The boom in mining construction may be set to end but for the time being, strong demand from resource firms is powering a buoyant commercial property market in Australia despite significant volumes of supply coming on to the market.
Unfortunately, doubts cloud the near-term future of the market amid further expectations of large volumes of stock coming online over the next six months.
In its latest Office Market Report, the Property Council of Australia says that national office vacancy rate as at the end of July stood at 7.8 per cent, down marginally from the 7.9 per cent recorded in January and the lowest level on record since 2009.
That outcome was achieved despite significant values of stock coming on to the market. In the six months to July, a total of 404,857 square meters in office space was added to the national supply – well above historic six month average additions of 283, 986 square meters.
Not surprisingly, the result is being driven by the resources boom, with strong demand from overseas investors also playing a part.
Property Council of Australia chief executive Peter Verwer says the majority of new demand is coming from mining states, and that the nation’s office market is reflective of the broader two-speed nature of the economy.
“Australia’s multi-speed economy is driving office market fundamentals and shaping business confidence,” Verwer says. “While demand for office space is a buoyant 50 percent above the 20-year historical average, three quarters of net CBD absorption occurred in just Perth and Brisbane.”
“The hard economics of the resources boom is tellingly reflected in the relative performance of the nation’s office markets.”
Paradoxically, the best performing markets in terms of vacancy rates were Sydney, Canberra and Adelaide, cities with relatively small amounts of exposure to resource construction.
The decline in vacancies in these markets, however, reflects low supply levels in the cases of Sydney and Canberra and significant stock withdrawals in Adelaide. Indeed, the demand side of the equation is not overly strong in any of these markets.
By contrast, significant increases in stock have pushed up vacancy rates in Perth and Brisbane despite three years of above average demand in Brisbane and a net absorption level in Perth that was eight times higher than the city’s historic average.
Still, with a vacancy rate of just 4.2 per cent, Perth remains by far the nation’s tightest market.
Outside of capital cities, vacancies in Australia’s non-CBD markets eased back from 9.1 per cent in January to nine per cent at the end of last month.
Despite the strong result, clouds hang over the immediate future of the overall market amid an anticipated flood of new supply: over the next six months alone, almost a year’s worth of supply (471,722 square metres) is set to come on to the market throughout the nation.