Larry Schlesinger and Matthew Cranston
Major corporations are looking beyond the Sydney CBD for office space after vacancies tumbled to a near 10-year low in the final quarter of 2017 and prime rents shot up more than 20 per cent over the past year.
Sydney’s CBD office vacancy rate fell to 5.4 per cent in the December quarter, down from 7.7 per cent a year ago, according to the latest figures from commercial agents JLL, which also saw declines in available office space in Melbourne, Brisbane, Adelaide and Perth on the back of improving economic conditions and rising confidence about the job market.
Total net absorption – the amount of vacancy removed from the market – was 187,100 square metres over the year for all CBD office markets with the national vacancy rate falling to 10.4 per cent, down 1.5 percentage points over the year.
Falling vacancies have in turn lifted the value of commercial property across the board, with yields on premium towers falling below 5 per cent across a number of recent transactions in Sydney and Melbourne.
With much of the leasing activity concentrated in good-quality assets, Sydney’s prime-grade office vacancy rate fell to 5.1 per cent, the lowest since the September quarter of 2008, just before the collapse of US firm Lehman Brothers sparked the Global Financial Crisis and a five-year downturn in office leasing demand.
However, with the Sydney CBD office cycle now firmly in favour of landlords – prime rents rose 20.5 per cent over the year – it has become increasingly difficult and more expensive for corporations to meet all their office needs in one location, pushing demand out to city fringe and suburban office markets.
“A number of large organisations are moving towards a multi-location model, with Allianz moving part of their operation to North Sydney and Herbert Smith Freehills relocating workers to Macquarie Park,” said JLL head of office leasing Tim O’Connor.
Melbourne had the strongest finish to the year in terms of leasing activity with 29,000 sq m of positive net absorption in the December quarter and 91,000 sq ms for the year pushing down the vacancy rate to 6.4 per cent – the lowest rate in six year – down from 8.1 per cent 12 months ago.
Lower vacancies lifted Melbourne CBD prime rents 12.2 per cent over the year.
“As vacancy decreases further, all size tenants are finding their options increasingly limited,” said Stuart Colquhoun, JLL’s Victorian head of office leasing:
“This is particularly true of tenants looking for more than 3000 sq m of prime grade space. JLL estimates there are just nine remaining prime grade contiguous vacancy options in the Melbourne CBD in existing product.
“We expect some relief for tenants as a wave of new supply hits the market, however vacancy will remain low and Melbourne’s CBD is likely to remain a landlord favourable market for the next few years,” he added.
In the Brisbane CBD, the office leasing market ended the year in a stronger position with the overall vacancy rate falling to 15 per cent from 16.8 per cent a year ago, and positive net absorption of 33,200 sq m recorded over the year.
“Brisbane’s strong net absorption result was in part driven by tenants moving from near city and suburban locations to the CBD. Allianz is the latest example after committing to 310 Ann Street last quarter,” said Adam Barrett, JLL’s Queensland head of office leasing.
“The other trend has been demand from the smaller sub 1,000 sq m tenants. Owners have been actively splitting their floors with speculatively fitted out suites to attract this part of the market,” he added.
Perth’s vacancy rate remained very high at 21.8 per cent, but fell from 24.1 per cent a year ago with net absorption of 41,800 sq m in 2017 well above the 25-year average.
The Adelaide vacancy rate tightened to 15.1 per cent from 16.9 per cent a year ago as it recorded its strongest annual net absorption of 8,700 sq m in 10 years.
Canberra was the only market to record a rising CBD office vacancy rate, which hit 13.3 per cent in the December quarter. However, prime grade vacancy remained tight at 5.6 per cent with rents up 4.3 per cent in 2017.