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National Metropolitan Market Overview
Rents hold up in tight metro marketsOverview
Rents are holding up as both CBD and metropolitan vacancy rates remain tight despite a national decline in investment sales in the first quarter of 2008 as investors take a `wait-and-see’ approach, according to Colliers International’s latest metropolitan office market research.
The Metropolitan Office Market Indicator Reports from Adelaide, Brisbane, Melbourne and Sydney found consistently strong economic growth was continuing to fuel demand for office space in the fringe and suburban markets.
Director Commercial Research (NSW), Felice Spark, said while undoubtedly the global credit squeeze had had an impact on the investment market, the underlying strength of the Australian economy, including white-collar jobs growth, continued to drive demand for office space on the fringes and in the suburbs of the state capitals.
"While there have been some serious financial sector problems in the US, which has affected some Australian institutions, there has been, as yet, no clear indication that the Australian economy will be seriously affected.
There has been some fall-out with some nervous businesses putting expansion plans temporarily on hold, as have investors, however the massive growth of the Chinese and Indian economies appears likely to continue to underpin the growth in the Australian economy," Ms Spark said.
"In terms of what is happening in our markets at the moment, what needs to be remembered is that we are coming off record highs and some softening in the markets has been inevitable, and, in markets like Brisbane, welcomed by businesses hitherto constrained by limited opportunities for expansion.
What we have is a very strong market going through a period of US sub-prime induced introspection which will ultimately lead to a more mature, less frenetic and predictable market," she said.
Ms Spark said white-collar jobs growth aside, the current historically tight CBD vacancy rates would also continue to drive metropolitan market demand as tenants sought alternative accommodation.
"White collar jobs growth and tight CBD vacancies will see continued upward pressure on metropolitan and fringe rents although it is unlikely to be at the same levels as we have witnessed in the previous 12 months," Ms Spark said.
Key findings include:
- Sydney: Predicted take-up will see decline in the overall metropolitan vacancy by mid 2008. Moderate net face rental growth expected to continue. Yields expected to soften, while increasing costs may delay some speculative developments in 2008.
- Melbourne: Ongoing tenant demand predicted continue to drive the market. Lower vacancies and higher rents expected to combine to drive both pre-commitment and speculative development.
- Brisbane: Fringe office market predicted to come off the boil slightly as global economic uncertainty feeds through, however it may come as a relief for businesses whose expansion plans have been curtailed in recent years by a lack of supply.
- Adelaide: Historically low vacancy rate in the Fringe office market is underpinning a rapidly emerging business park sector.
Sydney
Predicted take-up will see a decline in the overall metropolitan office vacancy rate by mid 2008, moderate net face rental growth is expected to continue, and yields are expected to soften, while increasing costs may delay some speculative developments in 2008.
The Sydney Metropolitan Office Market Indicators Report: Autumn 2008, found general economic conditions indicated some softening in the market heading into 2008 which may have an impact on leasing across Sydney - the Hudson Employment Expectations Report reveals NSW employer hiring expectations have declined for the second quarter of 2008 for the first time since the beginning of 2007 – however employment expectations remained strong for the state.
State Director Commercial Research, Felice Spark, said, based on forecast white-collar employment growth data from Access Economics, it was likely that positive net absorption levels would continue until at least the end of 2008 before a decline.
"We would expect to see absorption levels ease in 2009 overall, and more significantly in the latter half of the year, however despite the slowdown in the jobs growth rate, it’s important to note that it remains positive over the next five years," Ms Spark said.
She said demand for metropolitan office space would also continue to result from the record low vacancy level across Sydney’s CBD markets.
Sydney’s CBD vacancy declined from 5.6% to 3.7% as at January 2008 and is expected to remain below 4% for the next two years given limited new supply.
The report found the overall metropolitan office vacancy rate remained relatively stable in the last six months at 9.4% with some sub-markets, such as North Sydney, Norwest and Rhodes, experiencing an increase in vacancy as a result of new supply, while in others, such as St Leonards, North Ryde and Sydney Olympic Park, vacancy rates decreased sharply due to strong leasing activity.
Rents
The report found net face rents grew by 5% to 10+% on average in 2007 largely driven by new A grade supply and strong tenant demand for quality assets. Ms Spark said moderate net face rental growth was expected to continue throughout 2008 with the strongest growth expected to occur in the CBD Fringe, followed by North Sydney, St Leonards and Parramatta.
Construction
The report predicted that increasing construction costs, limited debt availability and the increasing costs of borrowing, could delay some speculative developments meaning that earlier predictions of an oversupply in some markets including North Ryde may not occur until after 2010 if at all.
Developments at 21 Talavera Road, 88 Talavera Road and Epicentre in North Ryde, which were expected to come online in late 2009/early 2010, have all been delayed.
Investment
The report found there had been limited investment sales activity in the first quarter of 2008 with only one major transaction occurring, however Ms Spark said while the uncertain financial climate had played its role, the volume of metropolitan office investment sales activity in the first quarter of 2007 had also been moderate with only a handful of sales recorded.
She said yields had almost certainly peaked in late 2007 and would soften in 2008 by as much as 25 to 100 basis points as investors delayed their investment decisions.
Melbourne
In Melbourne the enduring strength of the economy and indications that white collar employment will continue to grow throughout 2008, are likely to maintain the downward pressure on metropolitan office vacancy rates and upward pressure on rents at least in the short term.
The Melbourne Metropolitan Office Market Indicators Report: Autumn 2008 found the ongoing tenant demand would continue to drive the market and that lower vacancies and higher rents would combine to drive both pre-commitment and speculative development.
