Market reports
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.
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.
