Australian Commercial Property Market Wrap | Q2 2018
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.
Rent for A-Grade office premises in the Sydney CBD has increased by double digits over the past year. Now, you can expect to pay $1,190 per square metre (by far the most expensive rate in Australia). Incentives are also relatively low, averaging between 15 to 19%.
Vacancy rates are running at between 4 and 5%, which is well below the national average of just under 10%. It’s clear to see that Sydney office space continues to be one of Australia’s most sought-after assets despite such reduced stock levels.
A-Grade office space in North Sydney and Parramatta have also experienced double-digit increases, though their average rates are far more competitive than the CBD (about $900 and $635/m2 respectively). Macquarie Park rates are cheaper again – expect to pay around 400/m2 for comparable space, a rate that has stayed relatively flat over the past twelve months.
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:
- A decrease in leasing transactions. More and more businesses are electing to renegotiate their lease and stick-it-out a few more years, rather than moving. This is certain to cool the market and improve rent and incentive levels.
- A reasonably substantial injection of new stock, with nearly $8 billion worth of commercial real estate projects either under construction or scheduled to commence shortly.
- Continuing demand for co-working spaces with shorter-term, more flexible lease arrangements. This will undoubtedly put pressure on Sydney’s extraordinarily high office rents and unrivalled vacancy rates.
Read our spotlight on the 2018 Sydney market here.
Office rental rates in the Melbourne CBD have soared by over 10% in the past year, but they’re still a lot cheaper and come with higher incentives than comparable space in Sydney.
Rates for Melbourne A-Grade suites in the city centre average about $745/m2, accompanied by incentives of 27%. That incentive level also compares favourably with what’s currently being offered in Sydney.
Melbourne CBD office rent is slightly higher than both Brisbane and Perth at the moment. However, the average incentives offered in those two cities are higher (36% and 49% respectively).
Like Sydney, vacancy rates sit at about half the national average, and stock levels have remained relatively stable throughout the year.
On Melbourne’s city fringe, office rents in St Kilda have spiralled upwards by more than 15% in the last twelve months off the back of lower stock levels. Vacancy rates in the area are still running at around 7.2%. Nonetheless, it’s still comparably affordable at 450/m2.
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:
- A spike in the demand for office space due to the healthy population and employment growth and tenant displacement in other Melbourne markets due to lack of supply.
- A reduction in commercial lease incentives due to high demand
- Commercial stock withdrawals (approximately 25,000 sqm) and relatively low stock injection.
Read our spotlight on the 2018 Melbourne market here.
Rent rates have been flat for Brisbane CBD and inner-city A-Grade premises during the past twelve months. CBD rates are currently $688/m2 and about one hundred dollars cheaper on the city fringe.
Vacancy rates in both areas are high at 16% and 14% respectively. That’s triple the national average! That puts tenants in a strong bargaining position when negotiating lease arrangements. Landlords are keen to offer incentives to secure high-quality tenants, with the average incentive level hovering at 36%.
There’s also been a slight drop in Brisbane office stock over the last year.
Trends in the Brisbane market
It’s likely to remain a tenants’ market with the amount of stock available. However, some foresee a modest increase in gross effective rental rates throughout 2018 and beyond. This comes off the back of development completions, a limited new supply of quality office space and healthier employment levels.
Perth is another market where both office rent and stock levels have remained flat during the past financial year. Average rates for A-Grade CBD office space are sitting at an average of $728m2, making them comparable to the Brisbane and Melbourne markets.
Perth’s vacancy rate is also high at just under 20% in the CBD, about four times the national average. 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%!
Along with Canberra, Adelaide has the cheapest commercial rent rates you can find across Australia’s major capital cities. You’ll typically pay $475/m2 in the CBD and just over $400/m2 on the city fringe.
Vacancy rates are triple the national average in the CBD and more than double on the fringe. Incentive levels are at 40%, and stock levels have been flat over the last twelve months.
Trends in the Adelaide market
Like Brisbane and Perth, it’s a tenants’ market both now and (we expect) well into the future. However, vacancy is being driven down by two key factors:
- Major government contracts, spurring the relocation of a number of businesses and individuals
- The abolishment of the payroll tax for small businesses, which will make it financially attractive for some businesses to operate in from South Australia.
Read our spotlight on the 2018 Adelaide market here.
Office rental rates have increased by just under 3% in the Canberra CBD during the last year. At $455 m2, they’re almost on par with those in Adelaide.
Vacancy rates between the two cities are similar, but the level of incentives being offered in the nation’s capital is much lower at around 20%. Stock levels in Canberra have increased slightly over the past year.
Trends in the Canberra market
The vacancy levels in Canberra’s older office spaces are increasing significantly. It’s likely that these buildings will need major refurbishment or be knocked down and redeveloped to attract tenants.