Sydney the only partial bright spot as CBD office vacancies rise, with mining demand down: PCA

The office vacancy rate in the Sydney CBD, Australia’s biggest capital city office market, fell from 8.1% to 7.2% over the six months to January 2013, moving against the national trend of a rising office vacancy rate, according to the latest Property Council’s Australian Office Market Report.

Nationally, Australian office vacancies now stand at 8.4%, up from 7.8% in July 2012, driven by a “dramatic” fall in demand for office space.

Vacancy rates eased in Perth and Brisbane as demand for office space from mining companies and other businesses that service the resources sector “moved down a gear”.

Perth remains the tightest CBD office market, though its vacancy rate eased from 4.2% to 5.7%, with demand for office accommodation in Perth in the last six months the weakest since 2009.

“The Perth office market was affected by cost-cutting in resources companies, particularly the iron ore sector, last year. This resulted in less demand for office space by firms providing professional services to the sector”, says Property Council executive director,Joe Lenzo.

The Melbourne vacancy rate fell 5.6% to 6.9% over the period with and only premium and A grade stock experiencing substantial positive demand.

Consultants at Charter Keck Cramer anticipate a fall in demand for office space in the Melbourne CBD and Docklands over the next two years, with better quality office space best placed to attract tenants.

In Brisbane, the vacancy rate spiked from 8.0% to 9.1% bringing to an end “a sustained two-year run of strong demand and exceptional take-up levels in the market”.

PCA Queensland executive director Kathy MacDermott says the slowing resources sector has triggered a fall in demand to a four-year low with net absorption during the six-month period totalling a mere 2,406 square metres.

The against-trend fall in Sydney’s vacancy rate was masked to an extent by a high rate of withdrawals, but also from demand across the top end of the market.

Net absorption of office space in the Sydney CBD – the amount of space leased minus the amount of space vacated over a given time frame – totalled 8,466 square metres, but withdrawals were at a five-year high, with 87,903 square metres taken off the market.

Withdrawal of stock was strongest in the B- and C-grade markets – with 35,095 square metres and 36,257 square metres taken off ine respectively – as owners looked to refresh their offerings.

These were offset by 48,637 square metres of additions to the total commercial office stock.

“The premium market continues to enjoy strong demand – with 9,957 square metres of net absorption in the past six months – and its vacancy rate falling from 7.8 % to 6.3% in the past six months,” says Property Council NSW executive director Glenn Byres.

The A-grade office vacancy rate fell from 7.5% to 7.4% with net absorption totalling 10,166 square metres.

Commenting on the Sydney performance, Knight Frank managing director for NSW Richard Horne says there has been a marked improvement in sentiment and activity in the Sydney office market in the last four months.

“A large number of new mandates – both onshore superfund money and Asian-based offshore funds – are circling the market.

“These groups are mainly focused on the CBD, although selective suburban markets are starting to be considered. The sharp drop in borrowing costs have made our market very attractive on a world scale," he says.

“Knight Frank recently marketed 9 Hunter Street where interest was stronger than we've seen for many years, with 8 serious bidders. This bodes well for a strong year ahead,” he says.

The PCA report showed that demand for Australian office space in the six months to January dropped to less than half the 20-year average and was just one third of that recorded in the first six months of 2012.

On a more positive note, PCA chief executive, Peter Verwer, points out that overall vacancies sit below the historical average and the GFC peak with only four major markets recorded vacancies of more than 10%.

The four markets with vacancy rates above 10% are the Gold Coast, where the vacancy rate fell marginally from 21.5% to 20.3%; Canberra, which rose from 9.8% to 11.9% (and could rise higher in an election year), the Sunshine Coast, up from 13.6% to 14.1% and Crow’s Nest/St Leonards on the Sydney north shore, which rose from 10.7% to 12%.

“The capital cities of mining states went off the boil in the second half of 2012 and vacancy rates rose in two out of three markets across the country,” says Verwer.

“These vacancy numbers reflect the impact of insipid service sector growth and a resources industry engine that has moved down a gear”.

“Sluggish economic growth and weak demand for commercial space reinforce the need for a better targeted fiscal stimulus and further interest rate cuts,” Verwer says.