The latest PCA figures confirm the recent overall downward vacancy trend nationally with key cities, Sydney and Melbourne, leading the charge.
As you were for national office as vacancy trends down in east
– Record low vacancy to drive record low yields –
PCA National Office Vacancy Rate 10.9% (down from 11.0% six months ago)
Savills National Head, Office Leasing, Rob Dickins, said the latest PCA figures confirmed the recent overall downward vacancy trend nationally with key cities, Sydney and Melbourne, leading the charge while Perth, constrained by its heavy reliance on the mining sector, continued to lag behind.
"Broadly speaking the national leasing market is in a healthy state. Sydney looks headed for a record low vacancy, Melbourne has sound demand underpinned by its tenancy diversity, Brisbane is now heading in the right direction, Perth is looking at 6 -12 months before it sees some positive net absorption, and Adelaide and Canberra markets remain fairly static.
"What we are going to see over the next 12 months to two years is, pretty much, more of the same in terms of current trends with the ledger leaning increasingly towards a landlords’ market in Sydney and Melbourne and potentially Brisbane and that is going to mean solid double digit growth in effective rentals and falling incentives.
"In Brisbane there has been surprisingly little change despite substantial new supply and this indicates positive net absorption, a pleasing outcome, while significant Defence spending in South Australia should ultimately drive increased demand for office space there as the State economy picks up," Mr Dickins said.
He said on the positive side for tenants the Perth market offered rental stability, attractive incentives and numerous options.
On the investment front Savills CEO Australia & New Zealand, Paul Craig, said lower yields were likely across Sydney, Melbourne, and to a lesser degree, Brisbane markets as investors factored future rental growth into their calculations.
"Nationally, A Grade yields have firmed continuously over the last six years from a high of more than 10 percent to less than 6 percent now, and in some cases closer to 5 percent, and there has been much discussion about how far they can or will go.
"It now seems absolutely clear that yields will tighten even further in anticipation of future rental growth, as lower vacancy rates across the Sydney and Melbourne markets drive rental increases and a significant fall in incentives.
"That said we are bound to see a major office deal below 5 percent in 2017 in the Sydney and/or Melbourne CBD office markets especially considering the breadth of aggressive capital which will continue to chase fewer and fewer opportunities," Mr Craig said.
Sydney headed for sub 3.5% vacancy
PCA Sydney Office Vacancy Rate 6.2% (up from 5.6% six months ago)
Sydney’s CBD office market is heading for record low vacancy as the rate, currently at its lowest level since 2008, continues to trend down according to Savills National Head Office Leasing, Rob Dickins.
He said the latest fall in the vacancy rate was expected on the back of strong net absorption, stock withdrawals and limited supply over the next two years and increasing demand particularly from the Finance & Technology sectors.
"We are seeing continued growth in demand, there is no new supply and the Metropolitan markets, especially Parramatta, are also tight, and that all means increasing competition for CBD space and that the downward vacancy trend must continue.
"The general consensus is that we are heading for a record sub 3.5 percent low over the next 18 to 24 months and that is a landlords’ market in no uncertain terms that will produce higher net effective rents and falling incentives.
"The biggest issue is that Sydney will have no new supply until late 2018 and that is certainly not good news for tenants who would be well advised to bring forward future requirements as the market is already offering constrained opportunities," Mr Dickins said.
Melbourne: Tighter vacancy will drive 10% rent rise
PCA Melbourne Office Vacancy Rate 6.4% (down from 7.0% six months ago)
Victorian Director Office Leasing, Savills Melbourne, Mark Rasmussen, said the firmer vacancy figure – the lowest since July 2012 - was a true reflection of an increasingly stronger market which would see incentives continue to decline and rents climb.
"The bottom line is that the market is travelling well. Net absorption is positive and has been above average for four quarters in a row and that means companies are taking more space which is a fairly good indicator that the economy is improving.
"There have been several factors at work including a pretty positive economy and the fact that the four pillars of the Melbourne office market – Telstra, State and Federal governments, NAB and ANZ – who make up approximately 20 percent of the market - expanded at the same time for the first time in several years," Mr Rasmussen said.
Mr Rasmussen said with supply unable to satisfy growing demand the vacancy rate had further to fall and that rents would rise 10 percent over 2017. "It won’t be until 2019/2020 that we see the next tranche of new supply coming onto the market and that means in the meantime the market can only continue to tighten," Mr Rasmussen said.
He said incentives, which had averaged around 30 percent over the last decade, would fall to the low to mid 20s over 2017/2018. At the same time rents would rise 4 to 5 percent per annum which, taken together with the fall in incentives, would mean an effective face rent rise of around 10 percent per annum.
