The first half of 2014 has seen strong demand for office space, particularly in Sydney, and increased business confidence in Australia’s major CBD markets.
According Colliers International’s latest Office Demand Index, businesses enquired for 687,008sq m of office space nationally over the June 2014 quarter – the highest ever levels of demand for office space nationally.
“This is the highest level of demand on record, with the next highest – 599,565sq m – recorded back in the March quarter of 2011,” Simon Hunt, Colliers International Managing Director of Office Leasing, said.
The Sydney CBD office market has been a standout performer to date in 2014, accounting for around 45 per cent of national CBD enquiry.
“Traditional Sydney CBD occupants – legal firms, accountants, finance and business services organisations – are being joined by new business sectors including fast-moving consumer goods (FMCG) companies, such as Unilever, and new technology companies such as Google, LinkedIn and Atlassian who are relocating from suburban hubs,” Mr Hunt said. “This trend is keeping Sydney’s office vacancy relatively steady.
“We are also starting to see a greater amount of secondary stock being taken out of the market and converted to other uses, predominantly residential and hotel. This has been happening in Melbourne for some time but it is also now starting to take place in Sydney as well, which is leading to a stablisation of secondary rents due to withdrawal of stock.”
A recent example was the purchase of the Sydney Water buildings at 115 Bathurst and 339 Pitt St in Sydney by Greenland Holdings Group, where 28,643sqm of office space is intended for conversion to residential.
The latest NAB Business Survey recorded an unexpected increase in business confidence, with firms apparently ‘shrugging off’ the deterioration in consumer confidence that followed the May’s Federal Budget.
According to the survey, firms believe that stronger activity is on the cards despite business conditions remaining below long-run average.
“These are positive indicators for increased activity within the office leasing market for the remainder of this year,” Mr Hunt said. “These signs of a rise in confidence amongst local businesses go hand-in-hand with the cautiously optimistic forecasts that we are seeing for the global economy.
“Growth in the world economy is expected to rise from just over 3 per cent in 2013 to 4 per cent in 2014 –the fastest rate of growth in three years – driven by the beginnings of a recovery in the US and Europe.
“Tenant demand and rental growth have rebounded strongly in major gateway cities such as London and the US, particularly New York, however they have come off far lower bases than Australian markets which weathered post-GFC conditions much better.”
Colliers International US research found the Manhattan office market in particular performed solidly in the second quarter of 2014, buoyed by robust leasing activity Downtown.
“New York City added 34,300 jobs in the first five months of 2014, putting it ahead of the pace of job growth in 2013, when 30,100 jobs were added through to May,” Mr Hunt said. “Logically, the office leasing market should mirror the broader economy.”
"Our colleagues on the East Coast are telling us they are beginning to see signs of cautious corporate expansion for the first time since 2007, with professional organisations and corporations now tentatively thinking about expansion.
“Economic growth and improving sentiment offshore will be positive for Australian tenants, particularly those with headquarters overseas. As confidence increases in the US and Europe, we will see the effects trickle through to our local markets – particularly eastern seaboard hubs such as Sydney and Melbourne, with their higher exposure to international markets.”
Simon Crouch, Colliers International National Director of Tenant Representation, said a growing number of tenants were now considering relocating as opposed to renewing their leases, which was the trend post-GFC.
“This allows them to reposition their business, often instigating a major technology upgrade and a more efficient and collaborative open plan fitout,” Mr Crouch said.
“The majority of our clients are seeking to use their space more effectively and efficiently. The trend is to reduce footprint through more efficient layout whilst providing a greater amount of shared facilities for all staff to benefit from.
“Improved accommodation has a positive impact on the attraction and retention of staff which is often a key driver for our clients.”