Upper-grade offices are expected to lure tenants away from lower-grade stock, as the glut of space on the market across the Gold Coast forces competitive rents and incentives, new property research shows.

The latest Colliers International Gold Coast Office Market Indicators Property Research Report, compiled by commercial research analyst Isabelle Andrews, found while high-grade space had experienced increasing vacancy levels over the past six months and lower grades a decrease, the tide was about to turn.

Colliers International Gold Coast office leasing manager Edward Howard said secondary space was tipped to struggle to retain and attract new tenants, as first grade space was soaked up.

"Currently, A-grade space accounts for more than a third of all space sitting vacant, at 36.4 per cent of total vacant stock, up from 25.8 per cent in January," he said.

"Tenants will seize the opportunity to snap up bargains and, essentially, to lift their profile by relocating to buildings with strong street addresses and high quality fit-outs.

"Sustainability will also entice businesses who are looking to cut energy costs and operate from offices that bode well with current and future employees.

"In this market, state-of-the-art space is being offered for a fraction of the price that would have been paid 12 to 16 months ago and, in many cases, with good incentives thrown in too.

"As a result, we will see upper-grade space attracting tenants and, therefore, experiencing a decrease in vacancy, albeit slowly, while lower grade stock is likely to experience increasing vacancy rates."

Mr Howard said as companies downsized and consolidated, there was also an increasing level of sublease space being released to the market, which was popular with tenants looking to step straight into a fit-out office at a competitive rental rate and often on a short lease term.

Recent figures released by the Property Council of Australia showed the Gold Coast's office vacancy rate hit 20.1 per cent in July, with 83,429sqm of direct vacant space and a further 7,058sqm of space available for sublease.

It also found 14,830sqm of space was to come on-line in the second half of 2009, with 49 per cent pre-committed. About another 6,260sqm of office space is in the pipeline for 2010 and about 1,196sqm for 2011 and beyond.

Ms Andrews said the slow down in supply would help to stabilise the market in the medium term.

"A few factors have contributed to the vacancy rate in the city, which is at the highest level since 1995, including the significant supply of new space to come on-line recently and the decrease in demand caused by the current economic environment," she said.

"However, these conditions have also put the brakes on new development and, with a much reduced level of stock to come on-line in the next two years, the market will have the opportunity to soak up existing stock.

"The challenge going forward is not only to absorb the completed stock but to strike the equilibrium where supply and demand are consistent."

Ms Andrews said while sales activity was constrained, the majority of transactions in the last six months had been to private investors and superannuation funds swooping on the opportunities in the market to boost their portfolio.

"However, sales levels still remain relatively low, with a gap between vendor and purchaser price expectations remaining," she said.

"With limited activity it is difficult to properly pinpoint where yields are currently sitting, however, we believe prime office space has experienced a 100 to 170 basis point decompression since December 2007.

"A further softening of yields may occur, particularly for secondary stock."

Mr Howard said, in the current market, owners needed to look to improve management of tenant turnover and outgoings.

"Owners should look to negotiate with existing tenants, who would often prefer to stay put as relocating can be a costly exercise, in order to secure continued cash flow," he said.

"There are also good opportunities for buyers to secure quality premises, if they closely assess assets in terms of income growth potential, cash flow risk and future capital expenditure obligations."

For further information please contact:

Edward Howard
Colliers International Gold Coast office leasing manager
Tel: +61 7 5588 0200
Email: edward.howard@colliers.com

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