Australian Commercial Market Snapshot | Q3 2019
The year is flying by and we are already in the 3rd quarter of 2019. Let’s have a look at what has been going on over the past few months in the commercial Australian real estate market.
Sydney remains by far the most expensive capital city in Australia, with A-Grade office spaces leasing for $1,180 gross per square meter. B-Grade is slightly lower at $935 gross per square meter, but also well above rest of the country.
Vacancy rates for A-grade spaces are still declining and currently at a record low of 3.1% in the CBD, while B-grade properties are at 4.5%, also a slight decrease over the last quarter.
The rental rates in the fringe are heavily affected by the tightening vacancy in the CBD. Properties in Surry Hills are now on the market for up to $950 gross per square meter. In Redfern and Pyrmont they are up to $800 gross per square and rents in North Sydney at the higher end of the spectrum are at $900 gross per square meter.
Trends in the Sydney market
With the tight vacancy and the increasing rents not only in the CBD but in the fringe area as well, there are some trends to be seen:
- High pre-commitment: As vacancy remains at a 10-year low, tenants are reluctant to move and pre-commitments to buildings currently under construction account for the majority of transactions in the market. A good example is Salesforce, who recently pre-committed to 12 floors with naming rights. ‘Salesforce Tower’ will be Sydney’s tallest office building when Lendlease completes it in 2022, located in the coveted Circular Quay.
- Subleasing is on the rise: We have seen an increase in the number of sublease opportunities over the past quarter, not only in the CBD but also in suburban areas such as Macquarie Park. Canon is currently offering 2.700sqm at 2 Talavera Road while Fujitsu is offering 4.000sqm at 118 Talavera Road. These offer attractive alternatives for tenants looking in the market.
- Flexible workspaces shaking things up: We’re noticing an increase in smaller office suites (80sqm to 150sqm) hitting the market in the CBD as they compete directly with flexible workspaces that are being aggressively marketed.
Read our spotlight on the 2019 Sydney market here.
Average rental rates for A-Grade space in the Melbourne CBD have stayed fairly steady over the last few months. Tenants can expect to pay around $765 psqm gross, well below the prices in Sydney. For B-grade premises, the rent sits at about $655 psqm gross.
Vacancy rates for prime office space in the Melbourne CBD have dropped further over the last few months and are now at a record low of 2.5%, even lower than the tight Sydney market.
In contrast vacancy rates in St Kilda are around 6.5% and in Southbank just above 10%.
Trends in the Melbourne market
Melbourne remains the tightest market of Australia’s CBDs. The trends below are set to effect this:
- Controversial C270 development restrictions limiting new supply: This State Government Planning initiative, amongst other things, affects site set back and FSRs. Coupling limited supply with softening interest rates and Melbourne’s population growth, we are ensured that vacancy rates will stay tight for the foreseeable future.
- High pre-commitment: Similarly to the Sydney market, the pre-commitment for buildings currently under construction is high. Of the 400,000sqm of new stock under construction, 300,000sqm is already pre-committed. This is exacerbated by flexible workspace operators such as WeWork and JustCo, who continue to lease up to 10,000sqm at single office locations and have no sign of slowing down.
- Low face rents: Despite the above, Melbourne’s relatively low face rents will ensure it remains as Australia’s most attractive office market for any business reliant on space and attracted to a lower cost of business.
Read our spotlight on the 2019 Melbourne market here.
Rent rates have seen a slight increase over the last few months for the CBD and inner-city A-Grade premises. CBD rates are currently $745 psqm gross for A-grade and $625 psqm gross for B-grade properties.
Vacancy rates have been going down further to just under 10% for A-Grade properties and 14.5% for B-Grade. Even though the vacancy is slightly decreasing, tenants are still in a strong bargaining position when negotiating lease arrangements.
Trends in the Brisbane market
Despite the drop in vacancy, Brisbane is likely to remain a tenants’ market with the amount of stock available and the overall increasing attractiveness of the region.
Other trends include:
- Small suites available: Despite a slight decrease in the vacancy rate in the CBD, the stock for high quality fitted out suites ranging from 100sqm to 400sqm remains high.
- Demand drivers: The biggest demand for space over the past quarter has come from the finance and insurance industries, followed by the Government sector. Several companies with satellite offices on the Gold Coast have been consolidating their operations in Brisbane to increase synergies between staff and reduce real estate costs.
- Queensland attractive for businesses: The state is benefiting from government investments, infrastructure developments, lower interest rates, and rising migration. There are plenty of grants available from the government, especially for smaller business, such as the Business Growth Fund Program.
The market in Perth is in continuous recovery. This has led to a slight increase in rents, with average rates for A-Grade CBD office space at $740 psqm gross while B-grade spaces are around $550 psqm.
Perth’s vacancy rate is also the highest in the country at around 17% for A-Grade premises, more than 10% more as in cities such as Sydney and Melbourne.
Trends in the Perth market
Perth is expected to be a tenants’ market for the foreseeable future, similar to Brisbane. In fact, incentive levels on offer are currently the highest in Australia at up to 50%!
Other trends include:
- No shortage of space: With existing vacancy rates above 20% and further developments underway, the CBD office market offers plenty of options, especially for large size single floorplates.
- Tenants taking advantage: Landlords are capitulating to Tenants, offering full-fitouts and/or high incentives. Additionally there’s an increasing focus on building facilities, energy initiatives and environmental ratings, as well as amenities such as end of trip facilities (bike racks, showers, lockers). While the market is slowly recovering, now is the time to lock in a long term lease with a low rent and with annual increases as low as 2.8%.
Adelaide remains one of the cheapest of Australia’s major cities when it comes to commercial rental rates. Rents have remained steady over the past few months and are about $495 psqm gross for A-grade spaces and $445 psqm gross for B-grade.
Vacancy rates remain fairly steady as well, sitting at around 13%. The same goes for incentive levels which remain at 30%, making Adelaide a tenant market, similar to Perth and Brisbane.
Trends in the Adelaide market
- Defence sector activities picking up: Adelaide is set to become the new heart of the defence industry in Australia, with the Hunter-class future frigates to be built for the Royal Australian Navy there. This leads to an increased interest from companies in the defence sector for office and warehouse space, as well as new staff.
- Stronger demand in the CBD: Even though there is a stronger demand in the CBD for office space, this is yet to have an effect on rents. A slight drop in incentives is expected soon. However new supply is expected to come on the market end of this year and early next year. This will soften the above effect and likely lead to an unchanged situation in the Adelaide CBD.