Convergence trend continues to unfold as major CBD markets record vacancy falls
Convergence trend continues to unfold as major CBD markets record vacancy falls
| 2 August 2018
A convergence trend has continued to gain momentum in Australia’s office sector, following vacancy rate falls across most of the country’s major CBD markets.
Commenting on the Property Council of Australia’s latest office market statistics, CBRE Associate Director, Research, Felice Spark said the decline in vacancy rates had accelerated across all major CBD markets except for Sydney (where the vacancy rate remained stable at 4.6%).
However, CBRE is forecasting a further decline to 3.6% by the end of 2018 – in line with the record low recorded by the PCA in January 1990.
“We expect the recent strong performance of the Sydney CBD to continue, with negative supply forecast for 2018 and 2020 driven by limited new construction and withdrawals,” Ms Spark said.
“Several secondary grade buildings are being withdrawn for refurbishment in 2020, which will put further pressure on an already tight market.”
Ms Spark also noted that the tight market had driven rental growth, with prime net effective rents increasing by 4.5% in the Sydney CBD in Q2 - the 4th highest quarterly growth rate in the past five years.
Melbourne and Brisbane also witnessed effective growth, although Ms Spark noted that prime rental growth had slowed in Melbourne.
However, Melbourne still ranked as the best performing market in the first six months of the year with 65,392sqm of positive absorption, which led to vacancy tightening from 4.5% in January 2018 to just 3.6% by June.
Brisbane also recorded a significant reduction in vacancy - from 16.2% to 14.6% in the first half of the year - with positive demand of 21,739sqm. Prime grade net face rents grew by 1% in Q2 but average incentives remain high at 35%, Ms Spark noted.
CBRE is forecasting that 2018 will be characterised by continued constraints on net supply additions, particularly in Brisbane, Adelaide and Sydney. Melbourne will see the most supply added to its market with 88,500sqm of space, while Perth will see the new Woodside building completed, adding a further 48,500sqm.
National CBD net additions remain below the long-term average and this will contribute to the declining vacancy profile, which is expected to reach a cyclical national low of circa 8.2% by mid-2019.
In Melbourne, vacancy has been steadily declining for four years. Driving the decline in vacancy has been strong demand, driven by above trend growth in white collar employment, population growth and minimal supply additions. Over the next three years, supply in the Melbourne CBD will play catch-up, with a total of 520,000sqm due to be completed by 2020 – the largest boost to supply in over 20 years.
CITY BY CITY AGENT COMMENTARY
Sydney CBD – Mark Semple, Director, Office Leasing
With a continuation of constricted supply in 2018 through to 2019, a robust NSW economy and infrastructure boom, the CBD vacancy rate is set to reach an historic low by the end of 2018.
We are in unprecedented territory with respect to the low, long-term vacancy which is continuing to drive rentals. We have already witnessed 7.5% net effective rental growth in the prime grade market in the first half of 2018 and are forecasting 12.5% growth in total for the year ending December 2018.
Much of the stock supply forecast for 2019 and 2020 has high levels of pre-commitment and strong interest from the market.
Limited supply, historical low vacancy rates and healthy rent growth - these combined factors suggest there has never been a better time to be a landlord. However, these strong market fundamentals are also allowing landlords to deploy capital back into their assets with a view to not only future proofing them, but also improving the tenant customer experience.
The traditional landlord model has shifted from being a rent collector to a service provider, focused on brand, people and culture. Savvy landlords are now heavily focused on the tenant customer experience and are providing base building services more akin to a 5-star hotel, including concierge, flexible and third spaces, events, complimentary exercise and wellness classes, changerooms, bike racks and lockers.
Melbourne– Marc Mengoni, State Director, Office Leasing
Melbourne’s CBD is fast approaching its lowest vacancy ever recorded, with continued population growth, strong employment and a lack of new stock until mid-2019 driving the shift. PCA figures for Melbourne’s CBD will almost reach parity with July 2008 when the market experienced its tightest vacancy figure of 3.0%. Combined with the fact that no new stock will be completed until late 2019, Melbourne is set to experience a record low vacancy in 2019.
Demand continues to be strong and competition from major occupiers for the available vacant space will continue to drive strong rental growth and lead to a continued reduction in incentives.
