Market reports
The Western Australian economy has remained strong due to the resource sector and the constant influx of people into the State from Interstate and Overseas. This is expected to continue albeit at a slightly slower rate.
Brisbane CBD’s vacancy continues to remain low at 11.7% in comparison to other CBD markets across Australia. This has resulted from the increase in demand for prime-grade office space and the withdrawal of secondary-grade stock.
While the headline for Adelaide is that the CBD’s office vacancy is at its highest rate since 1995 at 19.3%, much of this has been driven by both positive tenant demand and supply. New building vacancy is estimated at just 3%, with prime A grade vacancy reported as 22% and secondary vacancy 17.1%.
Large Format Shopping Centres have observed a decline in vacancy, while Neighbourhood Centres and CBD locations remain steady. However, there is a limited space for new development in Large Format and Shopping Centres. Reduced vacancy typically drives higher face rentals and reduced incentives in most retail markets, except for CBD where face rents remain constant. Annual rental increases are on the rise across all markets, with retail typically operating on a CPI plus percentage basis, although CPI has descreased slightly from late 2022 offering some relief to retailers. From a tenant perspective, retail lease norms remain unfavorable, driven by landlords' collective power and market coverage. Despite varying market conditions, landlords are not adequately addressing tenant needs in response to current economic challenges.
The Australian Industrial real estate market continues to demonstrate a sustained pattern of minimal vacancy, thereby putting an upward pressue on net rents. Sydney in particular, has maintained a remarkably low vacancy rate at 0.2% for the past two years, leading to substantial increase in net face rents. This situation may prompt substantial users to explore alternative operational locations. Whereas, New Zealand has witnessed a modest allevaition of vacancy pressures, marked by a slight increase in vacancy rates within the major markets. Consequently rental rates have remain steady in response to this shift.
The Australian office market is currently favoring tenants due to the impact of hybrid working and reduced space requirements. Vacancy rate observed an increase from 13.4% to 14.1% over the six months to July 2023. However in New Zealand, vacancy remain steady. Sublease vacancies have increased in Q3, providing tenants with more options and opportunities for favorable deals. Landlords are innovating to attract tenants, offering unique amenities like gyms and collaborative spaces. Flexible workspaces are in high demand, offering lease flexibility, scalability, and reduced costs. ESG principles and partnerships with landlords are becoming crucial for occupiers. Subleasing is gaining popularity, with longer tenures and attractive incentives. The key recommendation for clients is to focus on lease structure before expiration to navigate the evolving office market conditions effectively.
The industrial market remains at ultra-low vacancy levels across all markets. Sydney remains the lowest industrial vacancy rate of any city worldwide. Brisbane, Adelaide, and Perth vacancy rates increased marginally to 0.6%, 0.9%, and 0.6%, respectively. With the increase in face rents and with limited incentives on offer, some larger tenants are looking to move their operations out of Sydney to more affordable locations. Whilst new stock is set to hit the market, this will not have a material impact on vacancy rates as most new developments are subject to tenant pre-commitment.
With high inflation negatively impacting consumer discretionary expenditure, retail tenants are bracing for a demand reduction, with several major retailers reporting a drop in sales and units sold during Q2. To mitigate the risk of reducing demand, some retail tenants are reducing stock orders in the lead-up to the festive season. Whilst one would expect reduced retail demand to strengthen tenant leverage in lease negotiations, limited choice and access to information remain challenging for tenants seeking to renegotiate and contain occupancy costs.
