The regional reversal has started in the commercial office market, with Sydney’s vacancy rate rising at a time of and Perth’s prime rate tightening to its lowest since mid-2015, the latest quarterly figures from JLL show.
The Sydney CBD average office vacancy rate widened to 5 per cent from 4.6 per cent in the December quarter making it the only capital city market to show negative net absorption of space over the year – while Perth’s narrowed to 19.1 per cent from 19.4 per cent, the commercial real estate agency said.
The figures signify another turn in Australia’s evolving economy as the conditions that made Sydney the leading economic light in the country start to fade, and the once dominant resource industry stirs again.
The changes afoot in the two cities have different drivers. Sydney – which JLL head of research for Australia Andrew Ballantyne called Australia’s only global city – was feeling the effect of nervousness among global organisations that were reducing their footprints as well as a decentralisation of NSW government tenants to new centres such as Parramatta.
In Perth, by contrast, resource employers, which often cut staff quickly in a downturn and then add workers and take additional space again when they start growing, are stirring as resource-based investment picks up, Mr Ballantyne said.
“The divergence we saw over the last few years – which was unprecedented in Australian office markets – is starting to narrow,” he said.
“It’s probably been bubbling through most of the year, but not really captured in the numbers.”
It is still early days in the rebalancing of office markets across the country.
“We would typically say equilibrium is 7-9 per cent for the Australian office market,” Mr Ballantyne said.
“So Sydney at 5 per cent would still be considered below equilibrium and Perth at 19 per cent – with 13.5 per cent for prime assets – would still be considered above equilibrium.”
Perth’s gain, similar to the improvement under way in Brisbane, was the consequence of an improved leasing environment by the resource industry employers, with both Dampier Bunbury Natural Gas Pipeline and Mineralogy expanding their footprints during the quarter.
The increasing demand affected the city’s prime vacancy rate, which slipped to 13.5 per cent in the fourth quarter from 14.4 per cent three months earlier. With no new premium office accommodation due to be completed until 2023, when Chevron’s new 29-storey tower at Elizabeth Quay comes on stream, vacancies will tighten further.
In Brisbane, resource employers BHP and New Hope Group also expanded their office footprints, but the effect was masked by other changes that saw the CBD vacancy widen to 11.7 per cent from 10.9 per cent.
“It’s felt like a bit of shuffling of chairs,” Mr Ballantyne said.
While 63,200 square metres worth of space came back into the Sydney CBD in the quarter, centres outside the city centre such as Parramatta, North Sydney and the Sydney Fringe market all showed strong net absorption, partly reflecting the effect of improved transport infrastructure that made those further-out office locations more attractive, JLL said.
Melbourne CBD, the country’s tightest office market, tightened even further, as it recorded 11,700 square metres of net absorption. The vacancy rate tightened to 3.4 per cent in the final quarter from 3.7 per cent to mark the lowest level since 1988. Melbourne CBD rents also moved higher, with prime gross effective rents rising 6.5 per cent over 2019.
“The Melbourne CBD has very high levels of pre-commitment for new developments scheduled to complete in 2020 and 2021,” said JLL head of leasing for Australia Tim O’Connor.
“There will, however, be concerns about backfill space availability in the Western Core and pressures in the secondary grade market as vacancy is cascaded down to lower quality assets.”
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