Strong demand, robust leasing activity set to define office markets in 2018

Australian office markets are primed for another year of strong demand and robust leasing activity.

“The latest figures from the Property Council of Australia are representative of what we are seeing on the ground across major office markets,” Simon Hunt, Colliers International Managing Director of Office Leasing, said.

“Sydney and Melbourne’s CBD vacancy rates are on par with each other and this is certainly an accurate representation of the competitive tension that we are witnessing in these hotly contested markets.

“In the Sydney CBD, we saw a boost in face rents across all grades in the fourth quarter of 2017, with Premium grade experiencing the strongest growth. According to Colliers International research, the strong rental growth in the secondary market over the past few years in Sydney has resulted in tenants electing to relocate into the prime end of the market – particularly in the core of the CBD.

“ Heightened investment activity will encourage further yield compression and we expect this trend to continue in 2018. Incentives are expected to reach their floor by the end of 2018 as the market tightens."

Mr Hunt said a major talking point in the latest PCA figures, for many, would be level of demand in Melbourne.

“We will continue to see strong take-up of space in Melbourne in 2018, off the back of the robust population growth of 2.7% p.a. and job growth that remains on an upward trajectory,” Mr Hunt said.

“Limited new supply over the next 12 months will further push rental growth in the Melbourne CBD, where tenants seeking alternative space will see absorption levels elevate in the metro market, particularly in the fringe market in this phase."

Doug Henry, Colliers International Managing Director of Occupier Services, said as the leasing market in Sydney continued to tighten, particularly within the CBD, occupiers were expected to consider alternate city fringe locations, such as North Sydney and Parramatta.

“Nationally, we will continue to see an increase in sub-1,000sqm tenants attracted to newly fitted out suites offered by the landlord,” Mr Henry said. “Large occupiers, particularly in CBD locations, will be attracted to office buildings that provide access to shared facilities and flexible workspace options, for example third spaces, client event areas and training rooms."

Colliers International data found 80% of Sydney leases expiring in 2018 were for businesses occupying less than 1,000sqm; which equated to around 32% of the total area in the market coming up for expiry. In Melbourne, that figure was around 72% of leases representing around 25% of total space in the market.

“Historically, we know that around 73% of businesses looking for space under 1,000sqm are likely to require space within three months of beginning their search,” Mr Hunt said.

“With this increase we will also see the percentage of lease expiries under 1,000sqm slightly decrease, from 80% in 2018 to 69% in 2020. With this information we could estimate that the deals flowing through from this will see an uplift in transactions from larger businesses in the Sydney market over the next year or so.

“In 2017, we know that 85% of the deals transacted in the Sydney CBD were for businesses under 1,000sqm, which equated to 43% of the total area transacted. In Melbourne, 80% of the number of deals concluded last year were less than 1,000sqm, which equated for 26% of the total area transacted.

“These figures are a strong indicator that the market is already showing convincing signs of following a similar pattern in 2018, with sub-1,000sqm businesses driving a significant share of leasing activity and demand, by volume."

According to Colliers International’s latest Office Demand Index, office markets nationally recorded a 19% year-on-year increase in enquiry from 415,737sqm in Q4 2016 to 492,947sqm in Q4 2017, with increases were seen across all segments of the market. 

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