Office vacancies rise on weak Perth and Brisbane demand

By Leith van Onselen

From the Property Council comes news that office vacancy rates are on the rise nationally, led by weakening office demand in Perth and Brisbane:

Demand for Australian office space fell dramatically in the second half of 2012 led by big slowdowns in Brisbane and Perth, according to the Property Council’s Australian Office Market Report.

The report showed that demand for Australian office space in the six months to January dropped to less than half the 20-year average and was just one third of that recorded in the first six months of 2012.

“On a more positive note, overall vacancies sit below both the historical average and the GFC peak. Only four major markets recorded vacancies of more than 10 percent,” says Property Council Chief Executive, Peter Verwer.

Australian office vacancies now stand at 8.4 percent, up from 7.8 percent in July 2012.

“The capital cities of mining states went off the boil in the second half of 2012 and vacancy rates rose in two out of three markets across the country,” says Verwer.

“These vacancy numbers reflect the impact of insipid service sector growth and a resources industry engine that has moved down a gear”.

“Sluggish economic growth and weak demand for commercial space reinforce the need for a better targeted fiscal stimulus and further interest rate cuts,” Verwer says.

“From a demand perspective, the best performing markets were Canberra and Adelaide, although new space entering these markets resulted in vacancy increases for both business districts”.

Around 400,000 square metres of office space was released during the past six months – a figure well above the historical half year average of 280,000 square metres.

2013 is expected to be another above average year of supply, with around 633,000 square metres due to be added.

In 2014 a further 244,000 square metres is expected to come on line, while a further 769,000 square metres is slated for 2015 and beyond. The bulk of these additions will be in CBD markets.

Quick Facts

• Overall vacancy up – Australian office market vacancy increased from 7.8 percent to 8.4 percent
• Demand weak – at 83,685 square metres, half-year net absorption was the lowest since the six months to July 2009 and less than half the 20-year historical average
• Supply challenges ahead – 633,294 square metres of stock is due to be added to Australian office markets in 2013, which is above the historical average
• Capital cities up, suburban markets steady – CBD vacancy increased from 7.3 percent to 8.1 percent while Non-CBD vacancy remained at 9.1 percent
• Two out of three markets recorded increases in vacancy – Sydney and Darwin were the only capitals to record vacancy decreases
• High withdrawals in Sydney – Sydney’s decrease in vacancy was due mainly to 87,903 square metres of withdrawals, almost double the historical average
• Negative demand in Perth – net absorption in Perth was negative 18,332 square metres, the only major capital to record net negative demand
• Supply impacts other capitals – although net absorption was positive, vacancy increased in Melbourne, Brisbane, Canberra and Adelaide due to higher supply additions
• NSW suburban markets on top – North Ryde, Chatswood, Parramatta, and Crows Nest/St Leonards had the highest net absorption of all non-CBD markets

Australian CBD vacancy and key indicators

Market	Vacancy rate, Jan 13 (%)	Vacancy rate Jul 12 (%)	Supply Additions, 6 months to Jan 13 (square metres)	Withdrawals, 6 months to Jan 13 (square metres)	Net Absorption, 6 months to Jan 13 (square metres)
Perth CBD	5.7	4.2	21,981	17,347	-18,332
Melbourne CBD	6.9	5.6	73,190	7,220	5,340
Sydney CBD	7.2	8.1	48,637	87,903	8,466
Darwin CBD*	8.0	9.1	0	4,366	-1,676
Brisbane CBD	9.1	8.0	29,786	2,715	2,406
Hobart CBD*	9.4	5.9	12,239	792	-2,013
Adelaide CBD	9.5	7.7	44,179	7,482	9,557
Canberra	11.9	9.8	87,582	6,746	23,328
Total (all CBD markets)	8.1	7.3	317,594	134,571	27,076

* Figures relate to annual changes

So with lots of office supply due to come online over the next few years, and absorbtion rates on the slide, it looks like office vacancy rates will continue to increase, placing downward pressure on rents. With an outlook like that, no wonder the Property Council is calling for “a better targeted fiscal stimulus and further interest rate cuts”. Otherwise, some of its members might need to take a significant haircut.

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