Demand to strengthen, but national office vacancy will rise in 2015
Demand to strengthen, but national office vacancy will rise in 2015
4 February 2015
5 February 2015 – Green
shoots are emerging in the national office leasing market, with CBRE
forecasting that net absorption will return to near long run averages by the
end of this year.
The latest Property Council of
Australia (PCA) vacancy statistics highlight 3,777sqm of net absorption in 2014
- a positive in an environment of persistently weak business conditions and
below average business investment.
Head of Research, Australia, Stephen McNabb said; “Directionally, this update
from the PCA is in line with our views on vacancy. The PCA data confirms an
improving trend in demand in the Sydney and Melbourne markets, consistent with
the shift in the mix of economic growth over the last year, which has favoured
NSW and Victoria over Western Australia and Queensland. Offsetting these
improved trends were continued declines in demand in Perth, Brisbane and
Mr McNabb noted that vacancy was expected to move higher across all capital
cities in the next 1-2 years, even with the improved demand evident in some markets,
as a result of new supply entering the market.
is forecasting that net additions to CBD office stock expected to peak this
year at 423,000sqm - 60% higher than the annual average over the past 15 years.
said, in Sydney and Melbourne, the increases in vacancy are expected to reach a
fairly modest peak of around 10% in contrast to the mid to high teens in
Brisbane and Perth,” Mr McNabb said.
CBRE Regional Director, Office
Services, Andrew Tracey said increased supply would be more of an issue in
markets such as Perth and Brisbane, where tenant demand had been impacted by
the resources slowdown.
However, Mr Tracey noted that tenant
demand and lease conversion levels had improved in most markets in the second
half of 2014, with the main driver for tenants being a continued search for
great efficiency - both spatially and financially.
“Tenants in Melbourne and Sydney now
understand that the deals on the table are as good as they will get and they
appear to have the confidence to start making decisions about the future rather
than simply sitting in their hands,” Mr Tracey said.
“We are seeing fewer short term
renewals and, significantly, more new long term commitments across the country,
particularly on the Eastern Seaboard. The exceptions to this are mining related
entities and government tenants, which are budget constrained.”
CBD - Jenine Cranston, Senior Director, Office Services
The Sydney market experienced a 21%
increase in enquiry volume in 2014 and, notably, a marked increase across all
size sectors. Encouragingly, the market also saw a healthy jump in the number
of deals transacted during 2014. Deal flow increased by close to 20%. This
affirms the more positive sentiment we saw in tenants across the market
consistently during the year; there was far more genuine engagement, something
we anticipate to continue in 2015.
Larger tenants are back, making
strategic, long-term decisions. Enquiry numbers for tenants over 3,000sqm
increased by an impressive 27% during 2014.
The competitive environment will
remain for some time but there has been a substantial increase in the number
and diversity of tenants over 3,000sqm back in the CBD market. Many are taking
the opportunity to come to the city from other lesser, fringe locations and
capitalising on quality stock. The Southern Sector again punched above its
weight, representing 23% of the city's deals in a sector which represents only
7% of the city's net lettable area. IT accounted for close to 20% of our enquiry
in 2014, again something we see continuing in 2015.
The effect of the large tranches of
space coming on line in 2016 will be tempered by the overall level activity
we're seeing in the market. To date 2015 has been very busy with strong demand
and a positive tempo.
North Shore - Peter Flint, NSW Head of Office Services
The star performer in metropolitan
Sydney has to be North Sydney, where the opportunity for tenants to upgrade
their office accommodation has led to strong relocation activity. The pressure on space has continued following
a redevelopment phase, where older stock continues to be reinvented into new
residential apartments. North Sydney and St Leonards/Crows Nest are seeing a
depleted supply of office space and a trend towards mixed-use developments. In
North Sydney, this means a dramatically changing occupancy profile - the amount
of new residential opportunities will see an influx of residents, resulting in
a more vibrant business area with many more food, beverage and shopping options
- Stephen Panagiotopoulos – Director, Commercial Sales and Leasing
Parramatta has yet again retained the
title as one of the most tightly held office markets in the country with the
PCA reporting a whole market vacancy rate of 6.3%. We expect the rate to
increase over the year due to a number of small to medium vacancies expected to
come to market in 2015. We also note major lease expiries coming up in the
medium term that we are closely monitoring, which has the potential to make a
significant impact on the market.
