Office market vacancies to tighten in 2019

Office market vacancies to tighten in 2019

Colliers International expects vacancy rates to squeeze even lower in major office markets in the years ahead, driven by commercial tenants competing for limited space and a rise in demand for large or contiguous office space.

Colliers' managing director for office leasing, Simon Hunt, says office vacancy forecasts for key markets like Sydney, Melbourne and Brisbane have tightened on the back of positive net absorption and continued strong demand.

"Vacancy will continue its downward trend in the Sydney CBD until 2021 with significant commitment to new supply that is coming on line in 2018 2020. In Melbourne, rental growth will continue to accelerate into 2019," says Hunt.

He says contiguous office space, meaning more than 2,000sqm over two or more adjoining floors, will be in short supply across eastern seabord CBDs, with limited options expected to drive rents further upwards in the years ahead.

"This will create a need for tenants to consider their office requirement sooner than they may have intended. In the current climate of low vacancy, particularly in Sydney and Melbourne, contiguous office space can be a competitive advantage for owners," says Hunt.

"Savvy tenants will come to the market earlier, so they don't miss out on future opportunities, with even large space occupiers being prepared to relocate well ahead of lease expiry to secure contiguous floors.

"Demand for large office space above 3,000sqm will continue to rise in major markets. Tight vacancy rates in Melbourne CBD and Sydney CBD, in particular, are impacting on how many leasing deals are being concluded."

Hunt expects that until the end of 2021, CBD markets in Sydney, Melbourne and Brisbane will have limited supply, impacting rents and motivating tenants to consider look for space outside CBD locations.

Managing director for capital markets and investment services, John Marasco, says the yield compression cycle is however seen to be nearing its trough, even though certain Metro office markets still offer investors the opportunity for good income growth over the next two years.

"To meet total return hurdles, we are already seeing the super funds look to the healthcare and retirement living and student accommodation sectors. The emerging Build-to-Rent sector continues to be watched closely by these groups," says Marasco, adding mergers and acquisitions will be a continued theme in 2019.

"With a lack of opportunity for our major global investors to source large scale individual assets, well funded groups are going after their smaller counterparts, in order to achieve scale and deploy capital.

"Overall, both local and offshore investors continue to be very positive about the outlook for Australian commercial property."

Even though population growth will be a key theme during the upcoming New South Wales and Federal elections, Marasco believes the medium-to-long term outlook remains positive with Australia set to continue attracting skilled migrants that help contribute to office demand.

"The continued infrastructure boom, and the positive endorsement this received from the electorate in the recent Victorian election, will also improve the outlook for Australian commercial property," he says. 

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