Colliers International releases CBD Office H2 research and forecast report
A hold on supply coupled with consistently strong demand is pushing rental growth in Sydney and Melbourne, as other CBD markets, while not seeing the same growth rates, are experiencing improving conditions, according to Colliers International’s latest CBD Office research and forecast report.
Population growth in New South Wales and Victoria is identified as a key catalyst in the market’s “perfect storm” conditions, with migration figures well above their 10-year averages in both states fuelling strong white collar job creation – but the report reveals that office supply will be constrained during this time of unprecedented demand.
Throughout 2016, 72,013 local and overseas migrants moved to New South Wales and 92,038 migrants moved to Victoria, which is 38 per cent and 45 per cent respectively above 10-year average migration levels in those states.
Colliers International’s national director of Research, Anneke Thompson, said office supply for the next 12 months was “even more ominous”.
“We’re forecasting the Sydney CBD office market to contract by 50,000sqm throughout the year to July 2018, and the Melbourne CBD to reduce by circa 5,000sqm, based on the supply that we know will enter the market and forecast withdrawals,” she said.
“This is at a time when Deloittes Access Economics expects an additional 5,600 office-based workers to require space in the Sydney CBD, and 6,121 workers in the Melbourne CBD.
“Based on a conservative estimate of 11sqm per office employee, this is about 60,000sqm of demand in Sydney and about 65,000sqm of demand in Melbourne. In a climate of reducing availability in stock, it’s only natural that face rental growth will increase.”
In Sydney, demand is still exceeding supply and vacancy is sitting at 5.9 per cent, down from 6.2 per cent in January. As a result, face rental growth is still trending above historical averages, with premium-grade net face rents exceeding $1,000 per sqm.
In the next three years to June 2020, average prime-grade net face rental growth is expected to increase by 8.2 per cent year on year, while incentives are expected to reach their lowest by December 2018, as the lack of new supply and ongoing withdrawals place downward pressure on vacancy.
“Sydney will then enter a period of above-average net supply, as major projects such as 60 Martin Place, Quay Quarter Tower and Wynyard Place are delivered,” Colliers International’s managing director for Office Leasing, Simon Hunt, said.
“As Sydney CBD enters its next supply cycle, vacancy is expected to rise to 6.9 per cent by July 2022, just under the 10-year historical average of 7.2 per cent.”
In Melbourne, a stronger supply pipeline is catering to the pent-up demand, with the CBD experiencing the strongest net absorption across the nation at 128,389sqm in the past 12 months, and net supply of 109,640sqm for the same period. This has resulted in vacancy decreasing from 7.1 per cent in July 2016 to currently sit at 6.5 per cent.
“The Melbourne CBD office market continues to perform well for landlords,” Mr Hunt said.
“The strong demand is resulting in above-average face and effective rental growth, with prime effective rents climbing by their strongest rate since 2011, underpinned by strong face rental growth throughout the year.
“As incentives gradually decline, effective rents will continue to grow, with double-digit growth forecast across all grades for the next 12 months.”
In Brisbane, green shoots of leasing recovery are appearing across the CBD, with a solid level of premium and A-grade office deals completed throughout the first half of 2017. In line with this comeback, the vacancy rate is forecast to decline to 13-14 per cent by January 2019.
More positive news for the sector is illustrated by QSuper signing a heads of agreement with Shayher Group to negotiate a lease for its 300 George Street office building, which is due for completion mid-2019.
Vacancy is starting to fall in Adelaide, with the market recording its highest net absorption figures since January 2014. Net absorption in the six months to July 2018 was 4,624 sqm, while the annual figure was 6,016sqm. This has seen vacancy fall ever so slightly to 16.1 per cent, down from 16.2 per cent in January 2017.
This small decline in vacancy can be partially attributed to the remainder of the recently refurbished 1 King William Street being added back into supply.
Stability is emerging in Perth’s office leasing market, with vacancy falling to 21.1 per cent. Net absorption is being driven by tenants’ flight to quality and new investment spend into increasing Western Australia’s output capacity of iron ore.