Businesses looking to establish long-term rental agreements for office space should do so now before prices increase, a new CB Richard Ellis report has warned, with offices becoming more expensive as white-collar workers multiply after the financial crisis.
The researcher’s new MarketView report shows that in the second half of 2010, the overall vacancy rate for Australian CBD office markets decreased by 0.4 percentage points, with vacancy at 8.3% in January 2011.
Report author Like Nixon says the main drivers of growth will be in Sydney and Melbourne, where firms start hiring again after years of lean operations – overall, rents are expected to grow by 3.8% per annum over the next four years.
“Over the next two years, the main areas of growth will definitely be in Sydney and Melbourne. There is a supply constraint in both of those markets with demand outpacing supply.”
“Compared to residential vacancy rates, we’re still talking about 6.5% in Melbourne. But in the next couple of years it will be hard to find more space.”
With corporations improving their financial health, they will expand into commercial property. The new report says this will provide office markets with a “return to relative strength”.
“A marked improvement in business sentiment locally is expected and will help to continue the strength of recovery in the market,” the report says.
“Growth from major trading partners remains strong, driven largely by emerging economies. Output growth is likely to be consistently strong over the next five years, constrained only by a potential lack of workers, materials and finance.”
In fact, the growth of all of this will push up inflation, the report predicts, with the cash rate expected to rise by one percentage point during the next 18 months.
But while Melbourne and Sydney may be the main areas of growth, Nixon points out that Queensland and Western Australia will be some of the most expensive markets once a recovery gets underway there.
In fact, rents are expected to remain highest in Perth, according to the report, and are “expected to be comfortably the nation’s most expensive office market on average by the end of 2015”.
The data comes as new figures from Jones Lang LaSelle indicate the gas ventures being explored in Western Australia – namely the Gorgon project – will take up huge amounts of office space in the next few years.
West Australian research manager Andrew Bouhlas told the Australian Financial Review this morning that tenants associated with major projects occupied 57,000 square metres in 2009, and those same tenants have taken an additional 60,000 square metres during the last 12 months.
Nixon says that is to be expected to continue over the next five years. “They definitely have enough supply there, but it’ll keep rental growth strong in those areas,” he says.
“We’re seeing Perth and Brisbane starting to outpace Brisbane at the top end of the town, and we don’t see that changing.”
In Brisbane, the vacancy rate is expected to drop down to 8.3% by the end of 2015, with an average of 9.5% during the 2011-2015 period.
“As a result, rents are likely to grow only modestly once the vacancy rate begins to shrink. Prime net face rents are forecast to grow from their current rate of $619/sq m at a compound rate of 3.3% per annum between 2011 and 2015.”
Adelaide will have a more consistent rate of growth, tied to expansion in Melbourne. Rents are forecast to grow by just 2.9% per annum between 2011 and 2015.
Canberra is expected to be one of the cheapest markets, with rents falling by 1% in 2010. The next three years will see more incentives given to tenants as rents rise, with Nixon pointing out the flight to green buildings by government tenants is “seeing a lot of new supply being added”.
In Melbourne, supply is beginning to tighten up, with net additions “expected to be at their lowest level since 2002”. This, along with greater demand, will increase rents at a compound average of 5.2% per annum over the next five years.
The story is the same in Sydney, where rents are expected to grow over the next two years before higher supply rates put downward pressure on prices.
But the message is clear, according to Nixon, who says businesses wanting to lock-in long-term deals should so now before incentives disappear.
“We see that in every property cycle, incentives go up, and incentives are definitely coming down over the next year. Now is the time to be looking for one.”
“We’re seeing Perth and Brisbane starting to outpace the top end of town, and we don’t see that changing. By the end of 2015, we think Perth is going to be the most expensive market – that’s where all the growth is going to be.”
Patrick Stafford is a freelance journalist and a former deputy editor of SmartCompany.
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