Modest rise in national office vacancy, but demand soars in Sydney, Melbourne: PCA report

National office vacancy in Australia remained largely flat, says the latest Property Council of Australia Office Market Report but it belies the changes to the economy as the mining investment boom ends and significant new office space comes online.

The rise in vacancy was 10.5 percent from 10.4 percent, but demand was seen increasing for the fourth consecutive period.

“The almost static national rate makes it look like it is all smooth sailing across the lake. This hides what is happening below the surface,” said Property Council chief executive Ken Morrison, pointing to the major differences between the cities and regional areas. 

“The economy is in transition; Sydney and Melbourne are reclaiming their historic claims as the economic engine-rooms of the economy; and in most cities, we are witnessing strong increases in demand. This demand is being sufficiently met by significant additions to office supply.”

He said the demand for offices in Sydney and Melbourne is strong, which is good news for Australia as the mining investment boom ends. 

Sydney CBD and Melbourne CBD showed the lowest vacancy rates with 6.3 per cent and 7.7 per cent respectively, closely followed by Hobart (8.1 per cent). The two top cities are also the best performing markets by net absorption.

“But the story is not even. Office vacancies in Brisbane, Perth, Canberra, Adelaide and Darwin are more than double that of Sydney,” Morrison said. 

The report also shows that Sydney, Brisbane and Adelaide will all have above average increases in new office stock over the next year.

Other highlights include: 

• Vacancy rates falling in 13 of the 17 Non-CBD markets tracked

• Vacancy rates increasing in Adelaide CBD (14.1 per cent up from 13.5 per cent), Perth CBD (19.2 per cent up from 16.6 per cent) and Darwin CBD (20.7 per cent up from 10.9 per cent)

• An additional 394,243 sqm in office space was added over the last six months – 25 per cent higher than the historic average 

 “The latest figures from the Property Council of Australia highlight the two-tier nature of Australia’s office markets nationally as a new year swings into action,” commented Simon Hunt, managing director- office leasing at Colliers International.

“In 2016, tenant appetite for Australian office space will continue to diverge between the high demand cities of Sydney and Melbourne and the country’s remaining major cities.”

The non-CBD markets were holding up well too with 13 out of 17 reporting falls in vacancy rates and 11 out of 17 markets reporting lower vacancy rates than the Australia wide non-CBD rate.

Perth saw the first positive net absorption (42,387sqm) after three years of negative demand. This helped to offset the large spike of an additional 113,463 sqm of new office stock that was added to the market over the past six months. 

Sydney continues to have the lowest vacancies and strongest demand of all cities. As well, it has a strong pipeline of new stock with 243,126 sqm expected in 2016. 

The fall in Hobart’s vacancy rate is occurring at the same time as major regulatory changes are taking place. These include the passage of the Tasmanian Planning Scheme and proposed changes to the Building Act amendments. 

Brisbane’s vacancy rate remained steady. The city is expecting an additional 192,281sqm in office space to come online during 2016. Brisbane is facing near record levels of new supply over the next year, which will continue to put pressure on this market. 

Melbourne’s vacancy rate fell to 7.7 per cent – second only to Sydney – off the back of strong demand. With 71,768sqm of new supply to come on board over the next year and none forecast for 2017, this market can be expected to remain tight. 

Adelaide continues to suffer from negative demand with CBD vacancies reaching as high as 20.6 per cent for D grade property. 

Canberra’s vacancy rate fell from 15.3 per cent to 14.9 per cent. While the improvement is welcome, the city continues to have one of the highest vacancy rates in the nation. The prevalence of older buildings throughout the city has seen vacancy rates hit 30 per cent for D grade properties. 

Darwin reported the worst result in the nation with vacancies increasing from 10.9 per cent to 20.7 per cent. This was the result of an economic convergence of increasing supply and lower demand. The city reported the highest supply rate increase in Australia at the same time as it was experiencing the lowest demand growth.