CBD office tenants are changing: Colliers International

Increasing number of small tenants becoming more influential in Australia’s CBD office markets

An increase in small tenants is creating a changing landscape for building owners in CBD office markets across the country.

Colliers International’s latest CBD Office Research & Forecast Report has found an increasing number of smaller CBD tenants, driven largely by the growth of start-up and technology businesses, is resulting in a rise in demand for sub-500sqm office space.

“Owners are responding to these changes with the way that they lease space, develop buildings and plan for the future of their buildings,” Nerida Conisbee, Colliers International National Director of Research, said. “This is more a cyclical element given the long leases that large corporations typically take.

“However there are a number of structural issues also occurring. The first is that there has been significant growth in small-to-medium size enterprises looking for space.

“Average lease enquiry levels in the sub-1,000sqm category have grown as a percentage of total leases. In 2009, it amounted to 71% of total deals. This has grown consistently to currently account for 83%.

“The second is that we expect to see a wave of part-floor users enter the market over the next two years as a large number of these leases expire. The number is expected to be much higher than single floor and multi floor users over the next two years.

“We therefore expect that it will not just be new tenants entering the market that are after smaller tenancies, but also existing users looking for new space."

Simon Hunt, Colliers International Managing Director of Office Leasing, said buildings in the Sydney CBD such as Chifley Tower, MLC Centre, 45 Clarence Street, 6-10 O’Connell Street, 25 Bligh Street, 10 Spring Street, and 55 Clarence Street had demonstrated the benefits of speculative sub-division and fit-outs to cater to smaller tenants.

“Our latest Colliers International Demand Index found 55% of the companies wanting office space in Sydney alone this year have sought less than 500sqm, and this is being experienced across the board for premium, A and B Grade tenancies,” Mr Hunt said.

“In Melbourne, we first saw the trend of floors being speculatively split up in order to attract smaller tenants occurring in secondary grade buildings. Now, owners of Prime Grade buildings – including Investa at 120 Collins Street – have split vacant floors into smaller tenancies.

“Owners are recognising where the largest pool of potential tenants lie, and are being proactive in meeting the market. Investa have been successful in recently leasing a whole floor at 120 Collins Street in this manner, and are capitalising on this success by splitting a further floor in this prestigious Melbourne building."

Mr Hunt said tenants were continuing  to place a greater focus on location. In both the Sydney and Melbourne CBDs, he said there was a current centralisation of tenants taking place.

“In Sydney CBD, the differential is not as significant however we are seeing even greater movement of tenants from metro markets,” he said. “It is likely part of this is affordability driven given the high incentives being offered, however close proximity to public transport and retail amenity are also considered important.

“Historically, Melbourne CBD has not had much movement of tenants between CBD and metro locations with most tenants preferring to stay in either location. This has changed over the past 12 months, where the cost of being based in the Melbourne CBD has dropped significantly compared to metropolitan markets."

In 2010, to being based in Melbourne’s Inner East office precinct was approximately $47 per sqm cheaper when compared to the CBD. In 2015, this differential has dropped to just $9 per sqm.

“In other cities, the trend is not as pronounced, even though markets like Brisbane and Perth CBDs are very affordable at present. A greater dependence on car travel is considered to be a major factor here, as is the ability to purpose-build an office building in the metro markets, a factor which appears to be important in these markets."

Mr Hunt said there was currently strong demand from technology tenants for CBD space, with the type of space required differing from other dominant office user categories of finance and insurance, business services and Government.

“Similarly to these organisations, they are trying to find the right environment to attract staff,” he said. “For technology companies, this involves creating an environment that is more aligned to the creative people they are trying to attract.”

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