Australian Commercial Market Snapshot | Q2 2019

August 7, 2019 | Commercial Real Estate

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Another financial year is now behind us, which makes it a great time to take stock of what’s happening in the Australian commercial property market.

Sydney

Average rental rates for A-Grade spaces in the Sydney CBD have increased by about 8%, which is lower than the double-digit increases of previous years. Expect to pay an average of about $1,270 gross per square metre – by far the highest rate in Australia. B-grade CBD office premises now sit at an average of $1,105 gross per square metre.

Vacancy rates for A-grade spaces are currently around 3.6% while B-grade properties are at 4.7%.

North Sydney has also seen an average rise of about 8% for office digs during the past 12 months. A-Grade premises there will now set you back (on average) about $925 gross per square metre, and around $780 gross per square metre for B-Grade suites.

Macquarie Park is significantly cheaper at around $485 gross for A-Grade premises. The Macquarie Park market was affected over the past year by the temporary closure of the Epping to Chatswood railway line between September 2018 and the end of May 2019.

Trends in the Sydney market

While the rental rates are extremely high, there are some encouraging trends that may lead to a slowdown in the short-to-medium term. These include:

  • Rise of sublease: Due to low vacancy, tenants are reluctant to move and prefer to stay put to renegotiate lease or sublease unused space.
  • New trainline to Chatswood open: The new trainline from Chatswood to Epping is now open with a train every 4 minutes during peak hours. This increases the attractiveness of Chatswood, as it reduces travel time for staff commuting.
  • Freeze on residential developments: The Ryde council froze all residential development plans for now so developers and landlords are looking at commercial developments instead.

Image of Melbourne CBD

Read our spotlight on the 2019 Sydney market here.

Melbourne

Average rental rates for A-Grade space in the Melbourne CBD have increased by just over 3% in the past 12 months off the back of tight vacancy rates. Tenants can expect to pay around $765 psqm gross – just over half the cost of comparable space in the Sydney CBD, and only slightly more expensive than what you’d pay in Perth and Brisbane.

The average B-grade rents sit at around $655 psqm gross.

Vacancy rates for prime office space in the Melbourne CBD have dropped slightly over the past year and are now sitting at just under 3%. That’s the lowest rate of any Australian capital city and well below the national CBD average vacancy rate of just over 8%.

Vacancy rates in East Melbourne are also low at just over 3%. That contrasts sharply with the Southbank market, where current vacancy rates are just under 11%. St Kilda vacancy rates are in the mid-range at around 6.6%.

Trends in the Melbourne market

Melbourne is leading the charge to coworking premises nationally. It has the largest concentration of coworking spaces in Australia. In fact, in the last 1-2 years, the number of co-working spaces in Melbourne surged by 63% and there is still at least 20,000 sqm required by co-working facilities. It will be interesting to see how this injection will change the Melbourne’s traditional leasing model.

Other trends include:

  • Competition among Co-working on the rise: Over the past 12 months new co-working spaces opened in Melbourne, which gives prospective tenants more than 15 choices currently in the CBD alone. Tenant representatives can help companies navigate through the different options.
  • Further infrastructure developments increase attractiveness: Projects in the pipeline include the Metro Tunnel and the Airport Rail, as well as the North East Link connecting Springvale Road to the M80 Ring Road and a planned renewal of the Queen Victoria Market Precinct.
  • Melbourne overtakes Sydney migration: For the first time in history, Melbourne has overtaken Sydney with the highest migration rate in Australia. This is a result of external and internal migration. This underlines the rising attractiveness of Melbourne for living and working.

Image of Brisbane CBD

Read our spotlight on the 2019 Melbourne market here.

Brisbane

Rent rates have been flat for Brisbane CBD and inner-city A-Grade premises during the past twelve months. CBD rates are currently $710 psqm for A-grade and $575 psqm for B-grade properties.

Vacancy rates had a large drop from 14.7% to 13% at the beginning of 2019. The relatively high rate puts tenants in a strong bargaining position when negotiating lease arrangements. Growth in key employment sectors such as education, construction, engineering and mining has increased demand for office space.

Trends in the Brisbane market

It’s likely to remain a tenants’ market with the amount of stock available. There’s currently a modest increase in gross effective rental rates occurring in the Brisbane market. 

Other trends include:

  • Queensland becoming more and more attractive: This can be seen in the increase of business activities and a general rise of visitor numbers, which makes the market more attractive for business as well.
  • Infrastructure developments support trend: Major projects include the Cross River Rail, Council Plans for a transit boulevard for Adelaide Street, as well as a revised proposal for 19 Eagle Terrace (which would offer around 21,000sqm office).

Image of Perth CBD

Perth

Perth is seeing an upsurge in the demand for commercial property thanks to an improvement in the employment market. With the increase in demand, the rents are rising as well. Average rates for A-Grade CBD office space are sitting at an average of $735 psqm gross while B-grade spaces are around $542 psqm, making them comparable to the Brisbane market.

Perth’s vacancy rate is also the highest in the country at around 16%. Tenants can certainly use that to their advantage at the negotiating table.

Trends in the Perth market

Like Brisbane, Perth should continue to be a tenants’ market for the foreseeable future. In fact, incentive levels on offer are currently the highest in Australia at a whopping 49%!

Other trends include:

  • Market recovering slowly: Local, as well as foreign investors are showing more interest in Perth again, as market recovers slowly. This is underlined by an increasingly strong labor market for white collar jobs as well as mining jobs.
  • Companies upgrading to better spaces: The commercial market is also in recovery and prices for rent are expected to go up. Many tenants use the current low rates to upgrade to a better space and renegotiate their lease early.

Adelaide

Along with Canberra, Adelaide has the cheapest commercial rent rates you can find across Australia’s major capital cities. You’ll typically pay $495 psqm gross for A-grade spaces and $390 psqm gross for B-grade.

Vacancy rates are currently 14.3% – a huge improvement from last year but still the second highest rate in the country. Incentive levels are at 30%, making Adelaide a competitive market for tenants.

Trends in the Adelaide market

Like Brisbane and Perth, it’s a tenants’ market both now and (we expect) well into the future.

Trends include:

  • Market driven by energy and defense sector: Demand at the moment is mostly for industrial spaces due to the two market drivers, as well as heavy investment in the manufacturing sector.
  • Abolition of stamp duty: The abolition of stamp duty and the low cost of capital has caused a shift in the industrial property market from tenants to owner-occupiers.

 

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The Author

Maxwell brings over ten years of commercial real estate experience and currently works as a tenant representation specialist in the tenant representation Sydney team. He says some of his more memorable projects over the years include an 11,000sqm lease renewal in Islamabad, Pakistan, and the sale of a 200sqm commercial unit on the Canals of Amsterdam.

In his spare time, Maxwell is a loving father, backcountry skiing fanatic, boat lover and food enthusiast.

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