Small-scale businesses fuel increased enquiry in Australian office market

Colliers International releases Q1 2017 Office Demand Index.

Office leasing transactions across major Australian markets are on the rise in 2017 despite low stock available nationally, with demand for all size segments increasing on prior year and prior quarter.

A 16 per cent increase in total office area and a 41 per cent increase in total enquiries was recorded between Q1 2016 and Q1 2017, according to Collier’s International’s latest Office Demand Index, highlighting the strongest start to the calendar year since 2009.

Pursuant of this, a 30 per cent increase in the number of deals and a 56 per cent increase in the area transacted was concluded this quarter, as compared to the first quarter of 2016, which is equivalent to 39 more deals and 63,000sqm more office space.

“Overall enquiry is up as the east-coast markets are displaying healthy leasing conditions,” managing director of Office Leasing, Simon Hunt, said. “White collar employment growth underpins this as business growth persists, especially by way of flexible working organisations.”

Demand for small-scale office space from the business services, health, IT and community services sectors is especially strong, particularly in New South Wales and Victoria, as the markets get tighter and refitted suites become the popular leasing option.

Head of Tenant Advisory for Occupier Services, Simon Crouch, said technology continued to drive this change, which supported the ongoing trend of businesses creating space efficiencies with new workplace models.

“The business services industry enquired for 17 per cent of the total area, largely as a result of the expansion of coworking, especially in the east-coast states,” he said. “For example, WeWork has tripled its floorplate in Sydney since entering the market just more than a year ago.

“Tenants are being forced to find new, more flexible accommodation. In some cases, these suite spaces attract higher rental growth than whole-floor deals.”

Sydney recorded a 33 per cent increase in demand between Q4 2016 and Q1 2017, while CBD yields compressed by 5.82 per cent, the lowest quarter-on-quarter compression since March last year.

“Despite a slow start for office sales in Q1, the health of the leasing market in Sydney continues to provide buyers with confidence as the two-speed economy continues,” Mr Hunt said. “While entry pricing is high, the current leasing market conditions will support purchases.

“Buoyed by positive rental outlooks and off the back of significant rental growth and declining vacancy, landlords have held onto core assets, particularly within the Sydney and Melbourne CBDs.”

Melbourne experienced a 13 per cent increase in demand from Q4 2016, with a 92 per cent increase in enquiry for space less than 1000sqm and a 28 per cent increase for space between 1000sqm and 2,999sqm.

A significant amount of office area greater than 3000sqm transacted as a result of a 65,000sqm transaction to a local government department.

“As market conditions continue to tighten in Melbourne, we are finding larger organisations approaching the market with longer lead times to secure space, which could in turn be a contributing factor to the increased enquiry level,” Mr Crouch said.

“Transactions are occurring quicker given the increased competition for space and falling vacancy, with businesses moving into quality A-grade accommodation to assist in keeping real estate costs down.”

The Brisbane office leasing market experienced a 123 per cent increase in demand in the 12 months to Q1 2017, recording almost 100,000sqm of enquiry in the past three months.

Demand for Adelaide’s office space increased by 285 per cent from Q4 2016, which received enquiry for 22,189sqm, to Q1 2017, which received enquiry for a substantial 85,320sqm. Large office investments in South Australia generated an uplift in capital value of 0.08 per cent and a greater yield compression than Sydney at seven basis points.

Perth’s office leasing market has also had a positive start to 2017, with all size segments recording an increase in the number of enquiries recorded, while Canberra experienced virtually no change in demand.

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