Softening economy puts breaks on office space demand

Softening economy puts breaks on office space demand

2 August 2019

Australian office vacancies have decreased over the first half of 2019, but tenant demand has only had a modest impact on this result reflecting the softer economic conditions over the period.

The Property Council Office Market Report for July 2019 shows that office market vacancy rates around the country decreased to 8.3 per cent for July 2019 (down from 8.5 per cent in January 2019).

“Office markets provide a unique window into business activity and sentiment, and it’s one that shows only minimal pick-up in demand for office space around the country,” said Ken Morrison, Chief Executive of the Property Council.

“The July 2019 results show that while office vacancy has tightened slightly overall, this has been mostly driven by withdrawal of stock from the market rather than tenant demand.

“In fact, net tenant demand for CBD office space grew by just 0.1 per cent over the six months, its lowest growth in over four years, a clear indicator of a softening economy.

“Looking behind the headline vacancy rate provides a deeper understanding of what is happening in office markets and the economy more generally,” Mr Morrison cautioned.

Colliers International research head Anneke Thompson was more bullish on the outlook for office demand, noting the Reserve Bank’s willingness to use the levers available to maintain jobs growth.

“A rough forecast suggests that if the RBA were to achieve its aim of a full employment rate of say, 4.5 per cent, by 2025, this would mean that the economy would be adding circa 225,000 jobs per year,” she said.

“Given the trend has been for the majority of these jobs to be in areas that typically require office accommodation, this statement alone is an extremely positive boost to the demand outlook for the Australian office market.”

The PCA’s NSW executive director Jane Fitzgerald said it was true that space was tight in Sydney, with the lowest vacancy rate in a decade, but demand was also subdued.

“The office market in the CBD needs a release valve – low vacancy and rising rents will increasingly impact our competitiveness as a global city with Melbourne benefiting, as they add more supply over the next four years,” she said.

JLL’s head of office leasing Australia Tim O’Connor said the uncertain economic outlook would create opportunities and challenges for owners over the 2019 and 2020 financial years.

“Parts of the economy are in expansion mode and those organisations will seek to grow their real estate footprint,” he said.

Net tenant demand grew by only 0.1 per cent for CBDs and 0.4 per cent for non-CBDs in the six months to July 2019, compared with 0.7 per cent and 0.2 per cent in the previous period. This was the lowest rate of change in positive net tenant demand since January 2015. Withdrawals accounted for 1 per cent of the vacancy rate change across the Australian CBD markets.

Melbourne and Sydney remain Australia’s strongest and best performing CBD markets with very tight vacancies.

Melbourne’s CBD vacancy rate was 3.3 per cent, up slightly from 3.2 per cent in January. New supply and withdrawals accounted for the biggest changes in Melbourne’s vacancy rate, with positive net tenant demand accounting for just 0.2 per cent.

Sydney’s CBD vacancy rate was 3.7 per cent, down from 4.1 per cent in January and its lowest vacancy since January 2008. Sydney’s result was influenced by a 0.7 per cent shift due to withdrawals with 0.1 per cent movement from negative net tenant demand.

Brisbane’s CBD vacancy rate fell for the third consecutive period to 11.9 per cent compared to 12.9 per cent in January. Positive net tenant demand accounted for 0.4 per cent of the shift, along with 0.6 per cent from withdrawals. There was no new supply in the period.

The Perth vacancy rate tightened slightly to 18.4 per cent in July, while Canberra’s vacancy rate was unchanged at 11 per cent. Adelaide’s vacancy fell to 12.8 per cent, down from 14.2 per cent, supported by the strongest growth of positive net tenant demand of any Australian CBD of 1.1 per cent.

Demand in non-CBD markets was slightly higher than for CBD markets at 0.4 per cent, with a slight increase in the vacancy rate to 9.3 per cent in July 2019, up from 9.2 per cent in January 2019. By vacancy, the tightest three non-CBD markets were East Melbourne (2 per cent), Parramatta (2.7 per cent) and Macquarie Park (4.9 per cent).

Non-CBD office supply increased the vacancy rate by 1 per cent during the period, while withdrawals made up 0.5 per cent of the reduction, and positive net tenant demand accounted for the remaining 0.4 per cent fall. Net absorption in non-CBD markets was about half the historical average, while additions and withdrawals were in line with historical averages.

A total of 334,494sqm of stock is due to be added to the office market during the second half of 2019, with 245,333sqm being added in CBD markets, which is slightly above the 6-month historic average of 238,140sqm. Across the CBD markets, an additional 603,566sqm is due to be added in 2020, with a further 667,359sqm due to come online from 2021 onwards.