The outlook for CBD office markets around the country in 2014
The office markets around the country saw negative absorption and declining effective rents over 2013, driven by a slowdown in Chinese interest and a general lack of business confidence, according to Matt Whitby, Knight Frank's national director of research, however despite this being experienced by all CBD office markets, the forecasts are distinctly separate.
Soft tenant demand and a rising vacancy rate may have some investors concerned, however some cities will fare better than others, explained Whitby.
“Tenant demand remains soft and vacancy rates have been rising, however with the supply pipeline in most markets benign over the next two years, there will be the commencement of downward pressure on vacancy rates in 2014, particularly in Sydney and Melbourne,” he said.
“If occupier demand conditions are to materially improve, we need to see a sustained pick up in fulltime jobs, which will be driven by persistent strength in business confidence and an upswing in business credit. With the stimulus of historically low interest rates washing through the economy, there are tentative signs that this is beginning to occur. This is highlighted by a 15 per cent increase in tenant enquiries this year on 2012 levels, led by professional service based tenants and insurance and finance businesses.
“After delivering approximately 463,000 square metres of new and refurbished stock to the Australian CBD markets, which was down 29 per cent on the 649,000 square metres recorded during 2012, projected supply for 2014 is only 241,000 square metres, which is the lowest level of gross supply additions since 2001, when just shy of 200,000 square metres was completed."
Relatively strong completion activity was seen over the past two years, with this hiatus in new construction completions this year being a positive for the market. Whitby pointed to an overhang of backfill and sublease space that is awaiting absorption.
“Sydney and Melbourne are showing signs of a return to growth, with an increase in enquiry and a withdrawal or reduction of sublease space on offer, which bodes well. Additionally, the highest and best use of CBD sites are increasingly being slanted towards residential, which will continue to see ageing assets withdrawn from the market permanently and converted to an alternate use, cushioning the impact of below trend demand. This is a real game changer for markets as the consequent increase in withdrawals will also help cushion the market," he said.
“Net absorption remains strongest for Premium and A Grade space as tenants continue to upgrade their premises, while absorption of secondary stock is clearly negative. This performance gap will continue over the next 12 to 18 months as tenants continue to take advantage of the competitive leasing environment and relocate to better quality office accommodation. Occupiers are acutely aware of the need to attract and retain quality staff and the quality of the accommodation is a significant factor to many corporate relocations."
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State and Territory performance and forecast summaries
ADELAIDE
Vacancy rates have pleateaued in the prime grade stock sector over the past quarter. Within the next 12 months it's expected that there will be a movement towards quality stock, with rental increases remaining subdued. Some upwards pressure will remain on incentives.
Source: Martin Potter, Knight Frank’s director, office leasing, SA
CANBERRA
There has been an increase in sublease space. This is due to the efficiency drive to reduce costs and duplication.
Uncertainty remains surrounding Canberra, and while the Commission of Audit is undertaken there have been resulting low levels of demand.
A drop in face rents is being seen as well as an increase in incentive levels.
Source: Nicola Cooper, Knight Frank’s director of leasing, ACT
The vacancy rate has peaked in the short term, with an expectation to fall over the next six months to mid-2014.
The migration of tenants from the fringe and suburban markets inwards, as well as some property being moved towards residential repurposing and sublease space have been the main drivers. This is resulting in incentives that are high, circa 30%, and prime rents holding, circa $460 net.
The 2014 outlook has improved demand as tenants realise the current situation won't last for long.
Source: Hamish Sutherland, Knight Frank’s national director, office leasing, VIC
BRISBANE
Lack of tenant demand and excess sublease space is causing the market to suffer, however there are a large number of requirements and enquiries in the market. The first quarter of 2014 should be revealing about these considerations.
A potential flurry of activity may trigger a positive ipswing in demand through 2014 and into 2015 before further stock occurs in 2016.
Source: David Howson, Knight Frank’s national director, office leasing, QLD
SYDNEY
A positive shift has been seen in the market, with enquiry improving during the second half of the fourth quarter in 2013. It is likely this trend will continue this year.
Confidence is growing in smaller business, and the demand for sub-500 square metres continues to remain strong, with incentives driving demand. Landlords are motivated to reduce vacancies by the middle of the year.
Rental growth remains flat, with no forecast for growth this year.
Source: Scott Berriman, Knight Frank director, office leasing, NSW
PERTH
The flux of the conomy in Perth and with vacancy rates rising, it's clear there's very little demand.
The face market rents are falling, incentives are increasing, and they may be reaching a level that will entice tenants into moving.
Source: Greg McAlpine, Knight Frank’s national director, office leasing, WA