In a promising sign for commercial property developers and investors, vacancy rates in offices across Australia are set to remain low despite global economic uncertainty after more office space was withdrawn than added to Australia’s major CBD markets in the second half of last year, a new report says.
And though the short term outlook for rents outside Perth remains subdued, commercial landlords are set to benefit from solid growth in rental income over the longer term.
In its latest Australian CBD Office MarketView report, industry research firm CBRE Australia says that almost 150,000sqm of office space was withdrawn from the Australian market during the second half of last year, outstripping the 140,000sqm which was added during the same period.
As a result, the national office vacancy rate fell to 7.0% as of January – the third consecutive quarterly fall – whilst vacancy rates for prime CBD office real-estate (5.1%) fell to its lowest level for three years.
Luke Nixon, CBRE Senior Manager, Global Research and Consulting, says that this was the first time in seven years that office markets had experienced an overall contraction in space, which he says bodes well for reasonable investment returns in the longer term.
“As vacant A-grade space continues to be absorbed there is expected to be growing demand from tenants for an increased development pipeline of high quality space” Nixon says.
“If the CBD markets cannot accommodate this demand, fringe markets are likely to be the beneficiaries”.
Whilst CBRE expects short term rents to remain stable (see chart below), the forecaster is expecting low levels of supply to translate into solid growth over the longer term. Over the five year period spanning 2012-16, CBRE expects rents to grow at a compound annual average of 3.8% across all major CBD areas throughout Australia. Whilst Perth (4.5% per year) is expected to record the strongest growth, rental growth at or above the consumer price index is expected for all major CBD markets over that time period.
The latest update on the Australian office market comes on top of reports earlier this month that overall conditions in office markets around the world had eased although a lack of new stock coming onto the market in a post GFC environment meant that supply of available space remained tight.
Perth the Star Performer
Although rents are expected to rise across the board, resource rich states are expected to perform strongly going forward as strong mining activity leads to more demand for office space (see chart below).
Here’s what the CBRE report says about each major capital’s CBD:
- In Sydney, vacancy rates (now 9.6%) have peaked and are expected to fall, resulting in a steady rise in prime effective rents (net of absorption).
- Although vacancy rates in Melbourne (5.3%) have dropped as a result of a vacuum of new supply in 2011, a range of completions in the Docklands area throughout 2012 and 2013 should see vacancy rates fall, albeit with a steady increase in rents over the next five years.
- Likewise, in Brisbane, vacancy rates have tightened over the past year as new supply failed to keep up with absorption. Whilst completions of new buildings at One One One Eagle Street and 145 Ann Street are likely to keep vacancies (now 6.2%) and rents in check this year, vacancy rates are expected to continue to fall long term thanks to strong resource demand.
- In Perth, the darling of the market where today’s vacancy rate of 3.3% is less than one third of its level in mid-2010, rents are expected to continue to rise at an average annual growth rate of 4.5% as strong mining demand drives the vacancy rate down to below 2% in 2013.
- In Adelaide, vacancies are on the rise and are expected to peak at around 12% in 2013, up from 7.2% now. Prime rents, however are expected to rise from an average of just under $400 per square meter to almost $500 in 2016.
- In Canberra, rents are expected to remain stable over the next two years as supply and demand remain roughly in balance. After that, however, a pickup in demand is expected to see vacancy rates (now just above 8%) fall and rents start rising again.