Net supply and net absorption were
negative for the year due to over 5,000sqm of large lower grade fringe stock
being withdrawn as result of residential development and building
refurbishments. We expect net supply and absorption to remain positive for 2015
as the market adjusts for residential demand.
- John Walklate, State Director, Office Services
The Brisbane CBD vacancy has risen
from 14.7% mid-year to 15.6%. There does remain a bias towards Prime stock,
however, with contiguous floor options amongst premium/Grade A+ stock remaining
in limited supply. It should be noted that secondary vacancy is substantially
higher and this is amplifying the overall vacancy figure. The second half of
the year was impacted by moves out of the CBD (Bank of Queensland and Ventyx)
as well as continued weakness in the resources sector.
CBRE recorded an increase in enquiry
levels over the latter half of 2014. Some occupiers are moving to take
advantage of what they see as attractive terms to lock in new leases and move
to higher quality premises. The total amount of sublease space available in the
market has tightened.
The outlook for 2015 suggests that
vacancy may ease slightly in the first half of the year before the next supply
cycle (starting with 180 Brisbane) impacts and vacancy spikes further. White collar employment growth is expected to
improve only gradually, although returning to positive territory, and is not
forecast to return to around its long term average until 2018, with net
absorption following the same trend. Prime rental growth (face) is expected to
be flat with secondary rentals remaining under pressure.
Near City vacancy edged higher to
12.8% (from 12.2% mid-year) - positive net absorption was generated (29,900sqm
annualised, reflecting tenant moves to new supply), although this was still
exceeded by the aggregate new supply, leading to the rise in vacancy. The Near
City outlook looks set to remain more in balance, with a modest supply outlook
for 2015 and 2016, dominated by pre-committed stock.
Coast - Nick Selbie, Associate Director, Office Services
While there has been a marginal
increase in vacancy, this was the result of a small number of major lease
expiries and follows a downward trend in recent years. A significant proportion
of the vacant stock on the Gold Coast is lower grade space that has been vacant
for some time and there remains limited availability of quality stock for users
seeking over 500sqm of space.
With limited supply additions over the
past couple of years and in the pipeline, we expect vacancy to decrease in the
next 12 months given the positive market conditions on the Gold Coast, which
are being underpinned by increased residential construction commitment and
rising tourism numbers.
This 67,263sqm of net absorption over
the past 12 months underlines the resilience of the Melbourne office market.
Despite almost 88,000sqm of new supply being delivered, the vacancy increase
has been quite modest particularly given some earlier forecasts that the
vacancy would be well into double figures.
There are two really important aspects
to consider. Firstly a consistent improvement in demand throughout 2014 which
early signs indicate will flow through to 2015. To complement a strong finish
to 2014, a number of medium to large tenants have agreed terms late in the year
and leases will be formalised shortly.
Secondly we are continuing to see
migration of tenants from the outer suburbs into the CBD. This should continue
with some large groups such as NEC, Guild Group & VECCI currently
considering CBD alternatives following moves by Australia Post, Viva Energy
(formerly Shell), and Jemena.
Further supply will enter the market
with the largest projects being 567 Collins Street and 570 Bourke Street. As a
result, we expect to see the vacancy rate increase again in the next 12 months,
however a continued demand environment should temper any rise. Refreshingly,
beyond the delivery of these projects, the market will get a breather for
approximately 18 months which will allow some consolidation and we anticipate
some positive absorption and a reduction in the vacancy rate.
