Australian office market to continue to diverge in 2016

Consumer, business confidence to flow through to office markets: Colliers International

Tenant appetite for Australian office space will continue to diverge between the high demand cities of Sydney and Melbourne and the country’s remaining major cities.

According to Simon Hunt, Colliers International Managing Director of Office Leasing, tenants in the IT and communications sector will continue to drive demand in the year ahead while business confidence encourages activity.

“Business and, to a lesser extent, consumer confidence is rebounding in Australia, particularly since Malcolm Turnbull has injected a more positive and economically progressive leadership style in his new position as Australian Prime Minister,” Mr Hunt said.

“Consumer confidence levels remain elevated and business confidence has now had a sustained increase over the past 12 months.

“This started to flow through to a number of markets at the beginning of 2015, with Sydney CBD office in particular showing a significant decline in vacancy over the year. This run is expected to continue to spread to other markets, with Melbourne CBD office in particular likely to experience strong demand conditions.

“Colliers International recorded an increase of 8% in the amount of office space leased nationally in 2015 compared to 2014."

The last NAB Monthly Business Survey suggested the apparent recovery in the non-mining economy has remained on track, with business conditions holding up at above average levels for the past nine months.

Colliers International’s latest Office Demand Index found tenant enquiry for office space in the Sydney CBD increased 24% in December 2015 compared to the previous quarter (September 2015). The biggest increase in demand was at the biggest end of the market, for space greater than 3,000sqm.

“With 52% more enquiry recorded in the 3,000sqm-plus sector of the market, we can see that more big businesses are actively enquiring for office space than small businesses in the Sydney CBD at present,” Mr Hunt said. “We expect this trend to continue early in 2016 as activity picks back up post-Christmas."

Nationally, there was a 29% decrease in demand for office space in the December 2015 quarter from the September 2015 quarter.

Mr Hunt said the continued dominance of the technology sector in major international markets across the United States and Europe would be mirrored in Australia in the year ahead.

“In the year ahead, the IT and Communications sector will continue to drive tenant demand, particularly in Sydney, where LinkedIn, Expedia and Twitter have either taken new space or expanded their footprint,” Mr Hunt said. “US-based WeWork, the newest player in the short-term flexible office provider market, is also believed to be close to signing their first Australian lease in the Sydney."

According to global Colliers International research, the diversification of tenants in New York’s Downtown district has helped drive the submarket, mitigating reliance on the financial sector. In Chicago, Google’s new converted storage facility in the Fulton Market submarket is helping more developers to lure tech firms to this alternative location, and shared office space companies are very active in all submarkets.

Developers in Los Angeles’ Downtown arts district are also increasingly refreshing older building stock to meet the needs of technology tenants, in the hope of creating a new tech hub. Co-working space firms have also been active across this market, from Pasadena to Downtown Los Angeles.

Submarkets in Boston are likewise becoming more diverse in tenant composition, with technology firms beginning to move to the Financial District. Technology growth continues to drive the Seattle market, with a growing number of Silicon Valley-based firms opening satellite offices in Seattle in order to tap into the local talent and reduced costs. Facebook, Google, Apple, Oracle, LinkedIn and Salesforce are just a sampling of companies expanding to Seattle.

According to Colliers International research, demand for office space in London and key European markets is also being driven by the technology sector.

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