New stock countered by strong tenant demand in Brisbane
PCA Brisbane Office Vacancy Rate 15.3% (down from 16.9% six months ago)
Despite the addition of new office stock to the Brisbane CBD in 2016, the latest vacancy rate has decreased from that of six months ago, which recent Savills research attributes to sustained positive levels of absorption, and tenant demand which only continues to strengthen.
With leasing activity markedly up over 2016, Savills Associate Director of Research and Consultancy for Queensland, Yvette Burton said “competitive rents and high incentives continue to attract businesses from both the fringe and suburban office markets to the Brisbane CBD.”
“Increased take up of space has occurred across all building grades, with A Grade recording the greatest leasing activity in 2016, with 108,558sq m or 59 percent of the total market. This is up 42 percent on the 12 months prior and up on the five year average of 64,414sq m.”
Premium grade stock, where a large proportion of sublease space became available in mid-2016, also recorded a strong take up of space, according to Savills recent Brisbane CBD Office Briefing.
“A total of 15,585sq m of premium grade office space, greater than 500sq m, was absorbed in the 12 months to December 2016, up on the previous year of 11,126sq m. Of the 15,585sq m leased, ‘sublease’ space accounted for 8,792sq m or 56 percent,” Ms Burton said.
Savills State Director for Office Leasing in Queensland, John McDonald said “the reduction in vacant office space has defied predictions, with an increase originally expected due to the injection of new stock to the Brisbane CBD office market in 2016.”
“The withdrawal of approximately 55,000sq m of former government buildings to make way for the Queens Wharf project, along with the addition of 75,000sq m of fully leased office space in 1 William Street - effectively adding 20,000sq m to net absorption - have been key contributors to the reduction in the city’s office vacancy rate.”
Additional supply to the market during 2017 will be minimal, Ms Burton said. “The only major office space to enter the market in 2017 will be the return of the refurbished 310 Ann Street. Beyond that, there remains only three other mooted projects totalling 100,000sq m, none of which are likely to come onto the market any sooner than late 2018, by which point the Brisbane leasing market is expected to have entered much healthier market conditions.”
Perth market stabilised, future supply limited
PCA Perth Office Vacancy Rate 22.5% (up from 21.8% six months ago)
Savills WA Managing Director Graham Postma said the Perth office market is showing signs of stability in both vacancy and rental rates and its future supply pipeline is now limited.
He said the latest vacancy rate does not yet fully reflect the flurry of leasing deals that were concluded late last year, on the back of a continued flight to quality and re-centralisation of business activity in the Perth CBD. The market has also benefitted from a strong turnaround in commodity prices over the last six months.
“On the surface, while the market appears to be marred by weak demand for office space, leasing activity has been above par as evidenced by a strong run of deals in the closing stages of 2016,” Mr Postma said.
“The Perth market has re-based its rental indicators and there is now a clear differential between the precincts as well as prime and secondary space. Almost 60 percent of the leasing deals at the end of the final quarter of 2016 were addresses on St Georges Terrace.”
“There has been a noticeable increase in demand from tenants who had previously put off relocation or expansion plans. This demand shift has fuelled rising leasing activity, especially for prime grade space, and reflects the ongoing flight to quality and re-centralisation trends.”
“The low supply cycle means that we are likely to see a plateau in the vacancy rate over the short-term, with a slight increase being factored in once Woodside’s new headquarters is completed in 2018,” Mr Postma said.
“Regardless of whether the official vacancy rate has peaked or is forecast to increase once Woodside’s new HQ is finished, the market has fully factored in the new supply with the future pipeline now very limited.”
Leasing enquiry on the rise in Adelaide
PCA Adelaide Office Vacancy Rate 16.2% (up from 15.4% six months ago)
Savills Director Office Leasing, in Adelaide, Adam Hartley, said the vacancy rate in the Adelaide market has been mainly driven by refurbished properties releasing vacant accommodation back into the market.
“We have found an increase in enquiry across the sub-500sq m tenants which has resulted in a large number of new leases for smaller tenancies,” Mr Hartley said.
"Enquiry in Q4/2016 was significantly up on the previous year and the recent continuation of enquiry that is transitioning into lease agreements has been the strongest in many years.”
Mr Hartley said Savills has a positive outlook for the Adelaide office market in 2017 due to the increase in tenant activity and working co-operatively with owners who are willing to work with tenants to find mutually beneficial outcomes.
“These active owners are attracting quality tenants and in some instances reducing the incentive value,” he said.