Rents for office space in Sydney and Melbourne are set to rise by 23 percent each over the next three years as rising demand is met by a dearth of new supply, according to the latest forecast.

In its latest forecasts, real-estate services firm CBRE said prime net effective rents for office stock would rise from an estimated $705 per square meter in December 2016 to $870 per square meter in December 2019.

Over the same period, prime net effective rents in Melbourne are expected to increase from $360 to $445 per square meter.

Across both cities, the upward rental cycle is being driven by a dearth of new supply.

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In Sydney, even as tenants snap up a new 37,0000 in stock, more stock is expected to be withdrawn in 2017 (mostly for residential conversion) than is to be added, whilst net absorption is expected to further exceed net additions in 2018.

Indeed, significant volumes of new stock are not expected to hit the market until 2020.

This is the case even as limited new supply and strong demand pushed rents up 25.5 percent in 2016.

Likewise in Melbourne, net additions of just 8,000 square meters in 2017 – lower than each of the past two years by a factor of eight – will be nowhere near sufficient to offset the robust net uptake of 58,000 square meters in that year.

In its report, CBRE said tenants in Sydney would be unlikely to relocate in response to the strong rents as rents were in fact largely returning back to historic averages after contracting between 2013 and 2015 and that rental cost was only one factor in a tenant’s location strategy.

In Melbourne, CBRE said demand would be driven by strong white collar employment growth whilst supply additions would be negligible.

Supply in Melbourne will pick up in 2018 with completions at 664 Collins Street and One Melbourne Quarter and a further 150,000 square meters set for completion over 2019-20.

With most of this being concentrated in the Docklands and Western Core precincts, however, Eastern CBD precinct markets are likely to remain tight.

Vacancies rates will drop from 4.7 percent to 3.6 percent and from 8.0 percent to 6.1 percent over the three years to December 2019 in Sydney and Melbourne respectively.

In other markets, CBRE says vacancies will edge downward from post-mining peak rates in Perth and Brisbane and that rents will edge upward in those markets.

Vacancies and rents are likely to be little changed in Adelaide, it said.

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