Major markets see further decrease in office vacancy: Colliers International

Demand for office space in Australia’s key CBD markets is expected to remain firm as occupiers compete for limited space and drive vacancy rates even lower in the years ahead.

According to Colliers International research, forecasts for office vacancy in key markets such as Sydney, Melbourne and Brisbane have tightened on the back of positive net absorption and continued strong demand.

“Amidst ongoing tight market conditions and increasing effective rents, the Sydney CBD has seen sustained demand from tenants seeking quality premises with proximity to amenity,” Simon Hunt, Colliers International Managing Director of Office Leasing, said.

“Vacancy will continue its downward trend in the Sydney CBD until 2021 with significant commitment to new supply that is coming on line in 2018 – 2020."

This includes Arup, Mills Oakley and Pfizer at 151 Clarence Street; WeWork at Barangaroo C1; Norton Rose and Banco at 60 Martin Place; and NAB and Allianz at Wynyard Place.

The Sydney CBD vacancy remained relatively stable at 4.6% for the July 2018 period, with a decrease of only 0.2% from the January 2018 period.

According to Kristina Mastrullo, Colliers International Associate Director of Research, 4.6% represents around 234,000sqm out of a total 5.1 million sqm (approx.) of stock within the Sydney CBD at present.

“Absorption for the six month period to July 2018 is recorded at 9,144sqm, stronger than the 345sqm reported on in the January 2018 period,” Ms Mastrullo said. “Sydney CBD’s vacancy will continue to decline towards 3% as net absorption remains positive, however as the market approaches the next supply cycle from 2020, we will see vacancy increase towards the historical average of 7.3%.

“Sydney continues to experience a flight to quality as premium stock continues to be built and A grade assets continue to be repositioned in order to future-proof throughout the next development cycle."

Doug Henry, Colliers International Managing Director of Occupier Services, said as many organisations continued to move from traditional workplaces to modern and open workplaces their real estate footprint, and size requirements, were typically reducing.

“We are seeing a rise in the number of tenants including requirements for flexible space in their market briefs, demonstrating that tenants are wanting flexible space, shared space or third space to be a standard building amenity, much like end of trip facilities,” Mr Henry said.

In its latest research update, Colliers International has revised its Melbourne CBD office vacancy forecast to peak at around 5.4% by July 2020. This is down from original estimates of around 7.6%.

“Our forecast peak vacancy rate of 5.4% in 2020 – which is the generally agreed timing for the peak of the current cycle – is well under the long term average for the Melbourne CBD of 6.6%,” Ms Mastrullo said.

Mr Hunt said the key difference between Q1 and Q2 this year was the volume of deal activity on upcoming vacant space. This meant the impact of the backfill that was coming onto the market would not be as disruptive as first believed.

“Whilst there will still be some major backfill opportunities in Melbourne between 2020 and 2022, this could be welcome space for tenants looking to expand after years of a very tight leasing market,” he said.

Between now and July 2020, Colliers International expects 380,000sqm of new office space to be completed in the Melbourne CBD. Net absorption, meanwhile, is forecast to be around 320,000sqm during the same period.

There were currently 14 buildings under construction in the Melbourne CBD and Docklands, with a combined pre-commitment rate of 70% – by far the strongest pre-commitment rate in the country.

“Demand for office space continues to be well above average in the Melbourne CBD, thanks in no small part to the population growth effect but also, importantly, the affordability aspect of Melbourne’s office market,” Mr Hunt said.

In the Brisbane CBD, the vacancy has decreased 1.6% over six months, hitting 14.6%.

“This is a significant result in this market – Brisbane hasn’t seen its office vacancy rate hit the 14%’s since January 2016,” Ms Mastrullo said.

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