Colliers International’s Eastern Office Chief Executive, Rob Joyes, said there had been no sign of slowing in employment growth and that business investment had increased by 8% over the year to the December quarter.
He said the Hudson Employment Expectations survey found that while employer sentiment had dropped for the first time in the last two years, employers were nevertheless expecting to increase their staffing levels in the June quarter.
Mr Joyes said he expected significant demand to come from the growth and expansion of existing, predominantly Blue Chip tenants, and to a lesser extent from an influx of tenant enquiry from other states with tighter vacancy rates and higher rental rates than Melbourne.
Colliers International’s Victorian research analyst, Amita Mehrotra, said the overall vacancy rate had increased marginally from 5.75% in July to 6.15% in April 2008.
Construction
Ms Mehrotra said the low vacancy rates and strong tenant demand were the key drivers behind more than 150,000m2 in speculative and pre-committed developments either recently completed, under construction or due for completion in the next 12 months.
She said the new developments in several regions and strong tenant demand had driven a rise in average net face rents with the City Fringe, in particular, seeing a circa 10% increase since July to now average $260/m2 - $320/m2. The Inner East has also recorded face rental growth and now averages $265/m2 - $295/m2, up from $240/m2 - $285/m2 in July, while rents in the Outer East have risen 7% during the last six months.
Ms Mehrotra said with high tenant demand and the scarcity of large space options, face rents should continue to increase over the next 12 months.
Investment
The report found while the investment sales market had been very active during the later half of 2007 with over $385 million in major transactions (more than $5 million), there had been limited activity in 2008.
However, according to Associate Director Investment Sales, Peter Bremner, the market should see a greater level of activity in the second half of the year as a combination of softening yields and better purchasing opportunities encourages buyers to take advantage of both prime and secondary opportunities.
Brisbane
Brisbane’s sizzling inner fringe office market is predicted to come off the boil slightly in 2008 as global economic uncertainty feeds through to the Queensland state economy according to the Brisbane Fringe Office Market Indicators Report: Autumn 2008.
Colliers International State Director Office Leasing, Matt Kearney, said this may come as a relief for many businesses whose expansion plans curtailed in recent years by a lack of supply throughout the commercial office market.
Mr Kearney said the vacancy rate across the entire Brisbane fringe office market, including Spring Hill, Milton, Toowong, the Inner South and the Urban Renewal precinct, was extraordinarily low at just 2%.
"However our research shows that a new picture is starting to emerge. We now expect vacancy rates to ease over the remainder of 2008 which will provide welcome relief to the many businesses that have had their expansion plans curtailed by an extremely tight commercial office market," he said.
The report also noted that rents in some areas had reached unprecedented levels in the past 12 months, climbing to as much as $550/m2 for new developments in the Urban Renewal precinct.
It suggested the strong rental growth around 17% in 2007 would decline to a more modest 7% to 10% in 2008.
New development
Commercial Research Manager, Helen Swanson said the rapid expansion of the Brisbane market would see significant changes to the face of the city in the short to medium term.
“Proposed changes to height restrictions outlined in the Fortitude Valley Urban Vision Document could allow 30 storey buildings in some precincts of the Valley which would dramatically alter the suburb’s skyline, while Bowen Hills could potentially become a secondary business hub, similar to North Sydney, with about 300,000m2 of office space forecast to be built in the area.
These changes in Fortitude Valley and Bowen Hills are the most significant we’ve seen in the fringe office market for quite some time. They could lead to the creation of what would be effectively sub-cities, offering major tenants credible alternatives to the congested Brisbane CBD," Ms Swanson said.
Investment
Ms Swanson said investors would continue to enjoy a robust market with fundamentals remaining strong despite a softening in rental growth and an injection of new supply.
She said while there was significant stock on the market, only quality investment sites were moving and that market sentiment suggested 2008 would see yields softening between 0.25% to 0.50% basis points.
The report found top of the market deals were achieving well over $5,500/m2, and initial yields well under 6%.
Adelaide
Adelaide fringe office market’s historically low vacancy rate is underpinning a rapidly emerging business park sector as demand for modern office space and business expansion space continues to drive a strong market.
The Adelaide Metropolitan Office Market Indicators Report: Autumn 2008 also found rents had increased an average of $20/m2 across all grades with the greatest rises in A and B grade stock where increases averaged $25/m2 while incentive falls and tighter yields reflected a landlord’s market.
According to Associate Director Office Leasing, Nicholas Shinnick, Adelaide fringe market’s current 2.2% vacancy rate – one of the lowest rates nationally – was unable to sustain the current demand for space.
"The emergence of business parks is an absolute necessity because the existing fringe market simply does not have the space. There’s been a huge amount of absorption and huge white-collar growth in Adelaide. If the current conditions persist the market will follow Perth and Brisbane and fall below 2%.
Worldpark:01 can supply 34,000m2 on the doorstep of the fringe market and only 2 kilometres from the city with 23,000m2 in the first stage to come online in a little over 12 months. If that wasn’t coming out of the ground I don’t know where the additional supply the market requirements would come from," Mr Shinnick said.
According to State Research Analyst, Katy Dean, Fringe vacancy levels are likely to stay close to 2% for at least another 12 months.
She said the Hudson Report’s survey of 7,195 employers across Australia found South Australia was the only state or territory to record a rise in sentiment with a net positive of 47% of employers surveyed, indicating an intention to increase permanent employment levels over the forthcoming quarter.
The report found there had been limited investment opportunities in 2008 with owners holding a firm grip on their prime capital assets, however the few market offerings had received significant interest reflected in tight yields such as that of 164 Fullarton Road which sold for $8.125 million on a yield of 7.01%.