The Docklands market is maturing with
the first generation of leases expiring, naturally impacting the statistics. A
number of medium sized tenants have pending expiries and current sub lease
opportunities point to a potential rationalisation amongst these. Alternatively, some of Docklands
“super-tenants” such as Medibank and NAB have grown within Docklands and taken
- Andrew Denny, Senior Director, Office Services
The Perth office market is continuing
to experience challenging conditions for building owners with high vacancy
rates and leasing incentives. Conversely the market is providing the best
conditions for tenants to relocate. This will remain the same throughout 2015.
The second half of 2015 will see
155,805sqm of new office space delivered to the market providing further
opportunities for tenants. This represents around 10% of the entire CBD,
although 62% of the new supply is leased.
The CBD will also see buildings
converted to other uses, examples being the two HBF buildings in Murray Street,
and the Synergy building at 226 Adelaide Terrace. Likely future use is
residential or accommodation. This will be an increasing trend.
The attractive terms available will
also attract tenants from suburban locations into the CBD. The lure will be
obtaining better quality buildings, a vibrant location and excellent public
transport. Examples of this trend in 2014 were the Navitas move from Applecross
to Brookfield Place Tower 1 leasing 1,692 sqm, and St Georges College from
Murdoch to 50 William Street leasing 2,500 sqm.
New tenant growth sectors will emerge
in 2015. The two examples above are both in education. Western Australia will
benefit from above average population growth numbers and the falling Australian
dollar. This will flow through to office demand.
- Michael Pfitzner, Director, Office Services
The Adelaide market, like the rest of
the country, has felt the pressure of subdued demand with a spike in vacancy
and incentive levels. However, we are of the view that with demand increasing
by over 25% from 2013 to 2014, the market is in a good position to respond quickly
and return to conditions more favourable to landlords.
Whilst the official vacancy rate at
13.8% is above the average, the real figure is much lower with numerous deals
concluded but not yet reflected in the figures. In addition, the majority of
this vacancy is secondary, poorer quality stock that in some circumstances is obsolete
or close to obsolete, but remains in the figures.
For secondary stock, landlords who
have commenced or are readying refurbishment projects will be ahead of the game
as those buildings without these undertakings will quickly fall into the
In next 12-18 months we expect to see
a reduction in incentive levels to circa 20% and a continued flight to quality by
tenants, resulting in a genuine uplift in face rents for Prime grade space.
The fringe market continues to bubble
along with good levels of activity, with local service providers being the main
driver for demand. Those fringe properties that have undergone refurbishments
and, in particular, addressed disabled access issues will continue to attract
tenants with rentals heading in the right direction.
– Helen Davies, Senior Director, Office Services
The second half of 2014 saw the net
addition of some 34,000sqm to the market leading to historical high vacancy
rates. This is no surprise given the
continued negativity surrounding the Public Sector and the constant internal
reconfigurations that are being undertaken as Government policies are
determined. Tenants are cautious and are fully aware that market conditions are
in their favour. There have been some decent deals to the private sector as
they take advantage of the flat market and improve their accommodation under enticing
terms and incentives. The market is shifting to quality accommodation and much
of the vacancy is in the lower secondary sector.
All Government departments are
reviewing their functions and are mandated to alleviate duplication and assess
if the functions may be better serviced by the private sector. In addition, the Government sector is being
pushed to share services within Government.
Further announcements are expected in the lead up to the May budget
around the merging and abolishment of some agencies. Inevitably there will be churn
activity and some positive flow of work to the private sector.
There are still some very large
enquiries in the market with decisions yet to be determined and there will be
activity as relocations and consolidations are decided. The rumoured impending
move by Finance to 1 Canberra Avenue supports Government policy to go green and
co-locate under one roof and benefit from associated space efficiencies. The
market is still awaiting the outcome of the Australian Border Force, Department
of Employment and ACT Government requirements, which will have an impact on the
2014 saw rises in incentive levels and
a flattening in rental rates. We do not
anticipate there will be any notable changes in incentives and rents in 2015,
however we believe that there will be an increase in activity, particularly in
the sought after quality accommodation which will lead to effective rental
growth in the A grade sector. The secondary sector vacancy will continue to
remain high during the coming months.
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