Over 75% of the 550,000sqm of new development under construction is already committed and this will continue to rise toward the end of 2018 and throughout 2019. Of the further 250,000sqm of backfill created by the new supply, major landlords are already well ahead of the game in terms of repositioning these assets for the next generation of occupiers, adding highly sought after amenities including high spec end of trip facilities and collaborative third spaces in addition to increased retail offerings and aesthetic upgrades.
Brisbane – Chris Butters, State Director, Office Leasing
Brisbane vacancy levels have begun to decline as demand steadily improves off the back of broader economic growth and improved sentiment – reflective of both business and consumer conditions.
New entrants to the market via the rapid growth of the co-working sector will positively influence net absorption as major players such as WeWork, HUB Australia and Regus finalise leases and begin creating their shared workplaces.
As the ‘flight to quality’ trend continues to garner further momentum in the Brisbane CBD, occupiers searching for contiguous banks of prime office accommodation do not have the depth of options they have witnessed in recent years. CBRE forecasts that prime vacancy will reduce to sub 9% over the next six months as demand continues to focus on better quality assets.
There will be no net additions over the next 12 months in the Brisbane CBD leading the way for effective rental growth.
Gold Coast – Nick Selbie, Associate Director, Office Leasing
The Gold Coast office market continues to benefit from positive sentiment, with limited supply entering the market and steady demand resulting in a gradual decline in direct (as opposed to total) vacancy.
Total vacancy at 30 June will increase to 12%. This is on the back of 6,000sqm-8,000sqm entering the sub-lease market as a subscription television group reduces its Gold Coast footprint. Whilst this will significantly alter the vacancy rates of the Gold Coast it is unlikely that it will negatively impact the positive market sentiment currently being experienced due to its isolated nature. Excepting this large addition, the market would have entered its tenth consecutive year of positive absorption.
The A-grade market continues to be the strongest performing category, with vacancy continuing to decline sharply and rental growth of 5-10% being witnessed across this market. Specifically, GDI’s 50 Cavill Avenue in Surfers Paradise has reached 98% occupancy, increasing from 40% in 2016.
Planning of commercial developments is now in its early stages as speculative developers look to seize opportunities to capitalise on rising tenant demand. This development is warranted with several large requirements (1,000sqm plus) being received and limited availability of large contiguous floor space available. It is expected that much of this development will be concentrated in the northern Gold Coast corridor due to accessibility and public transport factors, population growth in this region and availability of development land at feasible prices to support development.
The Perth CBD leasing market continues to show signs of recovery, led by several significant enquiries for space above 4,000sqm, with the WA State Government and resources sector at the forefront.
Other organisations seeking space include WA Police for 18,000sqm, the Department of Public Prosecutors for 4,000sqm and Rio Tinto for between 4,000sqm and 10,000sqm. It is several years since the market has seen such a concentration of new large space requirements.
These tenants are the biggest occupiers of the Perth CBD, with mining and engineering occupying nearly 16% of the CBD, and the signs point to the leasing market recovering at a far greater pace than previously forecast.
Additionally, the 46,000sqm, 240 St Georges Terrace is now 70% leased, with the building having previously faced 100% vacancy at the end of 2018. Kings Square 1 tower has also recently had 23,000sqm leased after three years of being nearly completely vacant.
Sub-lease vacancy is now just 21,860sqm throughout the Perth CBD, which is lower than mid-2012, during boom market conditions. The likelihood is that we will see both face rent increases and a reduction in incentive levels in 2019.
Adelaide – Andrew Bahr, Director, Office Leasing
The Adelaide office market is showing positive signs of growth as defence, resources and health/IT industries experience exponential and sustainable growth.
The defence industry is lively, with several large contracts recently awarded. Strong enquiries have been received over the past few months, both directly and through related service companies, including BAE, Lockhead Martin and Raytheon with more anticipated.
The resources sector also re-emerged after a long period of inactivity, with BHP’s commitment to 10,000sqm of new office space directly related to mining being a confidence booster. The health sector has been a strong performer for some time and this is only expected to continue as the life science industry expands in SA, which has a flow-on effect to the IT industry.
