Savills Australia comments on PCA Office Market Report findings

01 February 2018

NSW

Last year in February 2017, Savills predicted a vacancy rate of Sub 3.5 percent in a year’s time and according to Rob Dickins, National Head Office Leasing, “We are now very close to realising that prediction.

“Continued strong demand from SME’s has resulted in historic face rentals in most grades of assets – particularly B Grade class where $1,100 - $1,200 per sqm gross have been reached.

Mr Dickins said there are only six prime options for tenants upwards of 5,000sq m requiring space in the next 12 months and the only new development to be completed in 2018 is Barrack Place which is 60 percent pre-committed with a further 28 percent under HOA.

As at December 2017, the Savills Prime Full Floor report (which includes new developments/back fills etc.) has shown a reduction to just 173 available full floors across the Sydney CBD - dominated by the take out of 50 Bridge Street (49 full floors). If you were dealing with immediate availability, that number reduces significantly to 68 prime full floors.

Mr Dickins said there are circa 60,000sq m of active briefs in the Sydney CBD market and there is an expectation that Sub 3 percent vacancy could be reached by Q1 2019.

VIC

The 2018 and 2019 calendar years will be “game-changers” for the Melbourne office market, particularly the CBD, one industry expert has predicted.

In anticipation of the Property Council of Australia’s 2018 Office Market Report release on Thursday, Savills Australia’s Victorian State Director for Office Leasing, Mark Rasmussen, said that Melbourne’s lack of new supply, low vacancies and high demand across the board would combine to bring the city’s rents back in line with its global counterparts.

“After decades of effective office rents remaining stubbornly low in comparison to other Australian and comparable offshore markets, Melbourne tenants should be planning strategies to cope with significant effective rent increases,” he said.

“Buyers should be looking for properties with shorter WALEs to allow access to this growth.”

Mr Rasmussen said the “glass ceiling” on rents, which had been underpinned by a constant supply of high-quality Docklands office developments, was set to be removed in the short to medium term.

“New Docklands supply beyond 2020 will be restricted to sites beyond walking distance of Southern Cross station,” he said.

“While significant CBD new supply will be delivered in 2020 and 2021, and the resultant backfill will temper rental growth, the pent-up demand is likely to cater for a large proportion of these existing buildings.

“The majority of the backfill is of high quality and well located, and we believe higher rental levels – the new normal – will be maintained and incentives will rise, as landlords compete to fill the new supply while maintaining asset value.”

Mr Rasmussen said demand was being driven by Melbourne’s strong economic conditions and positive market sentiment across most business sectors.

“Generally, office tenants are now factoring growth into future office space planning and securing space additional to current requirements,” he said.

“The local and international education market is expanding, as are state and federal government departments and the bank sector, which is evolving to deliver to the changing marketplace.

“We are also experiencing explosive demand from the co-working/serviced office companies sector and businesses continue to migrate to the CBD from suburban locations.”

QLD

Despite much speculation, the Brisbane CBD has outperformed vacancy expectations attracting major fringe tenants back to the CBD.

Savills Director of Office Leasing, John McDonald said that big brands such as Origin Energy, Allianz and Suncorp are among those who have all re-located from the Western fringe suburbs.

“These tenants have been attracted to new A Grade refurbished products with large floor plates,” he said.

SA

Adelaide’s office vacancy rate has declined for the second half of 2017, marking two positive calendar-year halves in a row and setting a positive outlook for the new year, according to one industry expert.

Savills Adelaide’s Director for Office Leasing, Adam Hartley, said recent transactions had laid a solid foundation for the coming 12 months, highlighting Cooper Energy’s commitment to 70 Franklin Street.

“Recent deals within 70 Franklin Street, including commitment from Cooper Energy to a full floor, the additional full floor take-up of space by Blackrock International, and the final full floor under offer, has been a great result for the lessor,” he said.

“These deals bring the tower to near capacity.”

Mr Hartley said the addition of Charter Hall’s building to Franklin Street, which is due for completion in late 2019, as well as other planned developments would add backfill space and may inflate the technical vacancy rate in 2019.

“It is important to note, however, that all this space is now competing in the market for tenants,” he said.

“Adelaide continues to be underpinned by a two-tier office leasing market with prime-grade buildings with low vacancy rates, while the spread to second-tier properties continues to increase.”

Mr Hartley said the flight to quality was becoming increasingly topical among South Australia’s office tenants, and new development was needed to provide tenants with the opportunity to move into higher-quality buildings.

“The repositioning of second-tier buildings continues to prove challenging for owners,” he said.

Mr Hartley said there were signs of a recovery in the job sector, with the state’s job ads continuing their upward trend.

“While this is yet to translate into significant take-up of office space in the CBD, it bodes well for improvements in actual job numbers and positive net absorption in six to 12 months’ time,” he said.

WA

According to Shelley Ritter, Savills Director of Office Leasing in WA, “Perth’s office leasing market is in recovery, with continued improvement in business confidence and a resultant increase in demand. Recent employment growth is aiding net absorption. The mining and resources sectors continue to rally, buoyed by stronger and more stable commodity prices.

We are expecting a continuation of two-tiered market characteristics, with premium and A Grade space metrics pulling further away from secondary, particularly in the west and mid-CBD locales. In that regard, the market may start to see incentives at the prime end taper off, albeit slightly, especially in prime buildings where occupancy levels are normalising. Tenant enquiry levels have improved and effective rents are likely to increase modestly in the short to medium term. Effective rental growth will also be assisted by limited new supply.”

ACT

According to Pip Doogan, Savills Director of Office Leasing in Canberra, Gross face rents as at Q3/Q4 2017 typically range between $410/sq m and $490/sq m for A Grade buildings, and between $370/sq m and $405/sq m for good quality, second grade buildings. The average A Grade face rent derived from analysed transactions for Canberra is currently in the order of $445/sq m gross face, showing only limited growth over the previous year.

A Grade rents and incentives have, until recently, remained relatively stable during some of the toughest market conditions in recent history. Incentives for high quality A grade accommodation appear to have peaked, and are currently in the order of 17-20% for bare accommodation without an in-situ fit-out. Incentives for this class of property appear to have reduced marginally during 2017 as a result of low vacancy rates in this market sector.

Looking ahead in 2018, Ms Doogan said “Tenants in Canberra will be more demanding for spec fit-outs as an incentive which has been evident by motivated owners of multi-tenanted assets. The amount of B Grade stock within the CBD and particularly in Barton stock (in Barton) has shown that owners are refurbishing their buildings to a similar standard.”

Ms Doogan anticipates new Funds who have acquired stock are refurbishing and kicking off leasing campaigns this year.

“Owners with whole building Commonwealth Government tenants are approaching their tenants to try and renegotiate new deals long before the initial lease expiry and secondary stock in town centre markets will still continue to be challenging.

“We’re seeing the bulk of our leasing enquiry in the sub 500sq m range as a number of smaller businesses look to take advantage of current market conditions and strong economic confidence,” she continued.

Learn more about Savills Office Leasing services.

 
 

Key Contacts

Rob Dickins

Rob Dickins

National Head
Office Leasing

Savills Sydney

+61 (0) 2 8215 8833

 

Jessica Freeman

Jessica Freeman

Director - PR NSW
Corporate Services

Savills Sydney

+61 (0) 2 8913 4826