Australian office vacancy rates to continue to climb

Office vacancy rates across the nation are set to continue climbing with latest research released by Colliers International showing CBD markets are suffering under the weight of a flood of sub-lease space coming onto the market and decreasing tenant demand in some areas.

The quarterly Colliers International CBD Office Market Updates found vacancy rates are expected to have risen by as much as 4.2 per cent over the past 6 months.

Despite experiencing the highest increase, Perth remains one of the healthiest office markets at 5.5 percent vacancy, coming in only behind Adelaide at 5.1 per cent.

On the other hand, albeit experiencing the smallest rate increase, Canberra had the highest vacancy at 9 per cent, followed by Sydney at 7.9 per cent, Brisbane at 7.6 per cent and Melbourne at 6.2 per cent.

Simon Hunt, Managing Director of Office Leasing at Colliers International, said the increase in supply across Australia has been met with a softening in tenant demand as a result of recent deterioration in economic conditions, and this had affected the leasing market across the nation.

"Many tenants are looking to downsize their office space to cut costs on the back of the global financial crisis, which has led to a significant increase in sub-lease space coming onto the market," he said.

"The Sydney market, in particular, has seen a large proportion of sub-lease space become available in the last 6 to 12 months, with an estimated 80,000sq m to 100,000sq m now available.

"That said, and on the upside, we have begun to see a lift in leasing enquiry and activity as tenants begin to take advantage of market conditions.

"Face rents are softening in all CBD locations and we have seen a big jump in incentives this quarter, particularly in Sydney which is up 7 per cent on average, as landlords prefer to entice tenants rather than reduce rents.

"In Melbourne, landlords across the board increased incentive levels by about 3 per cent this quarter, now averaging 20 per cent, almost double the rate experienced in June 2008."

The second quarter of 2009 has revealed a number of significant leasing transactions across the country.

Harris & Co signed a 10 year lease for 565sq m taking up the whole of level 6 at 68 Pitt Street starting in May 2009. The space had a gross rent of $675/sq m per annum.

BP has committed to a 10 year lease at Seven17 Bourke Street, Docklands. BP is due to occupy about 10,154sq m over the top three floors of the building when it is completed in July 2010.

The Perth CBD has seen the biggest contraction in rents, which have fallen to levels previously achieved in the last quarter of 2007. Premium Grade space in the city is now likely to achieve an average of about $700/sq m per annum and A-Grade rents about $600/sq m per annum.

In Brisbane, the office leasing market is looking greener with pre-commitments still strong.

"Despite a general slowing of leasing activity in Brisbane, pre-commitments to new A-grade office buildings in the CBD remain strong with a number of large commitments in the past 12 months to major groups like Santos, Queensland Gas Company and Arrow Energy absorbing many thousands of square metres of new space," Mr Hunt said.

"The gap between gross face rents for new and existing A-Grade office space is also diminishing rather swiftly as a result of increased vacancy for existing premises, which is currently securing, on average, $625/sq m per annum to $750/sq m per annum, with incentives at 10 to 20 percent."

John Marasco, Managing Director of Investment Sales at Colliers International, said there are no doubts that there has been a shift in the investment market dynamic.

"Enquiry and activity is certainly beginning to lift, as private and offshore investors and syndicates look at opportunities in the current market," he said.

"Buyers want to take advantage of the softer yields and capital values, which have dropped about 9 per cent in Sydney and about 8 per cent in Brisbane this quarter."

According to Colliers International's recent inaugural Investor Sentiment Survey, the majority of investors believe the property market is at, or about to hit, bottom, and therefore see the coming year as a prime time to invest.

"The Investor Sentiment Survey showed positive signs for the office market in general over the rest of 2009, with investors identifying Sydney as the hotspot market to invest in over the next 12 months," said Mr Marasco.

"Of those surveyed, 21 per cent singled out Sydney office buildings as their preferred investment choice, and regardless of lower than average business lending rates over the last few months we have seen several big transactions, showing this change of attitude is already starting to translate into sales."

Major Sydney transactions this year include the $50+ million sale of Investa's Kindersley House to Energy Australia, the $40.5 million sale of 50 Margaret Street to a private investor and the $41 million sale of The Cinema Centre Car Park at 521 Kent Street to a Hong Kong-based investor.

One of the most notable transactions to take place this year was the sale of Industry House in Canberra on behalf of AMP Capital Investors to a private investor for $123 million.  

Another sale on behalf of AMP Capital Investors took place in Adelaide where the Grenfel Centre sold for $76 million in April.

In the Melbourne CBD, AMP Capital investors sold 15 William Street for $167 million earlier this month to purchaser Deka Immobilien Investment. The 40,434sqm office building was sold a reported initial yield of 8.75 per cent

Felice Spark, National Director of Commercial Research at Colliers International, said rising unemployment would continue to stymie a full office market rebound with Australian Bureau of Statistics (ABS) figures showing unemployment across Australia has continued to swell.

She said the June 2009 release of Labour Force Statistics by the ABS showed national employment figures increased from 5.7 per cent (seasonally adjusted) in May to 5.8 per cent in June on the back of the loss of 21,400 jobs across the country.

"Access Economics had also forecasted a decline in white collar employment during the six months to December 2009 – a sign of continued weak demand for the office market.

"Growth in white collar employment is an indicator of absorption levels in CBD office markets and therefore, when coupled with the current state of the market, we expect to see absorption levels remain negative throughout 2009 and office vacancy rates to continue to climb."