Office markets in Melbourne and Sydney are booming as strong demand across both cities is leading to tightening vacancies and rising rents.

In its latest Office Market report, the Property Council of Australia said national office vacancy rates across CBD capital markets have fallen from 9.6 per cent in January to 9.1 per cent in July.

Vacancies have fallen for three consecutive six month periods and have contracted from 10.5 per cent as recently as January last year.

These results are being underpinned by respectable growth in both the national economy and white collar employment. Overall, the Australian economy expanded by 3.1 per cent in the year to March. Some traditional office-occupying sectors are doing better. Over the 12 months to May, professional service firms added 50,900 workers to their payroll. Healthcare and social assistance organisations have added more that 100,000 jobs over the past two years. Banks and insurers have added 51,900 jobs over two years, though employment growth in this sector has slowed.

This is driving healthy levels of office demand. Over the six months to July, the Property Council says tenants have snapped up a net 79,217 square metres worth of space. Net absorption has now been in positive territory for nine consecutive six month periods.

Nevertheless, this overall result obscures divergence across the country.

In Sydney, Melbourne and Hobart, demand is strong and conditions are favourable to landlords.

Elsewhere, vacancies are higher and conditions are more tenant friendly. In the Northern Territory – where the economy shrank by more than 10 per cent over the year to March following years of boom as the Ichthys gas project was being built – vacancies are 21.6 per cent.

Pleasingly for landlords, however, vacancy rates have contracted except for Hobart, where they remain stable at a landlord friendly 8.1 per cent.

Property Council of Australia chief executive officer Ken Morrison said the results are a barometer of the overall economy.

“Office vacancy rates are a good measure of economic performance, and Melbourne is clearly the stand-out performer of the nation,” Morrison said.

“Melbourne is our fastest growing city and best performing economy which in turn is creating strong jobs growth and demand for office space at more than twice its historical average.”

Capital by capital (major cities only)

Melbourne

Courtesy of Victoria’s booming economy, Melbourne has the strongest office market of any capital.

As tenants soaked up an extra 79,217 square metres of space (net) between January and July, the Melbourne office CBD vacancy rate plummeted to 10-year lows of 3.8 per cent.

Rents are rising. Over the year to June, prime face rents ($595 per square metre) have risen 9.1 per cent whilst secondary face rents ($405 per square metre) have risen 10.3 per cent. Incentives are also falling.

This is being driven by strong conditions in the economy and white-collar employment.

With state final demand having risen by 4.5 per cent over the year to March, Victoria has the strongest performing economy in Australia. Whilst the state’s finance sector (a typical office occupying sector) laid off a net of 14,000 workers over the year to May following a period of strong employment growth prior to that, this has been more than offset as professional services firms have added 28,000 to their headcount. Each of these workers needs desk space.

Going forward, vacancies are expected to ease as a significant volume of new stock comes online. Between now and the end of 2020, the Property Council says more than 450,000 square metres will hit the market – about 10 per cent of current stock levels. Absorbing this will be a challenge.

Not surprisingly, therefore, CBRE expects vacancy rates to edge back up to around eight per cent by that time.

Sydney

Sydney may have ceded top spot to Melbourne but it still has a tight market. Between January and July, vacancies contracted a further 0.2 per cent and now stand at 4.6 per cent.

This is lining the hip pockets of landlords, whose tenants in prime CBD space are being forced to fork out 40 per cent more in the June quarter to what they did only three years ago.

Like Victoria, New South Wales has a strong economy with output having increased by 3.7 per cent over the year to March.

Employment in office occupying sectors is strong. The state’s finance and insurance sector has boosted its payrolls by almost 19,000 over the year to May. Media and telecommunications firms have added 8,900 over the past year or 30,200 over the two years. Over that same period, professional services firms have put on 38,900 new workers.

Net absorption (9,144 square metres Jan-Jul) remains positive despite having eased over the past year.

Simultaneously, supply is struggling to keep up as stock is withdrawn on account of residential conversion and compulsory acquisition to make way for rail projects such as Sydney Metro. Even though 45,122 square metres of new space has come online over the past six months, this has been offset by an almost equivalent volume of withdrawals.

Going forward, CBRE expects vacancies to remain at around five per cent or less until stock from the next major round of building projects currently underway comes online in 2021.

Canberra

Although Canberra’s vacancy has eased, it is still relatively high at 12.5 per cent.

Even that improvement was primarily driven by withdrawals as a net 25,755 square metres was taken offline over the past six months.

That said, there are positives for landlords. Although the ACT’s overall rate of economic growth is subdued, white collar employment expanded by a respectable 3.3 per cent in the year to March.

Moreover, CBRE expects vacancies to ease but remain high over coming years amid what it says will be reasonably robust white-collar employment growth and a muted pipeline of forward supply.

Queensland

Despite a subdued market for white collar employment, some positive signs in Brisbane are finally starting to emerge.

To be sure, demand for white collar workers (and space to accommodate them) has pulled back. Queensland’s finance and insurance sector, for example, shed 4,700 workers over the 12 months to May. Professional services and IT/media employment is up a bit, but not enough to compensate for the fall in finance.

Despite this, office tenants have taken up an extra 21,739 square metres of space. Thanks to this, as well as the effect of withdrawals, vacancies have fallen from 16.1 per cent to 14.4 per cent.

Going forward, the pipeline is subdued although a respectable 54,900 (gross) is slated for 2019 (Property Council) after no new stock is expected this year.

Consequently, CBRE expects vacancies to trend downward.

One promising sign is that Queensland has now overtaken Victoria as the nation’s hotspot for net interstate migration. Reasonable employment gains and a respectable infrastructure spend is on the horizon, CBRE adds.

Adelaide

Though its vacancy rate of 14.7 per cent remains above average, some green shoots are emerging in Adelaide.

Although prime rents remain stable, those for secondary stock have contracted by 3.3 per cent over the past year to June.

White collar employment (up 1.7 per cent over the year to March) is edging up as hiring increases in health and social assistance, information and media and professional services. In a report released in March, Deloitte Access Economics said it expected moderate but respectable levels of expansion in these sectors over the next two and five years.

In encouraging signs, net demand for office space has increased for four consecutive quarters following two previous quarters of decline.

Whilst more than 25,000 square metres of new stock will come online during 2019, nothing is in the pipeline after that.

Accordingly, CBRE reckon vacancies will contract back toward 12 per cent over the next three years.

Perth

With vacancies at nearly 20 per cent, the market in Perth remains favourable to tenants.

Although the worst seems to be over for the Western Australian economy following the aftermath of the mining boom, the state still has one of the nation’s softest performing economies. Over the 12 months to March, state final demand grew by just 0.6 per cent.

The one factor in landlords’ favour, however, is that no new stock after Capital Square Tower 1 (2018) is set to come online until the first of two proposed towers at Elizabeth Quay comes online in 2022. This, CBRE reckons, will see vacancies improve.

Having previously declined for three and a half years, rents have now been at least steady since the beginning of 2017.