Australia’s office market is tightening as healthy demand and a shortage of supply grip capital cities on the eastern seaboard.

Overall, data from the Property Council of Australia indicates that vacancy rates fell from 10.2 per cent last July to 9.6 per cent in January.

Driving this are Sydney and Melbourne (vacancy 4.6 per cent each), which together account for more than half of the nation’s overall stock and where tenants face greater constraints in their options compared with any other time since the Global Financial Crisis.

Overall, the market is being supported by healthy demand and limited supply. Thanks to modest but respectable levels of growth in economic output and white-collar employment, businesses soaked up around 95,510 square metres worth of space (net) over the period. Looking at supply, CBRE reckon 57,011 square metres was withdrawn over the second half of last year – the first time more supply has been taken away than added over the course of this decade.

Going forward, CBRE reckon vacancies will contract further to 8.8 per cent this year. With the Reserve Bank of Australia expecting higher levels of expansion in GDP (3.25 per cent in both 2018 and 2019 compared with 2.8 per cent in 2017), a robust market for white collar employees ought to help demand. Regarding supply, CBRE reckon net additions will amount to only around 100,000 square metres – the second lowest level in seven years.

Beyond that, with a pipeline of more than 700,000 square metres slated for 2019 and 2020, CBRE expect vacancies to edge back above 10 per cent over the following two years notwithstanding healthy levels of anticipated demand.

Sydney and Melbourne in front

With decade-low CBD vacancy rates of 4.6 per cent each, the eastern seaboard markets of Sydney and Melbourne lead the way.

In Sydney, double digit growth in net effective rents across most markets is burning holes in tenant pockets. Prime net effective rents in North Sydney jumped 15.4 per cent in 2017; secondary rents in the CBD jumped 20.5 per cent. As sky-high rents in the CBD prompt tenants to look elsewhere, non-CBD markets are feeling the pinch. Allianz has consolidated several of its operations in the CBD to take up 5,600 square metres in North Sydney; Freehills expect to move 230 workers to a new office in Macquarie Park this year.

Not surprisingly, markets in the city are being driven by demand and supply. Thanks to 18 consecutive quarters of economic expansion and a healthy labour market, net absorption has been positive for seven of the past eight half-yearly periods (Property Council). On supply, around 50,000 square metres was withdrawn last year and a similar volume will be taken off in 2018 (CBRE). As well as conversions for other uses (residential/hotels and so on), stock is being withdrawn for Sydney Metro.

Across sub-markets, Jones Laing LaSalle (JLL) says vacancies are particularly tight in Sydney Fringe (three per cent), Norwest (4.6 per cent) and Parramatta (3.9 per cent). Tenants may find more room in St Leonards (13.4 per cent), Sydney Olympic Park/Rhodes (9.2 per cent) and Chatswood (10.9 per cent).

Whilst CBD space is limited per se, this is especially so in D, C and A Grade (vacancy 2.1, 3.7 and 3.7 per cent respectively).

Going forward, CBRE reckons tenant pain will intensify throughout 2018 but ease thereon after as 100,000 square metres comes back in 2019 and 2020 and 150,000 square metres comes online in 2021. This year, it expects positive net absorption of around 50,000 square metres and tenant withdrawals worth around 50,000 square metres.

Short term, JLL reckon markets will tighten or remain tight in the CBD, Sydney Fringe, Macquarie Park (especially Prime Grade), North Shore, Norwest, Parramatta and South Sydney and will even improve in St Leonards and Chatswood – albeit with softer conditions persisting around Olympic Park.

In a similar vein, landlords in Melbourne raked in net effective rent increases of 15.9 and 13.4 per cent for primary and secondary stock respectively throughout 2017 as vacancies dropped from 5.9 per cent in July to 4.6 per cent in January. Driven by the strongest growth rates in both economic output and white-collar employment (4.7 per cent and 2.6 per cent respectively, Victoria, year to September) anywhere in the country, hungry tenants snapped up 74,829 square metres worth of space over the six months to January.

Outside the CBD, some space can be found around Spencer Street and the Western Core, but hardly any room is available at Docklands, North-Eastern, Eastern Core and Civic.

