Supply-demand imbalance in Sydney, Melbourne continues to push up rents: Colliers
The simplest of all economic theories, the one most first year economic students are taught on day one, is the theory of supply and demand.
Today, we can witness the Sydney and Melbourne CBD office markets as a perfect real-life example of this phenomenon. Both NSW and Victoria are experiencing extraordinary population growth fuelled by migration.
According to the ABS, 72,013 local and overseas migrants moved to NSW, and an unprecedented 92,038 migrants moved to Victoria in 2016. These figures are 38 per cent and 45 per cent respectively above the 10-year average migration levels for these two states.
This flow of migrants is contributing to strong white collar job creation in both capital cities – the demand side of our equation. The supply side, however, is not keeping up.
The Sydney CBD office market only grew by 4,314 sqm over the last 12 months. This is a mere 0.1 per cent of total CBD supply.
Melbourne had far stronger supply, growing by 109,640 sqm over the past year, although all of this and more was absorbed.
Total vacant space reduced from 313,311 sqm in July 2016, to 294,562 in July 2017. Supply for the next twelve months is even more ominous.
Colliers International is forecasting the Sydney CBD office market to contract by 50,000 sqm over the year to July 2018, and the Melbourne CBD to reduce by 7,000 sqm. This, at a time when Deloittes Access Economics expects an additional 5,600 office based workers to require space in the Sydney CBD, and 6,121 workers in the Melbourne CBD.
Based on a conservative estimate of 11 sqm per office employee, this is about 60,000 sqm of demand in Sydney and about 65,000 sqm of demand in Melbourne. In a climate of reducing availability of stock, the simple law of supply and demand tells us that the result must be an increase in prices.
Over the year to June 2017, prime grade face rents grew by 7.8 per cent in Sydney, and 14 per cent in Melbourne.
“While these growth rates are well above ten year averages (4.7 per cent in Sydney and 4.3 per cent in Melbourne), our outlook for growth is over the next 12 months is also very strong,” says Anneke Thompson, national director at Colliers Research.
“Over the year to June 2018, we expect face rent growth of 10.3 per cent in Sydney and 13 per cent in Melbourne.
“This growth will have implications for landlords and occupiers. It is next year when we expect to see the bulk of face rent growth, before new supply begins to hit the market in 2019. Beyond that time, we see growth returning to more normalised levels, as supply and demand of office space rebalances.”