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Demand for office space softens with Australia's economy

OFFICE • August 6, 2019
Tags: RESEARCH

Last week’s release of the Property Council Office Market report showed Australian office vacancies have decreased over the first half of 2019, but tenant demand has only had a modest impact on this result reflecting the softer economic conditions over the period. Vacancy rates around the country decreased to 8.3 per cent for July 2019 (down from 8.5 per cent in January 2019).

“Office markets provide a unique window into business activity and sentiment, and it’s one that shows only minimal pick-up in demand for office space around the country,” said Ken Morrison, Chief Executive of the Property Council.

 

Melbourne

Melbourne’s CBD vacancy rate was 3.3 per cent, up slightly from 3.2 per cent in January. New supply and withdrawals accounted for the biggest changes in Melbourne’s vacancy rate, with positive net tenant demand accounting for just 0.2 per cent.

According to Cressida Wall, the Property Council’s Victorian executive director, the looming question for Melbourne’s office supply is where will workers go when the office supply pipeline dries up in 2023?

“With Melbourne’s population set to match that of Sydney by 2028, immediate action is required to ensure that Melbourne’s CBD is able to accommodate its growing workforce,” Wall says.

 

Sydney

Sydney’s CBD vacancy rate was 3.7 per cent, down from 4.1 per cent in January and its lowest vacancy since January 2008. Sydney’s result was influenced by a 0.7 per cent shift due to withdrawals with 0.1 per cent movement from negative net tenant demand.

NSW executive director Jane Fitzgerald attributes the results to political certainty, a strong budget and record investment in infrastructure.

But she also cautions that the CBD office market needs a “release valve”, adding that “low vacancy and rising rents will increasingly impact our competitiveness as a global city”.

 

Brisbane

Healthy demand for office space across Brisbane reveals a vacancy decrease from 12.9 per cent to 11.9 per cent over the last six months. Vacancy in the Brisbane Fringe fell from 15.7 per cent to 13.8 per cent over the same period.

Queensland executive director Chris Mountford says the results confirm that Brisbane’s office market is recovering from recent record high vacancy rates.

“The Brisbane office market is clearly in the midst of a good recovery, with confidence that demand will continue to grow and strong investment underway in new office projects.”

 

Perth

The Perth vacancy rate tightened slightly to 18.4 per cent in July, marginally lower than the 18.5 per cent recorded in January. Net absorption of 15,923 sqm demonstrates the opportunities available, “despite the challenges facing landlords in central Perth,” says executive director in WA, Sandra Brewer.

“Landlords have been working overtime to offer outstanding leasing deals and incentives to attract and retain tenants,” Brewer adds.

“Our industry needs action on City of Perth's parking allocation policies for refurbished buildings. We hear stories from many office building owners who would love to upgrade buildings but are frustrated by planning red tape.”

 

Canberra

Canberra’s vacancy rate was unchanged at 11 per cent. More than 50 per cent of the ACT office market is tenanted by the federal government, says executive director in the ACT, Adina Cirson.

“We know the Commonwealth will continue to seek occupational density targets, by reducing ‘empty desk space’ with some 11,000 desks currently across its tenancies. Improving fitouts and incentives before locking in longer term leases will be a goal – meaning the next 12 months will continue to be busy.”

 

Adelaide

Adelaide’s vacancy fell to 12.8 per cent, down from 14.2 per cent, supported by the strongest growth of positive net tenant demand of any Australian CBD of 1.1 per cent.

But executive director Daniel Gannon warns that the state government's tax measures will “take a sledgehammer to South Australia’s institutional investment market and development sector”.

“At a time when 26,070sqm of space is due to come online in the second half of 2019, followed by 17,786sqm in 2020 and 43,636sqm after that, risky tax changes are the last thing we need,” Gannon says.

 

Other insights

Demand in non-CBD markets was slightly higher than for CBD markets at 0.4 per cent, with a slight increase in the vacancy rate to 9.3 per cent in July 2019, up from 9.2 per cent in January 2019.

The tightest three non-CBD markets, by vacancy, were East Melbourne (2%), Parramatta (2.7%) and Macquarie Park (4.9%).

Non-CBD office supply increased the vacancy rate by one per cent during the period, while withdrawals made up 0.5 per cent of the reduction, and positive net tenant demand accounted for the remaining 0.4 per cent fall. Net absorption in non-CBD markets was about half the historical average, while additions and withdrawals were in line with historical averages.

A total of 334,494 sqm of stock is due to be added to the office market during the second half of 2019. Of that, 245,333 sqm will be added in CBD markets, slightly above the six-month historic average. Across the CBD markets, an additional 603,566sqm is due to be added in 2020, with a further 667,359sqm due to come online from 2021 onwards.

 

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