Outside of Perth, conditions in office markets in Australia are expected to remain subdued over the next five years amid restrained levels of economic activity and demand as well as the impact of significant addition of stock in some areas – including the Barangaroo development in Sydney.
In its latest national office forecast, real-estate services firm CBRE Australia says with the exception of Melbourne, where Docklands projects will add significantly to supply in 2013 and 2014, the supply of office space will remain constrained in most capital cities in the short term.
Further out, however, CBRE says that unless a ‘material’ shift in demand is observed, anticipated increases in supply from planned and under construction projects pose a significant risk to market balance in Sydney, Brisbane and Adelaide.
Furthermore, for a number of reasons, an increase in demand to keep up with the boost in supply is unlikely to materialise.
For one thing, white collar employment growth – a key driver of demand for office space – is likely to remain subdued over the next 12 months before commencing a modest recovery after that amid national economic growth at or just below trend and weaker conditions still in sectors unrelated to mining.
More fundamentally, however, CBRE says a number of structural factors mean that achieving historic rates of absorption will become increasingly difficult. Along with an increasing propensity of tenants to look for cost-saving opportunities through more efficient use of space, these trends include greater flexibility in working arrangements and the growing use of technology which allows workers to perform work from remote locations.
“Hence, even achieving historical average net absorption is extremely optimistic,” CBRE says in its report.
Perth strong, others less so
With an already low vacancy rate of 4.2 per cent according to the Property Council of Australia’s July figures, negligible supply is expected to come onto the market in the next two years. Combined with continued expectations of strong demand thanks to the huge pipeline of engineering work, that means downward pressure on vacancy rates in Perth will not abate anytime soon, and the WA capital is expected to remain the nation’s outstanding performer amongst major population centres.
Indeed, over the next five years, CBRE expects an average annualised rental growth rate in Perth of 7 per cent, more than double that of any other major capital city.
Darwin, which CBRE does not include in its report, is also expected to perform well thanks to demand associated with the Ichthys LNG project and other gas and infrastructure projects.
Outside of Perth and Darwin, however, CBRE says five-year projections remain subdued. While Sydney is expecting tight conditions in the short term, that will change once Barangaroo hits the market, and a significant boost in demand from the current trajectory will be required in order to backfill resulting CBD space.
In Melbourne, vacancies will rise over the next two years as a number of buildings to be completed at the Docklands will pull tenants away from the CBD. Demand also remains subdued amid the weak economy.
While the Queensland economy is benefiting from reasonable momentum, employment growth has been concentrated close to the heart of the resources boom, and has only had a moderate effect in Brisbane thus far, where new supply is expected to put some pressure on vacancy rates and thus constrain growth in rents to moderate levels.
In Adelaide, which until recently was expecting to see increased demand for space among resource companies amid the now mothballed Olympic Dam expansion project, vacancy rates will increase amid weak underlying demand and large blocks of supply coming on to the market.
Finally, in Canberra, softer demand from the public sector will result in ‘fairly muted’ rental growth relative to other markets in the forecast period.