Going forward, CBRE reckons vacancies will tighten further this year, but rental growth will ease. All stock slated to come online has been pre-leased, it points out.

Beyond that, net additions of nearly 500,000 square metres over 2019 and 2020 will see conditions ease and vacancies edge up again.

Another solid performer is Hobart, where the economy is growing at a respectable 2.1 per cent, the city is benefiting from significant private and public construction and the government is trying to reinvigorate the city centre through projects such as Parliament Square.

Despite having added more stock over the past six months (15,000 square metres) than for any other half-year period for the past 25 years, vacancies (8.1 per cent) declined and the city remains the third tightest capital city market in Australia.

With no new stock slated for 2018 and only limited volumes (3,800 square metres) anticipated for 2019, there is little vacancy pressure from a supply perspective going forward. Accordingly barring any erosion of demand, the market should hold up reasonably well over the near term.

Elsewhere, conditions are more favourable to tenants.

In the nation’s capital, Canberra has a vacancy rate of 13.1 per cent as federal government fiscal measures have driven several years of decline in white collar employment. Tenant options are particularly evident for B, C and D Grade stock (vacancies 11, 21.7 and 19 per cent respectively). Pricing pressures for these offerings are subdued.

Going forward, CBRE expects conditions to stabilise as the effect of budget cuts tapers off, private sector employment grows and the pipeline of supply is limited. It describes market fundamentals as ‘well balanced’ and expects vacancies to gradually tighten to nine percent by 2020/21.

Next is Adelaide, which has a vacancy rate of 15.4 per cent (down from 16.1 per cent in July) and double-digit vacancies across all grades of stock amid several years of subdued economic conditions.

Secondary stock has been particularly impacted as tenants capitalise upon favourable markets to move into better space. Over the past 12 months, net effective rents have fallen by two and a half per cent for prime grade stock and by five per cent in the case of secondary stock.

Going forward, JLL says optimism that business conditions are turning the corner is growing. Near term, it says both these and leasing conditions will improve.

That said, CBRE expects vacancies to remain 15 per cent or thereabouts for the next three years.

Property Council SA executive director Daniel Gannon says the state needs to attract more companies and reduce its dependency upon a small number of players.

In Brisbane, falling demand (31,6364 square metres) has seen vacancy levels (16.2 per cent) blow out further over the six months to January. Tenant friendly conditions are also evident in the CBD fringe (14.1 per cent vacancy).

In the near term, zero new supply in 2018 will afford the market breathing room to absorb some excess space. Helpfully, the economy (state final demand) expanded by a respectable 3.8 per cent over the past year.

The challenge will come in 2019 with the arrival of around 80,000 square metres of new space including the Shayer Group’s Brisbane Quarter development.

Property Council Queensland executive director Chris Mountford paints a hopeful picture, pointing to demands from Suncorp, the ATO and QSuper for 30,000, 24,000 and 15,000 square metres of space respectively.

Though accommodating for tenants, meanwhile, conditions in Perth are finally improving. Occupier demand has registered two consecutive six-month periods of growth after having declined in eight of the previous nine six-month Property Council survey periods. Whilst lagging other states, economic and white-collar employment growth is at least positive.

That, along with restricted volumes of new supply, is delivering a reprieve to digest massive new supply additions from the peak of the resource sector construction boom.

As a result, vacancies have contracted from 21.1 per cent to 19.8 per cent over the past six months. Rents have stabilised after three years of decline.

Within asset classes, a ‘flight to quality’ has seen premium vacancies fall from 11.7 per cent to 6.3 per cent as tenants use favourable conditions to secure nicer premises.

Going forward, the only significant project which has been confirmed to come online over the short term is the 48,484 square metre Capital Square development (due late 2018).

As a result, CBRE expects vacancies to gradually tighten over the next three years and for rents to stop falling – albeit with some further contractions possible in rents for secondary stock before a floor takes hold in this segment.

That said, it expects no rental growth until at least 2020.

Finally, Darwin once again has the highest vacancies (21.1 per cent) of any capital and has seen negative demand throughout most of the past four years.

As the construction phase of the Ichthys LNG Project winds own, the Territory Government is under pressure to chart a new way forward for the struggling economy.