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Metro office occupier pool deepens, driving demand across major markets

Colliers International launches new Metro Office Research & Forecast Report

Metro office markets continue to experience strong demand conditions along the eastern seaboard as the pool of occupiers showing a preference for a metro location deepens.

According to a new report from Colliers International, all major metropolitan office precincts experienced an increase in net face rents over the past year.

The Metro Office Research & Forecast Report found the largest increase was in Parramatta, where rents grew 12.4% over the year to March 2019. 

Anneke Thompson, Colliers International National Director of Research, said the pool of occupiers indicating a preference to be based in a metro location spanned a range of sectors including creative industries, technology, property, health and education.  

“The rising popularity of metro office markets with occupiers, coupled with the downturn in the residential market, has encouraged developers into the market,” Ms Thompson said. “This has resulted in prime grade incentives rising marginally in a number of metro markets in the past year, including in most Melbourne precincts, North Sydney and the Sydney City Fringe. 

“In Melbourne in particular, this is due to an upcoming boost to supply in both the CBD and City Fringe markets, which means there are both landlords and developers competing for upcoming tenant requirements. 

“North Sydney also has some new development space coming online in 2019, and while we expect that this will be mostly pre-committed, the market will have some backfill space to work through.” 

The report found subdued conditions in the residential market were also starting to have an impact on the metro office supply outlook. 

“This is most evident in the Sydney South and Melbourne City Fringe markets, where development sites previously earmarked for residential conversion are now being considered as potential office development sites,” Ms Thompson said. 

“In South Sydney, this means there is less tenant displacement activity than the previous few years, while in Melbourne City Fringe, the potential office supply pipeline continues to grow, particularly in projects proposed by smaller, local developers, who would have traditionally built residential space.”

While office supply would continue to grow in our metro office markets, it did not necessarily mean a more relaxed rental growth outlook. 

“Metro office markets can benefit from increased supply, as this supply improves the overall quality of office stock available and creates a critical mass that some occupiers need before they are willing to move to a precinct,” Simon Hunt, Colliers International Managing Director of Office Leasing, said.

“Looking at the supply pipeline in Parramatta and rental growth over the past few years is a good case in point. Parramatta retains the record as the tightest office market in Australia with a vacancy rate of 3.0 per cent as at January 2019. Rents in Parramatta are not suffering due to the upcoming supply pipeline, but are actually being boosted by the increase in tenant activity that this supply creates.”

“Prime office space remains at a severe shortage, with the A-Grade vacancy rate sitting at 0.8%. Following the completion of 25,000 sqm 105 Phillip Street, which has been leased to capacity by the Department of Education and Property NSW, there has been no new supply in the region over the past six months. 

“The lack of supply is expected to continue until at least until the end of 2020, when several new office developments will complete. Nevertheless, speculative supply will be limited as most of the upcoming developments have high levels of pre-commitment.  

“Net face rents for pre-committed deals are currently sitting between $570 and $620 per sqm. This is, however, still around 40-50% more affordable than similar office accommodation in the CBD and 20-30% more affordable than North Sydney.” 

Net face rents for existing A-Grade stock in Parramatta were currently between $510 and $580 per sqm with incentive levels running at 12-18%. B-Grade net face rents are standing at around $425 and $500 per sqm with incentives sitting at between 10-20%.

“Our view also is that over the longer term, the Sydney and Melbourne CBD markets will continue to be supply constrained, with vacancy well below long term averages even through their upcoming supply cycles,” Mr Hunt said.

“This means metro office markets will play a more critical role in absorbing office demand in these cities over the short and longer term.”

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