Amid this positive outlook, vacancy is beginning to decline – to less than 4% in buildings constructed post 2006 following on from recent transactions within A-grade buildings. This will flow through the grades of space in the market over time as flight to quality continues to fill space from the best down. Those buildings that present well and have ticked all the boxes in terms of the modern amenity expected by tenants will be the first to see good space uptake.
Effective rents have been hit hard over the past three years with incentives reaching all-time highs, however we expect incentives in the A grade market will begin reducing by the end of 2018, flowing through to the secondary market in 2019 when landlords can expect some effective rental growth.
A further positive is the lack of any major supply for the next few years. GPO Exchange is the only new tower being constructed, due for completion in Q3 2019, and is largely pre-committed to the Attorney Generals Department and BHP. The back-fill space created at 45 Pirie Street is still leased to the State Government until 2022 and is not expected back to the market until then.
New developments by CBUS on Pirie Street and Walker Corp at Festival Plaza have been DA approved but are yet to achieve significant pre-commitment with a delivery date of late 2021/early 2022 anticipated.
Sydney North Shore – Stefan Perkowski, Director, Office Leasing
North Sydney continues to undergo an exciting period of change through three distinct pillars: local council initiatives, state government infrastructure spending and strong private development interest.
Through careful planning, the local council hopes to encourage the creation of a range of new public facilities to enable more attractive, sustainable and vibrant places for workers, businesses, residents and visitors. The draft Ward Street Masterplan is an example of one of these initiatives, which proposes to replace the Ward Street car park with a major new community facility and a 1450sqm public square. New planning controls are also proposed for several opportunity sites within the precinct, including the car park, thus encouraging continued development activity in North Sydney from the private sector.
The Sydney Metro will also bring accessibility and opportunity through improved connectivity of North Sydney to the wider Sydney basin and importantly direct connections back into the CBD.
A continued lack of existing A-grade options has meant that assets such as 101 Miller Street, 80 Pacific Highway and 141 Walker Street are now heading towards 100% occupancy. With this continued pressure on supply, we are predicting that by the end of 2018, North Sydney could see vacancy decline to a low of 4.5%.
Congruently, development sites such as 100 Mount Street and 1 Denison Street are starting to receive real traction in the market as A-grade supply is focused to remain tight throughout 2018.
Three groups have been shortlisted for the tender to build Victoria Cross Station in North Sydney and the building above the station – the first integrated station package to be shortlisted. The over station development will provide circa 50,000sqm of office accommodation and retail amenities in 2024 and is set to be the next critical piece of the puzzle driving the transformation of North Sydney.
North Sydney is in the middle of a once in a generation transformation – it will no longer be the poor cousin to the CBD rather as an extension of the CBD: the Northern Corridor.
Western Sydney – Stephen Panagiotopoulos Director, Office Leasing
Parramatta is gaining strong momentum, underpinned by huge population growth in the South West and North West and infrastructure spending, with both financial and government groups considering providing their employees with opportunities closer to home.
In the short term, we are seeing strong enquiry from whole floor tenants with a battle for the prime stock. Fitted options are still desired and with the growth of consultancy firms, we are seeing multiple groups negotiating on properties – resulting in excellent growth in effective rents.
There are limited options from now till late 2020 and we will continue to see Parramatta as having the lowest vacancy rate in the country.
With only one new development occurring in Liverpool, we are witnessing excellent enquiry from Government, project groups and consultants wanting to be in the heart of the south west growth precinct and the proposed Badgerys Airport. New developments such as the brand-new WSU facility in the core of Liverpool CBD, residential development and new DA’s being submitted, are signs of strong growth in the area.
Penrith is also showing positive signs of growth with both State and Federal government agencies looking at growing within the region.
Bankstown has made a big push over the past 18 months with a prized development known as the Flinders Centre. It’s a brand new, A grade development that has attracted multiple users from the local and suburban area seeking a building that ticks all the boxes including amenity, transport, parking, excellent floor plates and uninterrupted views with areas available from 150sqm – 6,500 sqm approx.
There are two or three excellent opportunities in the area that will be coming up over the next 12 months that provides a great opportunity for occupies that require a flight-to-quality and see the advantage of the excellent access and the proposed new Metro being developed.
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