Australian CBD Office m3property Insight
In 2019, the Australian CBD office markets, while largely on the left hand side of the property clock, are at varying places within their respective property cycles.
Opportunities and Challenges
The Australian CBD office markets are at varying places within their respective property cycles.
Most markets are in the upward phase with Sydney and Melbourne approaching a peak, Adelaide in a stable growth phase, Brisbane and Canberra in early upturn and Perth at the nadir of its cycle.
Over the three-year outlook, from 2019-2021, there are likely to be major risks faced by the office markets, including further adoption of technology, challenging economic conditions both domestically and globally and supply cycles gaining momentum, particularly in Sydney and Melbourne.
Despite the risks, a moderate cycle is predicted across all markets. Landlords appear to have taken heed of previous cycles and in most cases are delaying starting new supply projects until pre-commitments are achieved.
CBD Office Market Overview
Key Leasing Market Trends
Occupier demand strengthened, driving positive net absorption in the Australian CBDs, except Canberra, over the year to January 2019. Similarly, vacancy rates declined across all CBD markets, except Canberra.
There has been solid demand from Finance and Insurance, IT and Communications, Wholesale and Retail Trade, Health and Professional Services firms over the year to March 2019. Mining and Infrastructure firms are also taking a growing amount of space in Western Australia and Queensland. Education and Training and the Government Sector have reduced the level of demand for office space nationally compared to the year prior.
A strong national pipeline of infrastructure works and major projects across most states has boosted white-collar employment nationally.
Co-working providers create flexible and collegiate spaces within their tenancies allowing interaction between team members and people from within the same industries. They have expanded their national presence and accounted for a large share of demand for new office space in a number of markets.
Key Investment Market Trends
National trends hide a myriad of individual markets and buildings with their own risk/return profiles.
Landlords constantly assess the requirement for new services, environmental features, additional support, flexibility or technology for their tenants and how to best use space to reduce risk and improve the performance of their assets.
Office property remains on investors’ buy lists, however, buyers are unwilling to pay over-market prices resulting in some properties being taken off the market and yields considered to be close to, or at, their peaks.
Investors continue to pay close attention to tenancy profiles. There appears to be an increasing focus on business services, property services and technology-based tenancy profiles. With a higher proportion of these tenants within the eastern seaboard CBDs, these markets continue to outperform. That said, with improving resources markets, investment demand is increasing in Brisbane and Perth. Adelaide and Canberra are also seeing demand for the limited stock available on the market.
Outlook – National CBD Office
Over the three-year outlook from 2019-2021, there are likely to be risks faced by the office markets, including further adoption of technology, challenging economic conditions both domestically and globally and supply cycles gaining momentum, particularly in Sydney and Melbourne. But there are potential positives with official interest rates likely to be cut again and tax cuts providing further stimulus for improved economic growth.
It was recently reported that many Australian Banks are looking to embark on programmes of cost-cutting by using new technologies including blockchain and artificial intelligence to reduce staff numbers. According to The Australian Business Review’s Margin Call, initially, this could result in job cuts of up to 20-25% in some of the major banks. ANZ is expected to shed 8,000 employees over the next three years, CBA may cut 10,000 jobs over the next 3-5 years.
The risk to employment levels is not restricted to banks with government, accounting, legal, telecommunications and some mining firms looking at similar ways to reduce costs in a period of technological advancement, combined with challenging economic conditions.
While much of the banks’ staff reduction will result in closures of branches in retail centres and main roads rather than head offices, other sectors undertaking similar rationalisation are more likely to directly impact the CBDs and the indirect impacts on supporting industries will also affect office markets generally.
Overall net absorption in the CBDs is expected to be positive over the three-year outlook. The largest annual average is expected in the Melbourne CBD. Melbourne CBD, despite the strong take-up, is expected to see vacancy rise, due to a large increase in supply. Sydney CBD is the other market expected to see vacancy rise by the end of 2021, due to strong net supply. Brisbane is likely to witness low to moderate supply over the period, resulting in falling vacancy over the three years. Perth and Adelaide CBDs will see a rise in supply and vacancy in 2019 before following the same downward trend as Brisbane in 2020 and 2021.
Other than Melbourne, prime face rents have only risen marginally, if at all, over the year to March 2019, and are forecast to continue this trend in the short-term.
Landlords appear cautious about increasing rents in Sydney CBD due to the already high rental rates, which are resulting in tenants downsizing or looking at fringe locations. High vacancy levels in Brisbane, Adelaide and Perth are expected to keep rent growth low in these markets.
Investment yields are set to stabilise in most CBDs over the three-year outlook. Perth is the main exception with a further slight firming expected over the period. Investment demand is likely to come from listed and unlisted funds. Foreign investors appear to be reducing direct investment into Australia, with APRA reporting that commercial approvals, by value, in 2017-18 had fallen by 9.6%.