Growing demand for office space is driving down vacancy rates in CBDs across Australia, with Melbourne and Sydney at decade lows. What’s the story in your market?
The Property Council’s Australian Office Market Report compares around 5,000 office buildings in more than 25 office markets with historical data back to January 1990.
The latest survey reveals a 0.8 per cent fall in the national CBD office market vacancy rate in the six months to January 2019 – down to 8.3 per cent from 9.1 per cent the previous period. This is the lowest level of vacancy since January 2013.
Melbourne’s CBD is now Australia’s tightest office market, with the 3.2 per cent vacancy rate (down from 3.6 per cent) a 10-year low.
The strength of Melbourne’s office market is driven by strong demand, and reflects Victoria’s economic fundamentals, population growth, liveability and comparatively affordable rents.
The Property Council’s Victorian executive director Cressida Wall, however, is concerned about a “looming supply shortage”.
The Melbourne CBD is forecast to grow from 317,500 to 480,400 workers by 2036, requiring an additional 4.4 million sqm of commercial floorspace, Wall says.
Just two commercial developments have been approved against current C270 planning controls since their introduction over two years ago. “We welcome the government’s announcement that it will review the restrictive and inflexible C270 planning controls and call for this to occur as a matter of urgency,” Wall says.
While Sydney’s CBD vacancy fell by 0.5 per cent to 4.1 per cent, it is now in a “titanic battle” with Melbourne for “Australia’s largest and most in-demand office market”, says the Property Council’s NSW executive director Jane Fitzgerald.
There is more space in the pipeline for Sydney from 2019 onwards with more than 80,000 sqm entering the market in 2019 and 100,000 sqm in 2020.
Fitzgerald says the outlook is good. “The completion of new transport projects including the North-West Metro and the South West metro in the years to come will open up new office space and opportunities for investment, and there may be an increasing diversity in demand from sectors such as tech and pharmaceuticals.”
Hobart posted the third-lowest CBD vacancy at 5.9 per cent – up 0.1 per cent on the previous period. Tasmanian executive director Brian Wightman notes that the market has tightened significantly in the last three years due to tenant demand.
“The B, C and D grade vacancy rates have all decreased with the increase in A grade vacancy due to tenant relocations to outside market boundaries,” Wightman explains.
In the nation’s capital – Australia’s third largest office market – the overall vacancy rate fell from 12.4 per cent to 11 per cent in the six months to January.
With more than 50 per cent of the ACT office market tenanted by the federal government, absorption can often be “a little slower” in a federal election year, observes ACT executive director Adina Cirson.
“However there seems to be a continuation for the Commonwealth to seek efficiencies through its leasing strategy, leaning towards a reduction in occupational density targets, improved fitouts and seeking to attract incentives before locking in longer term leases, meaning the next 12 months will be busy.”
Brisbane has seen vacancy rates fall for the second consecutive period, down to 13.0 per cent in January 2019 from 14.7 per cent in July 2018.
According to Queensland executive director Chris Mountford, this result is a “product of positive tenant demand, combined with the withdrawal of half of the Brisbane Transit Centre making way for the Cross River Rail project”.
“Brisbane has recorded the largest drop in office vacancy compared to any other state capital. High tenant demand has seen 25,192 sqm absorbed over the past six months – a great indicator of positive activity in the economy,” Mountford adds.
Vacancy rates have also decreased on the Gold Coast, from 12 per cent to 11.6 per cent, over the six months to January 2019. In contrast, vacancy on the Sunshine Coast rose from 15 per cent in January 2018 to 21.8 per cent in January 2019. Mountford attributes this to new supply additions.
A drop from 14.7 to 14.2 per cent in the CBD is one reason to be optimistic, says, SA executive director Daniel Gannon.
“While Adelaide’s CBD has 203,000 sqm of office vacancy – the equivalent of 10 Adelaide Oval playing surfaces – this figure has decreased for the fourth consecutive period. Positive demand in the commercial office space is driving this result, with more tenants looking for high-quality office space, thus a decrease in prime vacancy.”
While there has been positive movement across the prime grade stock, vacancy rates across other segments remain in double-digit territory.
While vacancy in Darwin has dropped to 17.2 per cent, from 21.6 per cent six months ago, NT executive director Ruth Palmer says this is “simply a timing issue rather than any real movement in the market”.
Cavenagh House’s demolition withdrew three per cent of the city’s CBD stock, but the completion of the new Health building will create vacancies in existing buildings, Palmer explains.
“The Darwin CBD is the primary employment hub for the Top End and is in desperate need of additional employment and economic activity. We need to continue to focus more on improving amenities in the City,” she says.
Perth’s office market registered a strong start to the new year, with a 0.9 per cent drop in the vacancy rate to 18.5 per cent. This marks the first time the benchmark CBD vacancy rate has fallen below 19 per cent since July 2015.
“There’s no question the broader Perth office market has experienced a difficult few years,” says Property Council WA executive director Sandra Brewer.
“But we are now seeing a steady decline in the vacancy rate and we’re moving in to a market where new supply will be limited and economic indicators are positive.
“At the same time, our market has diversified – rather than pinning leasing activity and activations to any one sector, building owners are actively exploring new uses and tenants for their assets.” This includes student accommodation, cinemas, retail and “lifestyle hubs” that increase the vibrancy and activity of the city.
The top 10 best performing non-CBD markets were all in New South Wales and Victoria: Parramatta, East Melbourne, Macquarie Park, Crows Nest/St Leonards, Chatswood, St Kilda Road, North Sydney, Newcastle, Wollongong and Southbank.
Almost one million sqm of office space will be added to Australian CBD markets over the next three years, with half of this new space being supplied to the Melbourne market which will grow by more than 10 per cent of its current stock.
The Office Market Report follows hot on the heels of the latest ANZ/Property Council Survey,* released in January, which finds confidence in the Australian property industry has dropped to its lowest level in more than five years. While still in positive territory, this result emphasises the importance of good policy decisions in 2019 to sustain growth in Australia’s largest industry.
For more analysis and commentary by markets, visit the Property Council Data Room.
*Congratulations to David Dragicevic from Colliers International, winner of the ANZ/Property Council Survey competition, who takes home a $500 Apple voucher.