each CBD market are vastly different, though a normalisation in economic conditions across sectors and states, paired with strong office market fundamentals, are buoying CBD office markets across the country.

We are at a point where we are seeing significant growth across a diverse range of industries, which is evident from gains in corporate profits in 2018.

This has organically translated to growing requirements for workers in these industries. 

In the September quarter, we saw the healthcare, mining, construction, and professional and technical services sectors driving total economic growth.

New South Wales

Commentary from Tom Mott, NSW State Director for Office Leasing

In the Sydney CBD, the vacancy rate fell 50 basis points in the latter half of 2018 to 4.1 percent, the lowest it has been since 2011, and one of the three lowest figures since the PCA started its Office Market Report series in 1990. There was a skew towards lessees from the property and business services, and finance and insurance industries seeking new office space.

Occupiers looking for office space greater than 3,000sq m with a start date in 2018 have been hard-pressed to find anything suitable.

There was also merger and acquisition activity among law firms, and centralisation from the suburbs to the CBD, and the co-working trend continued.

Apart from the co-working deals (such as WeWork for 3,800sq m at 64 York Street), staff attraction and retention were at the top of the agenda for why major office moves took place.

Despite the upcoming state and federal elections, which would typically suppress demand, we believe building owners will continue to benefit from the lack of supply. As a result, we will continue to see net effective rental growth and ongoing competition for space.

With the tight supply in 2019, many occupiers will look to refurbish their existing premises, which will see them upgrade their break-out areas and collaboration zones.

We’re seeing an ongoing focus on mental health and overall wellness, which is an evolving trend to encourage staff to engage with each other on a more personal level, and in turn retain them.

Building owners with vacant space would be well advised to create a customer-focused, innovative and warm end-to-end experience in their buildings to capture the tenants looking to move.

Key lease deals in 2018 included Allianz for 10,820sq m at 10 Carrington Street; WeWork for 3,800sq m at 64 York Street; Mills Oakley for 5,673sq m and Pfizer for 4,640sq m, both at 151 Clarence Street; and Norton Rose Fulbright for 9,527sq m at 60 Martin Place.

Victoria

Commentary from Mark Rasmussen, VIC State Director for Office Leasing

In Melbourne, the CBD office vacancy rate fell 40 basis points to 3.2 percent in the six-month period to December 2018, the lowest of all CBD markets nationally, which was largely in line with market expectations, given the limited amount of space available to lease. 

Savills research shows this phenomenon reflected in the leasing volumes, with just more than 250,000sq m (for space greater than 1,000sq m) leased in 2018, which was well below the numbers recorded in the past two years. 

The simple fact is that office space in the Melbourne CBD is limited. The vacancy rate in June 2018 was already at a record low, so the scope for further downward movement is restricted. Tellingly, of the total leasing volume that was recorded last year, nearly half was for pre-commitments, further highlighting the lack of space currently available in the CBD.

Melbourne’s CBD is experiencing a greater diversification in the tenant base, with government and education providers more prevalent than in Sydney, due to the lower rents.

Melbourne’s office market and economy had been the powerhouse of the nation in 2018, recently outpacing the rest of the eastern seaboard. 

The dramatic falls in office vacancy rates throughout the past two years are becoming more gradual, as Melbourne moves towards a vacancy trough at the end of 2019. 

We simply do not have the space to lease. The current vacancy rate is at an all-time low of circa 3.0 percent, with the early 2020s trough expected to sink to mid-2.0 percent, and A Grade office vacancy significantly lower again.

At the coalface of the leasing market, we feel the frenetic pace of the Melbourne economy will slow with the looming federal election, the expected change of government, the reduced availability of credit, and the geo-political challenges across the globe.

Despite these challenges, tenants with leases expiring in 2019 are faced with a lack of options and continued high rental growth, which has been close to 10 percent per annum these past two years.

Tenants with 2019 lease expiry dates and their landlords should ensure they seek advice to understand and keep up with this dynamic marketplace.

Despite the recent sharp increases to rental rates, the higher base would become the new normal, as Melbourne finally starts to catch up with other Australian capital city rents.

Key lease deals in 2018 included NAB for 65,000sq m at 405 Bourke Street; Energy Australia for 22,000sq m at 697 Collins Street; Cbus Super for 9,600sq m at 130 Lonsdale Street; and the Australian Financial Complaints Authority for 7,600sq m, also at 130 Lonsdale Street.

Queensland

Commentary from Daniel Boyes, Manager of Office Leasing

PCA data showed the Brisbane CBD’s office vacancy rate lead the national drop in office vacancy, falling 170 basis points in the latter half of 2018, to 13.0 percent, which exceeded market expectations. 

Recent leasing activity suggests there will be greater movement in the vacancy rate in the first half of 2019, with several large leasing deals currently underway. 

Leasing activity in the CBD is often restricted by the proximity of the city’s fringe office market, allowing occupiers to move easily between the two precincts, though similar rents and incentives are providing the impetus for occupiers to look for space in the more viable CBD.

