The outlook for CBD office markets around the country in 2014

The office markets around the country saw negative absorption and declining effective rents over 2013, driven by a slowdown in Chinese interest and a general lack of business confidence, according to Matt Whitby, Knight Frank’s national director of research, however despite this being experienced by all CBD office markets, the forecasts are distinctly separate.

Soft tenant demand and a rising vacancy rate may have some investors concerned, however some cities will fare better than others, explained Whitby.

“Tenant demand remains soft and vacancy rates have been rising, however with the supply pipeline in most markets benign over the next two years, there will be the commencement of downward pressure on vacancy rates in 2014, particularly in Sydney and Melbourne,” he said.

“If occupier demand conditions are to materially improve, we need to see a sustained pick up in fulltime jobs, which will be driven by persistent strength in business confidence and an upswing in business credit. With the stimulus of historically low interest rates washing through the economy, there are tentative signs that this is beginning to occur. This is highlighted by a 15 per cent increase in tenant enquiries this year on 2012 levels, led by professional service based tenants and insurance and finance businesses.

“After delivering approximately 463,000 square metres of new and refurbished stock to the Australian CBD markets, which was down 29 per cent on the 649,000 square metres recorded during 2012, projected supply for 2014 is only 241,000 square metres, which is the lowest level of gross supply additions since 2001, when just shy of 200,000 square metres was completed.”

Relatively strong completion activity was seen over the past two years, with this hiatus in new construction completions this year being a positive for the market. Whitby pointed to an overhang of backfill and sublease space that is awaiting absorption.

“Sydney and Melbourne are showing signs of a return to growth, with an increase in enquiry and a withdrawal or reduction of sublease space on offer, which bodes well. Additionally, the highest and best use of CBD sites are increasingly being slanted towards residential, which will continue to see ageing assets withdrawn from the market permanently and converted to an alternate use, cushioning the impact of below trend demand. This is a real game changer for markets as the consequent increase in withdrawals will also help cushion the market,” he said.

“Net absorption remains strongest for Premium and A Grade space as tenants continue to upgrade their premises, while absorption of secondary stock is clearly negative. This performance gap will continue over the next 12 to 18 months as tenants continue to take advantage of the competitive leasing environment and relocate to better quality office accommodation. Occupiers are acutely aware of the need to attract and retain quality staff and the quality of the accommodation is a significant factor to many corporate relocations.”

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