Big lease deals rebound in Q3
After a second quarter in which smaller deals dominated the Sydney CBD office leasing market, the third quarter rebounded as expected with multiple large deals. This included Clayton Utz renewing 17,000 sq m of their Premium grade space at 1 Bligh Street. The NSW Government (Jobs for NSW) also struck a large lease agreement, signing on to 17,000 sq m on floors 1 to 11 in the refurbished B-grade 11–31 York Street for its start-up hub. Global IT firm Dimension Data also took 6,000 sq m at Darling Park Tower 3.
Strong prime absorption drives vacancy lower
The trend of above-average prime-grade net absorption continued with half-year H1 2017 marking the sixth consecutive half-year of above average take-up of stock. On this uptake, vacancy declined, with the Premium rate compressing 300 basis points to 9.5% while the A-grade market, down 50 basis points to 3.6%, recorded its lowest rate since mid-2008.
Prime rent growth bounces back
After muted gross effective rental growth in the second quarter, stronger growth returned in the third quarter. Prime gross effective rents, which were up 1.6% q-o-q and 6.9% y-o-y, were underpinned by an increase in face rent growth and a 50 basis point decline in incentives to move to $916 per sq m per annum. B-grade gross effective rents tracked sideways at $729 per sq m with face rent growth stabilising, while gross incentives remained at circa 20%.
Land taxes hit outgoings
In the third quarter, tenant outgoings increased as landlords passed on higher land tax expenses stemming from recent land revaluations. For prime grade outgoings this equated to a q-o-q increase of 7%, while B-grade outgoings increased by 10%. Landlords have also been exposed to increased electricity costs caused by volatility and uncertainty in the electricity market. Unit rates on multi-year electricity supply contracts have risen significantly compared to previous years, and these rises have started to flow back to tenants.
Prime vacancy tightens, prime rents increase
Prime vacancy sharpened 40 basis points to 6.1% in the first half of 2017. Although there was a lack of contiguous stock, prime net absorption matched the historic average. Tighter vacancy drove further rent growth, especially for Premium grade assets. Prime net effective rents now sit at $376 per sq m per annum, up 1.2% q-o-q and 6.9% y-o-y.
Developers still vying for multiple large tenants
A who’s who of developers, including Lendlease, Cbus and Mirvac, are behind 12 office towers in the CBD that are either under construction or have planning approval. Landlords are jostling to secure large requirements, and there are pre-commitment rumours aplenty. Placement of such tenants is expected to provide market clarity and backfill opportunities for smaller tenants, which are expected to be active over the coming year.
Prime market leading the recovery
Annual prime net absorption to July 2017 of 111,788 sq m saw the vacancy rate decline from 15.5% to 11.7%. While this was partly driven by the completion of new stock, tenants are also choosing to upgrade office accommodation while the market remains favourable to them. In light of this, prime rents have remained little changed, with 1.1% growth y-o-y on a gross effective basis.
Tenants driving a flight to fit-out
Given that vacancy across building grades remains above the long-term average, landlords continue to compete for tenants. Strategies include refurbishing floor space, upgrading building services, and offering speculative fit-outs. The latter have become increasingly common and offer smaller-sized tenants a cost-effective turn-key solution.
Stronger demand outlook
The Brisbane CBD office market is emerging from the worst of the downturn in tenant demand. Looking to the future, stronger economic growth across most sectors is forecast over the next five years, which, coupled with limited near-term supply and extensive infrastructure projects shaping the CBD, should see the vacancy rate trend downwards. The pace of recovery is expected to gather momentum in 2018 and bring with it stronger rental growth.
Australian Capital Territory (ACT) economy leads service sector states
In the second quarter, Canberra’s state final demand growth again exhibited strength. The ACT led all service sector-based states, and was second only to the more volatile Northern Territory. Unemployment in the ACT remained tight at 4.5% and is expected to receive a boost from construction of stage one of the Canberra light rail project, which is now underway.
New development completed in Tuggeranong
As one major office development in Canberra is completed, another begins. In Tuggeranong, Cromwell’s 30,000 sq m A-grade development has reached completion and will be occupied by the Department of Social Services from late September 2017. In the city, the demolition of the former Australian Federal Police building on Mort Street and Northbourne Avenue has commenced. The developer, Amalgamated Property Group, will construct an 18,000 sq m building, which, upon completion in mid-2019, is expected to be Canberra’s first Premium grade building.
Education providers active on Barry Drive
The Union Court redevelopment at the Australian National University campus has forced a number of educational providers to relocate. Landlords on nearby Barry Drive have benefited, with multiple deals reached in the secondary grade circa 500 sq m category.
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