Tenants expected to enter market early to snap up limited office space in major markets
Vacancy rates across major Australian office markets are expected to continue their downward trend in the year ahead on the back of outstanding white collar growth, increased tenant demand and limited supply.
The Property Council of Australia’s first Office Market Report for 2019 has found the overall Australian office vacancy rate has dropped to 8.5% from 9.1%. Likewise, vacancy across all major CBD markets also decreased for the second consecutive period.
“We forecast further decreases in vacancy Australia-wide in the six to 12 months ahead,” Simon Hunt, Colliers International Managing Director of Office Leasing, said. “These decreases may be less pronounced in the already tight markets of Sydney and Melbourne – more of a stabilisation – elsewhere in Brisbane, Adelaide, Canberra and Perth we predict a continued steady decline.
“In Sydney, where vacancy is also extremely low by historic standards, and has been for some time, we are finding that rather commit to new space in the current cycle, occupiers are reducing floor space ratios and squeezing more staff into existing space.
“We expect that in 2020, more options should open up for tenants in Sydney, and that net absorption rates will start to improve, although the market will continue to be impacted by withdrawals of vacated space for refurbishment.
“The continued decline in vacancy is likely to begin to have an impact on rents going forward, particularly in Melbourne where limited space and strong pre-commitment rates on new developments are contributing to very solid rental growth."
In its latest Office Demand Index, Colliers International recorded a 7% increase in the number of enquiries for office space nationally in Q4 2018 alone. Year-on-year demand for office space had increased by 12% nationally from 2017 to 2018, by volume of enquiry, and by 10% by area (sqm).
“From 2017 to 2018, Sydney CBD saw a 43% increase in enquiries in terms of sqm and 74% in terms of number year on year, while Melbourne CBD saw a 35% increase in enquiries in terms of sqm and 21% in terms of number.
“We are seeing the majority of the demand for these two locations in particular coming from businesses looking for more than 3,000sqm of space. Sydney CBD saw an additional 100,700sqm of demand in 2018 for space over 3,000sqm compared to 2017, while Melbourne recorded an additional 163,550sqm.
“This is a similar trend to that which we have seen in previous cycles, whereby large tenants are entering the market earlier than usual and will precommit to new and existing buildings so they don’t miss out on great opportunities in new developments due to the upcoming supply cycle in both locations."
Anneke Thompson, Colliers International National Director of Research, said an increase in white collar growth, which was fuelling strong leasing markets across the country, was being driven by professional, scientific and finance and insurance services.
“According to the ABS’ most recent job vacancy data, there is currently a record number of jobs available in NSW – almost 90,000 – as at November 2018,” Ms Thompson said. “And there are now more jobs available in the finance and insurance sector nationally than ever, since these ABS records begain in 2009."
According to Colliers’ Office Demand Index, the business services sector was the most dominant in 2018, responsible for more than 360 enquiries for an average of 567sqm of office space per business.
“Perhaps the most interesting sector to watch this year will be the Finance industry,” Mr Hunt said. “In 2018, we started to see an increase in requirements off the back of the Royal Commission. With increased regulations in addition to banks considering split operations, we expect the Finance Industry will record a strong number of transactions over 2019.
“Our Office Demand Index saw the Finance, IT and Property Services industries record over 200 enquiries last year, looking for space, on average, around 740sqm, and we expect this will continue to grow in the year ahead."
Simon Crouch, Colliers International Head of Tenant Advisory, expected to see continued growth across the technology and pharmaceuticals sector where companies were opting to base themselves close to CBD areas and take on additional space as they continued to expand.
“Significant merger and acquisitions will continue to encourage considerable consolidation activity across some of the major cities as corporates looked to make smarter decisions on the efficiency and utilisation of their office space as rents rise,” Mr Crouch said.
“As vacancy is expected to further decline throughout Sydney and Melbourne over the next 18 months, there will be limited options for large tenants looking to relocate, particularly tenants occupying above 5,000sqm and those requiring contiguous space. Larger tenants need to be considering their options and future accommodation strategies three years in advance of their lease expiries.
“Conversely, Perth remains at a high vacancy rate and will continue to favour tenants; and while Brisbane is also still very much a tenants market with adequate choice, we are beginning to see signs of vacancy declining in better quality assets within the CBD."
While unemployment was low, Mr Crouch said companies needed to remain competitive to attract and retain talent and this was one of the key reasons for CBD locations continuing to be desirable despite tenants encountering significant increases in rent.
“Tenants within CBD locations are, however, ensuring they use their space efficiently to avoid underutilisation and are looking for amenities such as flexible space options and meeting room facilities within the premises to reduce their footprint,” he said.