Canberra the only market where office rents will rise in 2020

No other CBD market is forecast to record rental growth. A decline in rents of 9.5 per cent is forecast for the Sydney CBD over the calendar year while a softer fall of 5.5 per cent in Melbourne is expected, accounting for the city’s lower vacancy rate.

JLL’s ACT managing director Andrew Balzanelli said the stability of the public sector in Canberra had traditionally bolstered the market’s economic resilience to external shocks.

“Unemployment in Canberra is starting at a low base of 3.5 per cent as at early March, the lowest nationally and due in large part to the high levels of public sector employment,” Mr Balzanelli said.

“Employment within the Australian Public Sector has aligned very closely to 2006-07 levels since the 2015-16 Federal Budget”.

Canberra was one of just two CBD office markets to record positive net absorption – of 22,300 sq m – in the first quarter of 2020. The city’s office vacancy rate is now at its lowest level since 2009, at 8.9 per cent.

While Canberra’s large exposure to the public service is expected to protect it from a slowdown in the private sector, the same can’t be said for some of the other capital cities.

Analysts from Citi said that while the Sydney and Melbourne office markets had entered the coronavirus period in a strong position with low vacancies and high rents, several factors, including a decline in job ads and net absorption lower than the long-term average, indicated market rents were likely to fall in the near-term.

There is also long-term uncertainty around the impact of social distancing measures and the adoption of work from home practices on the office market.

On balance, Citi expects demand to be slightly lower forecasting a small decline of 1 per cent to 2 per cent in office occupancy.

“Overall, we believe work from home arrangements may increase slightly versus pre-virus levels, but are unlikely to significantly reduce office demand longer-term, while other workplace practices (like hot-desking) could significantly reduce or be abolished altogether,” Citi analyst Suraj Nebhani said.

Office asset values could fall by more than 15 per cent as a result of a fall in income and cap rate decompression, the Citi analysts said.

JLL’s head of sales and investments in Canberra, Tim Mutton, expects prices to remain strong in Canberra for high quality assets with public sector tenants or those with exposure to the sector.