While conditions remain soft elsewhere, a surge in tenant demand is placing upward pressure on rents for office space in Sydney and Melbourne, according to a new report.

Releasing the January edition of its Office Market Report, the Property Council of Australia said that while conditions in other capitals remained favourable to tenants, net effective rents jumped by 8.6 per cent and 5.9 per cent in the CBDs of Sydney and Melbourne respectively over the 12 months to December last year as strong demand underpinned buoyant occupancy volumes in each market.

In Sydney, net absorption of more than three times decade averages over the six months to January saw vacancy rates remain well below national averages at just 6.3 per cent, notwithstanding the addition of high levels of stock associated with Barangaroo and a number of major CBD developments.

Melbourne, meanwhile, saw vacancies fall from 8.1 per cent last July to 7.7 per cent in January amid net absorption levels which were roughly double historic averages.

Around Australia, requirements for greater levels of office space have shifted away from cities in which the economy is largely exposed to the resource sector and toward those where sources of occupancy demand are more diverse.

While leasing activity on the part of public sector clients has eased over recent years, occupancy momentum in Australia’s two biggest cities is largely being driven by private sector clients in industries such as media, technology and telecommunications.

Moreover, conditions across both of these markets are expected to tighten further over the medium term amid shrinking pipelines of supply.

Real-estate services provider CBRE, for example, expects vacancy rates in the CBD of Sydney to drop to just four per cent by 2018 and those in Melbourne to do likewise by 2019.

Some sub-markets will see tighter conditions still; in Parramatta, for example, CBRE expects no vacancies at all by 2019.

Outside of CBD markets, meanwhile, conditions appear to be holding up reasonably well in significant regional and suburban markets.

Vacancies declined in 13 out of 17 such markets over the past six months, the Property Council said.

Still, conditions continue to favour tenants in resource exposed cities such as Perth, Darwin, Brisbane and Adelaide, with vacancy rates exceeding the national average in each of these markets.

Overall, Property Council of Australia CEO Ken Morrison said a flat-lining in the national vacancy rate masked significant divergence in performance across different markets.

“The almost static national rate makes it look like it is all smooth sailing across the lake,” Morrison said. “This hides what is happening below the surface.

“The economy is in transition; Sydney and Melbourne are reclaiming their historic claims as the economic engine-rooms of the economy, and in most cities, we are witnessing strong increases in demand.

“This demand is being sufficiently met by significant additions to office supply.”

A snapshot of conditions across major markets is as follows:

Sydney:

• As the New South Wales economy continues to outperform, conditions remain tighter in the Sydney market compared with any other CBD market around the country.
• Demand from clients in sectors such as property and technology saw net absorption reach 96,745 square metres in the six months to January – more than three times decade averages across periods of similar duration.
• Vacancies are low across all major localities (CBD, Parramatta, North Shore etc.) except for Crows Nest/St Leonards.
• Over the medium term, markets are generally expected to tighten further across major localities amid a limited pipeline of forward supply.

Melbourne:

• Conditions in the Melbourne market are generally favourable to landlords amid strong demand from clients in areas such as technology and professional services.
• Net absorption over the six months to January came in at a solid 55,857 square metres as vacancies declined across five out of seven CBD locales.
• The lowest vacancy rates by CBD locality are found in Eastern Core (3.6 per cent) and Civic (4.6 per cent).
• As with Sydney, market conditions are expected to tighten further going forward amid limited supply additions.

Brisbane

• Market conditions remain favourable to tenants (vacancy rate 14.9 per cent) following the pull-back in demand from resource sector clients.
• Going forward, potential exists for the withdrawal of considerable volumes of space due to conversions for student accommodation.
• Notwithstanding this, conditions are expected to be challenged further in 2016 as developments such as 180 Brisbane, 480 Queen Street and 1 William Street see more than 190,000 square metres in new CBD space come online. Added to that, a further 220,000 square metres of new space is expected to come online over the course of the year in Brisbane’s CBD fringe.

Perth:

• As vacancies blow out to 19.2 per cent amid an influx of new supply coming on the tail end of the resource sector boom, tenants within the Perth CBD market are currently being spoiled for choice.
• Notwithstanding that, demand has finally stopped falling, with net absorption of 42,387 in the six months to January representing the first period of net positive absorption in three years.
• Thanks to this, along with a diminishing forward pipeline of new supply, conditions are expected to stabilise in 2016.

Adelaide:

• Courtesy of a subdued broader economy, Adelaide is another city where conditions remain favourable to tenants amid soft levels of demand and completion of several developments in the latter part of 2015.
• While the anticipated shutdown of the automotive manufacturing industry and tough conditions in sectors such as defence mean forward demand drivers are few, a limited pipeline of supply means vacancies should at least stabilise going forward.

Canberra:

• While the withdrawal of stock saw market conditions tighten slightly over the past six months, lacklustre demand associated with a mild contraction in white collar employment over the past year and a half has seen the vacancy rate (14.9 per cent) remain high in Canberra and conditions remain favourable to tenants.
• Going forward, however, availability is expected to tighten further over the medium term amid a limited pipeline of new stock.