2018 was the year of convergence for Australia’s major office markets.
Commenting on the Property Council of Australia’s latest office vacancy statistics, CBRE Associate Director, Research, Felice Spark said that of the six major CBD office markets > 1 million sqm, the country’s resource-based centres of Brisbane, Perth and Adelaide recorded the greatest vacancy rate declines over the second half of the year – eclipsing the powerhouse markets of Sydney and Melbourne.
The resource-centric CBDs also recorded positive prime effective rental growth following negative growth in 2017.
Looking ahead, Ms Spark said the Perth CBD was shaping up to be one of the key markets to watch in 2019.
“CBRE Research’s bold prediction for 2019 is that the Perth CBD will see the highest level of prime net effective rental growth of all major CBD markets. As Sydney and Melbourne growth rates begin to wind back, we are forecasting that incentives will begin to decline in Perth as the outlook improves in the resource sector.”
Ms Spark noted that incentives in the Perth CBD had declined by 100bps in the last quarter of 2018, with a further contraction forecast in 2019.
“This in conjunction with some nominal rental growth, is expected to result in prime net effective rents growing by 8.8% this year in the Perth CBD,” Ms Spark said.
In relation to the Sydney CBD, Ms Spark said the city’s vacancy rate would be sustained at a lower level and reach an historical low of 3.6% by mid-year, underpinned by strong white collar employment growth, pent-up demand and further stock withdrawals.
“A near record low vacancy rate over 2019 will help to sustain continued rental growth and declining incentives in Sydney CBD, with CBRE Research forecasting prime net effective rental growth of 7.1% in 2019,” Ms Spark said.
In the Melbourne CBD, strong demand and white collar employment growth in the face of limited supply have driven vacancy downwards and Ms Spark said this was expected to continue through to mid-2019 when CBRE expected the vacancy rate to hit a cyclical low of 3.1%.
“At 135,290sqm, the Melbourne CBD recorded the highest level of absorption over 2018 of all the major CBD office markets. However, while the city has been in between supply cycles, just shy of 400,000sqm of space will be added to the market over 2019-2020, causing vacancy to rise to a forecast 6% by the end of 2019 before peaking at 9.3% by the end of 2022,” Ms Spark said.
Ms Spark noted that Brisbane surprised on the upside in 2018, with the city’s vacancy rate falling by the most of any major CBD office market in Australia in the second half of the year (down 1.6% from 14.6% in July 2018 to 13.0% as at December 2018.)
“The strong decline has surprised on the upside, however it’s important to note the two-tier nature of the market in Brisbane CBD, with secondary vacancy remaining stubbornly high,” Ms Spark said.
“However, an improving economic outlook for the resource markets across Australia will see the overall Brisbane vacancy rate continue to trend downwards and prime net effective rental growth of circa 4.1% is forecast for 2019.”
CITY BY CITY AGENT COMMENTARY
Sydney CBD – Paul Badenhorst, Regional Director, Office Leasing
There has been active enquiry in both the sub 500sqm and 1,000sqm+ markets at the start of this year, as the Sydney CBD vacancy approaches its tightest point in this current cycle. Following strong Prime effective rental growth of 14.6% in 2018, tenants are considering all accommodation options and it is expected that occupiers will now look at all available alternatives.
The quality of stock now being delivered in North Sydney, the CBD fringe and Paramatta has resulted in these markets being viewed as attractive options for some traditional CBD occupiers facing sharp rental increases on expiry of their current lease terms.
Effective rentals also increased by 13% in the city’s B-grade market in 2018. This may lead more price sensitive tenants and those with shorter term project requirements to look at alternatives to direct leases such as sublease and co-working options during 2019.
Melbourne – Marc Mengoni, State Director, Office Leasing
A new era is unfolding in the Melbourne office market, with 2019 set to deliver the lowest CBD office vacancy rate on record, whilst the city’s once plentiful supply of viable development sites remains at an all-time low.
Throughout 2018, major corporate occupiers vied for the remaining vacancy within the circa 535,000sqm of new office developments, with well over 80% of this supply now committed and no shortage of ongoing tenant demand. This demand will continue to drive growth in face rents, which in some cases increased by between 10-20% throughout 2018 combined with a decline in the incentives on offer.
We expect to see continued strong competition for the remaining office vacancies across Melbourne in 2019 Strong employment is driving the battle for talent resulting in major corporates upgrading their premises to offer better amenity and more modern, agile ways of working for staff. Historically, a low CBD vacancy has driven tenant demand out to fringe locations, but even inner areas like Richmond and South Yarra are incredibly tight for options due to long term demand from the Technology & IT sectors.
Brisbane – Chris Butters, State Director, Office Leasing
A renewed sense of optimism is apparent in Queensland on the back of improving consumer sentiment, stronger coal prices and significant public infrastructure projects either underway or due to commence in 2019.
The outlook for the next twelve months remains positive with limited new supply additions and a constrained level of contiguous prime vacancies available in the near term.
The demand side of the equation is steadily improving, with industries related to the resource sector, construction, engineering and tourism beginning to contemplate growth to cater for improved market conditions.
Additionally, the CBD market has been aided by the introduction of large co-working groups, who are jostling for major banks of quality office accommodation to open new facilities as demand continues to surface for flexible leasing structures.
Gold Coast – Nick Selbie, Director, Office Leasing
Throughout the course of 2019, vacancy is projected to decrease to around 10% across the market. This level generally stimulates new construction, which is evidenced by credible D & C options being either approved or in the planning phase.
