Unprecedented effective rental growth in Sydney, Melbourne metro office markets

Colliers International releases H1 Metro Office Research and Forecast Report

Effective rents for Sydney and Melbourne metro office space are growing at an unprecedented rate, as fringe office markets continue to skyrocket in popularity, according to Colliers International’s latest metro office research and forecast report.

Sydney’s CBD fringe was the fastest growing market in the country, with effective rents growing by 30.7 per cent in the year to March 2017, while Melbourne’s city fringe grew by 22.7 per cent in the same period.

Colliers International’s national director for research, Anneke Thompson, said the growth was evident in the two major cities when compared to the other capital cities, as well as in inner-metro markets when compared to their outer-metro counterparts.

“For some years now, the CBD office markets of Sydney and Melbourne have been diverging from the rest of country, creating an unprecedented effective rental growth story in both markets,” she said.

“Both of these precincts are attracting creative industries and tech firms, which need a central location to attract younger Gen Y staff. They seem to be steering clear of CBD space that doesn’t offer them the aesthetic fitout options they require, such as exposed ceilings and polished concrete floors.”

In the 12 months to April 2017, 362 deals were concluded for 248,738 square metres of metro office space across Australia. 3,500sqm for 2.5 levels at 101 Miller Street, North Sydney, on behalf of Mirvac and TH Real Estate was one of the city’s key metro office leases, while 4,664.2sqm at 321 Ferntree Gully Road, Mount Waverley, on behalf of DEXUS, was significant for metro Melbourne.

However, Colliers International’s managing director for office leasing, Simon Hunt, said both the Sydney and Melbourne city-fringe markets had seen significant stock withdrawn from the market during the past few years, as residential developments had proven to offer higher return for developers.

“The rents now on offer in these city-fringe markets mean that owners are more encouraged to retain buildings, which had previously been earmarked for residential conversion, for office use,” he said.

“Sydney is seeing $650 per sqm in average net face rents, while Melbourne is seeing $400 per sqm.”

According to the report, Parramatta continues to offer some of the lowest incentives in Australia, at an average of 15 per cent for A-grade office space. Office space in this grade remains at full occupancy.

“The challenge for landlords is to find the space to get deals done in the current supply climate,” Mr Hunt said.

Ms Thompson said some of the strongest rental growth in the country had occurred in markets where vacancy rates had increased.

“This is an unusual paradox of metro office markets, where the smaller nature of the markets means that face rents and incentives factors in future supply constraints to a far greater extent than CBD markets,” she said.

“For example, at 27.5 per cent, St Leonards in Sydney’s lower North Shore recorded the second largest effective rental growth rate of any metro market in the country in the year to March 2017, despite the vacancy rate in that market increasing from 8.5 per cent to 10.5 per cent in the same period.”

The Brisbane fringe markets saw healthy rental growth levels, with effective rents growing by double figure percentages in Milton, Toowong and Spring Hill. Metro markets in Adelaide and Perth remain challenged, as subdued tenant demand impacts South and Western Australia. 3,962sqm at 515 St Pauls Terrace, Fortitude Valley, on behalf of ISPT, was a key metro office lease for Brisbane’s market, while 3,000sqm for 1284 South Road, Tonsley, on behalf of Renewal SA, was significant for metro Adelaide.

Ms Thompson said the Sydney and Melbourne fringe and inner markets should continue to see significant tenant activity, as CBD supply constraints and appetite for unusual or creative office space strengthened.

“The question is, will landlords and developers take the plunge and respond to this pent-up demand?”
she asked.

“Already in the Melbourne fringe, there are almost 200,000sqm of office space approved or planned, a substantial change from previous years when residential development dominated. Infrastructure projects will also impact tenant movements in the medium to longer term, further boosting these sought-after markets.”

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