Office Rents to Keep Falling

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Friday, August 30th, 2013
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Rents for office buildings in capital cities across Australia are set to keep falling as vacancy rates rise, while growth in rents across other classes of commercial property is expected to remain subdued, a leading real-estate services firm in Australia says.

In its annual Market Outlook breakfast in Sydney earlier this week, CBRE unveiled forecasts of weak short-term conditions for commercial property but with an expectation that the market will pick up over the longer term.

In 2013, CBRE says it expects office rents to fall by around five per cent as vacancy rates rise across major capital centres such as Sydney, Melbourne, Brisbane and Perth.

Rental growth in the industrial sector, meanwhile, is set to ease back while retail property rents would hit rock bottom this year – with even rental growth in reasonably well performing segments of the market such as warehouses and regional shopping centres expected to remain well below 10-year averages.

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CBRE’s head of research for Australia Stephen McNabb says that while promising yields are attracting foreign investors, below-par rates of growth in the domestic economy will continue to impact the owner-occupier market in the near term.

“The expectation is for below trend [economic] growth for the next two years before we move back to trend in around 2016,” he says.

“In what remains a tough environment, business has had to focus on labour and cost efficiency and we’ve seen a decline in full time employment. That’s really what has been dictating sentiment in the commercial property market and not surprisingly we’ve seen rental growth soften in the year to June 30 – by three per cent in the retail sector and by seven per cent in the office sector.”

Going forward, however, McNabb expects rents to slow in the industrial sector but improve in retail throughout 2014 after hitting rock bottom this year and stabilise in the office market next year as demand recovers in that sector.

office vacancies

McNabb’s comments come amid broader subdued expectations for rents and capital growth of various classes of commercial property around the country – albeit with rising sentiment about the overall property development sector amid strong forward work schedule expectations.

Participants in the September quarter Property Council of Australia/ANZ Property Industry Confidence Survey say they expect negative capital growth over the next 12 months in the office and retail sectors and modest growth only in accommodation and industrial property, with retirement living the only sector where significant capital growth is expected.

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