A grade or flight to quality demand is strong and will support limited new supply, however capital for new projects is hard to source due to underlying vacancy in the stagnant C and D grade markets. Those projects with pre-commitments secured or those shortlisted for major and current market briefs will capitalise and will likely deliver additional NLA to those sites. The first to market will secure the tenants and research suggests that around 10,000sqm-15,000sqm could be added and absorbed in the next 12-18 months.
Outside the main commercial centres, we continue to see demand for smaller boutique assets, particularly along the southern Gold Coast from Broadbeach to the NSW border. This market is largely driven by lifestyle decisions and the gentrification of many beachside suburbs such as Mermaid Beach and Palm Beach.
The northern corridor continues to grow aggressively and suburbs such as Helensvale and Coomera are experiencing demand for commercial space adjacent to major housing development, transport infrastructure and retail amenity.
Rental rates across the markets have incrementally increased, aligning with decreasing vacancy, however a rental ceiling of $600psm gross exists. Incentive levels for fitted and sub 500sqm tenancies have contracted to approximately 12%-17%, while incentives for unfitted existing or new stock greater than 500sqm remains consistent at approximately 20%-27%.
Perth – Andrew Denny, Senior Director, Office Leasing
The Perth office market recovery is continuing, with the CBD vacancy having now fallen for four consecutive six month periods since the January 2017 peak.
The fall in vacancy is widespread, with Premium vacancy already below 5%, A grade vacancy continuing to fall, and a decline also occurring in B grade buildings for the first time this cycle. The flight to quality and the flight to the CBD, plus expanding existing tenants, continue to drive the leasing market.
In 2018, 240 St Georges Terrace (ex-Woodside), Kings Square 1 and The Quadrant all experienced remarkable turnarounds. At 240 St Georges Terrace, 98% of the building was available for lease at the start of the year, dropping to below 37% by year’s end. KS1 went from 86% availability to 22%, while availability in The Quadrant at 1 William Street dropped from 52% to 7% in the second half of last year. The represents a total reduction of available space in just these three buildings of over 52,000 sqm. This is a strong indicator of further substantial vacancy falls in 2019.
2018 was also the first year since 2012 that lease incentives did not increase. As a sign of future movements, in high grade buildings with large floor plates, incentives fell by around 10%.
Perth is back.
Adelaide – Andrew Bahr, Senior Director, Office Leasing
The return to a landlord’s market has begun, with the strong market activity evidenced in 2018 expected to continue into 2019.
The best quality CBD buildings built post 2006 are near full occupancy and we expect the vacancy rate to decrease even further by mid-year once completed deals are accounted for.
Incentives have fallen by around 5%-8% in the past six months, our expectation being that the market will continue to benefit from a lack of new supply and tenant demand, particularly from the Defence, Resources and Health sectors.
Canberra – Zoe Ferrari, State Director, Office Leasing
Construction is now well underway on the ACT’s two new A Grade office towers – Constitution Place and Civic Place – which will see a new standard set for quality office accommodation in the Canberra market and a new benchmark in terms of net effective rents. A ‘flight to quality’, like what has been witnessed over the past 12 – 18 months, is set to continue.
Tightening vacancy within prime grade buildings is predicted to place upward pressure on rents in the short to medium term, which will in turn place pressure on the landlords of existing B and C grade assets to refurbish and upgrade their buildings.
Refurbished, well located buildings with high-quality fitted out office space has driven demand over the past 12 months, particularly in the sub 500sqm size bracket. Efficient floor plates, access to green or ‘third’ spaces and proximity to high-quality amenity remain key drivers for tenant relocations. This is driving refurbishment programs such as the one underway at 73 Northbourne Avenue as landlords continue to leverage the strong leasing market fundamentals.
We expect vacancy rates to continue on a downward trend and vacancy spreads between prime and secondary grade stock will continue to grow.
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.
1 Denison Street, which is at the forefront of promoting this change, has witnessed unprecedented occupier interest throughout 2018 and this is set to continue throughout 2019. What’s interesting to note is that most new enquiry is coming from occupiers who traditionally would not have considered North Sydney as a location for their businesses. With the possibility of limited backfill coming to the market in 2019 and 2020, vacancy could fall below 5% by the end of 2019.
Through careful planning, the local council hopes to encourage businesses to call North Sydney home with the creation of a range of new public facilities to enable more attractive, sustainable and vibrant places for workers, businesses, residents and visitors. New planning controls are also proposed for several opportunity sites within the precinct, 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. 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 an extension of the CBD: the Northern Corridor.
Western Sydney – Stephen Panagiotopoulos, Director, Office Leasing
With the amount of construction due, the question is; “Does Parramatta have the depth of enquiry?”.
The simple answer is yes. Although Parramatta has 161,000 sqm currently under construction with Parramatta Square, 32 Smith and 6 Hassall (an additional 22% of the current market), circa 75% of this space has already been committed.
Yes, we will see a rise in vacancy over the next 18 – 24 months but we strongly believe this is a positive as it will allow growth and the vacancy will be absorbed very quickly.
Based on existing enquiry and our current market knowledge, we estimate there is close to 236,000sqm of live activity and tenants who will have a requirement for Parramatta office space. As such, those who act quickly have an excellent choice of options, however once two or three new commitments are announced, the market will revert to increased rentals and a reduction in incentives for prime grade stock.
This will see the balance of the future vacancy being absorbed, with strong competition and future developments such as PS 6 and 8, 50 Macquarie and 140 George coming out of the ground quicker than anticipated.
The challenge in 2019 will be the limited opportunities for companies looking to relocate to Parramatta.
The popularity of carparking has also continued to rise, with most tenants exhausting their allocations, and we expect traditional rates of $350 per month to increase by as much as 15% during 2019.