Complementary development activity in the form of Queens Wharf has really brought the CBD to life, and the wellness movement that has taken off recently is also aiding occupier moves into the city.

Brisbane’s leasing enquiry has continued to strengthen on the back of the downward trend in vacancy. The CBD has seen several new additions with WeWork, The Hub and various other groups absorbing large portions of space. Demand for smaller fitted suites has also seen consistent growth despite a significant increase in supply.

We believe that the Brisbane CBD hosts a healthy mix of tenants and is not as skewed towards the mining industry as the media is suggesting. Throughout the past 12 months, we have actually seen several lessees from the finance and insurance industries capitalise on low rents and relatively high incentives to recentralise into the CBD.

That said, we will see continued growth and demand from coal miners, along with the state government, two sectors we have identified as major growth occupiers in 2019.

Key lease deals in 2018 included Suncorp for 39,600sq m at 80 Ann Street; Deloitte for 8,000sq m at 123 Eagle Street; the state government for 5,319sq m Capital Hill; and Sonic Healthcare for 2,138sq m at 545 Queen Street.

Western Australia

Commentary from Graham Postma, National Head of Office Leasing

In Perth, PCA data showed the CBD office vacancy rate falling 90 basis points to 18.5 percent in the six-month period to December 2018, with leasing activity showing an uplift, and recentralisation a recurring theme among occupiers. 

In 2018, we saw just under 70,000sq m (for space greater than 1,000sq m) of leasing volume recorded, which was up from the year prior.

We are likely to see leasing volumes continue to be supported by the recentralisation trend, as lessees look to capitalise on record low rents and relatively high incentives. 

Perth is similar to Brisbane, in that we are seeing the city come alive with complementary development activity, most notably in the form of Elizabeth Quay. Infrastructure activity is also pushing this story, with Perth City Link aiding connectivity to the CBD.

The significant decline in vacancy is a direct result of the key trends of 2018 – recentralisation to the CBD and the flight to quality.  

This is clearly evidenced by the divergence in direction of the premium and A Grade vacancy, both of which are declining, compared to Sydney levels in the case of premium stock, while lower-grade stock continues to increase.

Perth has long been known as the mining capital of Australia, with the mining resurgence underpinning the CBD leasing market. In 2018, almost half of the total leasing volume was to tenants from the mining and utilities industry.

Key lease deals included Wood Group for 9,198sq m at 240 St Georges Terrace; the Department of Human Services for a combined 13,037sq m across two deals at 556 Wellington Street and 226 Adelaide Terrace; Minter Ellison for 3,440sq m at 77 St Georges Terrace; and Macquarie Bank for 3,311sq m at 240 St Georges Terrace.

South Australia

Commentary from Adam Hartley, Director of Office Leasing

Adelaide’s CBD office market experienced a vacancy rate fall of 50 basis points to 14.2 percent in the latter half of 2018, with leasing volumes recording a significant increase on 2017, and more than 30,000sq m (for space greater than 1,000sq m) of leasing transactions recorded in Savills research.

The city is at a turning point, with prospects for growth notably greater this year. This contraction is likely to continue in response to office relocations in the first quarter of 2019.

Interestingly, the vacancy rate for prime-grade office space will contract the most, with the majority of office vacancy available in secondary-grade accommodation.

The contraction will swing the balance towards a lessor market, which in turn will reduce incentive rates in high B Grade and A Grade office buildings..

Recent record-breaking transactions showcased the desire of several major international companies to establish a footprint in Adelaide. One of these was Suncorp, which took up 4,660sq m of space and building signage rights at 1 King William Street, representing Adelaide’s largest net-lettable-area deal to date.

The entrance of global post-production effects company, Technicolor, into Adelaide at 178 North Terrace was another internationally successful outcome that reinforced South Australia’s position on the world map.  The Technicolor win for South Australia was the largest office accommodation tenant attracted to Adelaide, which will in turn employ up to 400 new staff.

Australian Capital Territory

Commentary from Pip Doogan, Director of Office Leasing

Canberra had the second-largest drop in its vacancy rate in 2018, falling 140 basis points to 11.0 percent between June and December, which was largely driven by a withdrawal of stock. 

That said, prime-grade vacancy in city-fringe precincts like Barton were already at record low levels, with limited options for tenants to move around.

We have seen demand shift from larger office spaces to smaller occupiers in the 250sq m to 500sq m market, making up the majority of the lease transactions across Canberra throughout the past six months.

Spec fit-outs are proving to be the favorable option for tenants who are considering a move.

Canberra hasn’t really moved throughout the past 12 months in regards to rents or incentives across all markets.

Private sectors are still floating around but the majority of the deals are being done in the sub-1,000sq m market.

Looking forward, we cannot see that it will shift in the next six months, especially with an election this year and the likelihood of a change in government.

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