Market reports
The office market presents a mixed picture in Q2 2023. Brisbane continues to see CBD vacancy decrease in contrast to the rest of Australia's CBD markets, where vacancy rates are increasing, especially the Sydney and Melbourne markets, which experience reduced demand and increased supply. Tenants seek shorter leases, less space, and greater flexibility to mitigate business risk. The flight to quality continues with an increasing tenant emphasis on ESG and green buildings.
The industrial real estate market continues to witness a steady decline in vacancy rates. In a previous update, we highlighted that Sydney had the lowest industrial vacancy rate of any city worldwide at 0.3%; that rate has now decreased to 0.2%. As a result of the low vacancy rates, net face rents have been on a continuous upward trend across all industrial markets. Nevertheless, it remains to be seen whether current economic conditions will have any impact. Our industrial space users will face significant challenges navigating this tough market.
Despite the rising interest rates and cost of living pressures, face rents and annual rent increases are on the upswing across most retail sectors. This trend persists despite households cutting down on non-essential spending. Retail rent reviews are typically based on CPI, commonly on a CPI plus 2% basis. According to the latest national CPI figure for March 2023, it now stands at 7%, up from 5.1% a year ago. As a result, some of our retail tenants on a CPI plus 2% review basis may now face their second consecutive year of rent increases of around 7% to 9%, even as the demand for non-essential goods falls. The current economic climate suggests retail deals should be seen as tenant-incentivised however, the trends suggest otherwise.
According to the Property Council's office vacancy stats from January 23, our largest office markets present a mixed picture. Brisbane and Perth and their suburban markets are experiencing positive net demand and declining vacancy rates. Meanwhile, Sydney and Melbourne and their suburban markets, Parramatta being the only exception, are seeing negative demand and increased vacancy. Brisbane and its fringe has recorded over 150,000 square metres of positive net absorption in the past year. Despite these diverging trends, the flight to quality remains a prevailing theme, with most premium-grade markets recording positive demand. As tenants seek to entice their workforce back to the office and companies evolve their ESG policies, the environmental and sustainability factors of the building are becoming increasingly important in premises decisions. Consequently, lower-grade assets may struggle.
Vacancies continue to rise in the two biggest office markets of Sydney and Melbourne, both up by 1% from July 2022 as a result of negative demand. The Sydney CBD saw negative demand across A, B and C Grade stock, however the Premium Grade stock demand remained positive as a result of the post-Covid trend of flight to quality buildings. The Perth, Adelaide and Canberra markets also saw a rise in vacancy over the last six months. Non-CBD vacancy as a whole rose across Australia, with all Sydney non-CBD markets recording an increase in vacancy apart from Parramatta with the only positive demand of just under 13,000sqm. Hobart remains the tightest market in Australia at 2.5% vacancy. Brisbane saw a further decrease in vacancy down to 12.9% and continued to see positive demand at more than 40,000sqm. This is four times the historical average for Brisbane. Watch our Office Market Update and download our Office Market Reports for more information...
There have been limited new developments in large format retail since Covid and we are seeing a decrease in vacancy with an upward trend in face rents and reductions in incentives. We are seeing vacancy decreasing in shopping centers and landlords raising face rents and reducing incentives on offer. Vacancy in neighbourhood centers remains static as it does in the CBD which continues to be impacted by lower office occupancy. Rent reviews have increased across all sectors with expectations of this trend to continue. Retail rent reviews are typically based on a CPI plus percentage basis and Australia’s December CPI figure had a national rate of 7.8%. A rate this high hasn’t been seen since June 1990 and is now the fourth quarter in a row recording above 5%. Watch our Retail Market Update for more information...
The industrial real estate market is experiencing a consistent trend of decreasing vacancy with some cities, such as Sydney, reaching extremely low levels of 0.2%. This is the lowest industrial vacancy rate of any city globally. As a result of this low vacancy we are observing an upward trend in net-face rents across all markets. Watch our Industrial Market Update for more information...
The overall office market vacancy rate for Sydney CBD remains at 10.1% being the highest vacancy rate for over the past decade. Leasing activity has slowed during this quarter because of inflation, rising interest rates and the uncertainty in the overall global economy as these factors have damped business confidence.
