Why you should be confident about the office market, even as vacancy rates rise

The near-zero office vacancy rates enjoyed by the mining cities of Brisbane and Perth pre-GFC  now seem to have come back into line with the other capital cities.

The latest survey released by the Property Council of Australia (PCA) displays a much more even spread for cffces vacancies around the country.

The cooling of the mining sector, coupled with the Queensland floods, has caused a number of key players to rethink their office space requirements.

So, what's happening around Australia?

In the past six months, Perth's vacancy rate has increased by nearly a quarter — to where it now sits at around 5.7%. This has followed some major staff and space reductions by mining companies and their related consulting firms.

Over the past five years, developers in Melbourne have had the chance to secure pre-commitments from major tenants wishing to move into brand-new buildings within Docklands. And only recently has it become viable to tackle any new projects within the CBD proper.

Therefore, most of Melbourne's increased vacancy (currently at a respectable 6.9%) has resulted from the need to refurbish and back-fill the space being vacated.

In the past six months Sydney's vacancy rate has fallen to 7.2%. However, the leasing market remains cautious because much of the available space was withdrawn as landlords looked to refurbish buildings before reoffering them to the market.

As such, around 165,000 square metres of space is due to come onto the market over the next 12 months, representing about three years of supply.

Mining companies led the office boom in Brisbane, but that demand has sadly fallen away. And now that impact is being felt, as the current vacancy rate of 9.1% needs to be mopped up by traditional businesses. And like in Sydney, there are also a number of major projects due for completion over the next three years.

With a vacancy rate of 9.5%, Adelaide currently sits as the highest for any mainland capital city. But unfortunately, things are likely to get worse.

With the completion of several major projects, the PCA estimates the past six months has produced Adelaide's fourth highest supply increase on record — three times its historical average.

As such, the current vacancy rate will no doubt rise before returning to a more reasonable level, of around 7% to 8%.

Bottom line: The commercial property playing field around Australia now seems considerably more level.

While access to CBD offices may not be readily available for the small to medium investor, this sector does provide a good guide to the health of the overall office market.

Clearly, interest rates and consumer confidence (i.e. spending levels) dramatically affect retail property. And to a lesser extent, industrial property — which (in Australia) caters mainly to warehousing for retailers.

However, according to an 80-year study by Macquarie Bank, there is apparently no correlation with rising interest rates having a detrimental affect upon office property.

And so, given we are currently at the bottom of the interest rate cycle, that ought to give you considerable added confidence for investing in the office sector going forward.

Chris Lang is an advisor to commercial property investors, sell-out author and regular speaker on how to invest in commercial property. You can visit his website Property Edge Australia to help you get the most out of your commercial property investing.