Positive office leasing sentiments emerge in 2020 as demand continues

According to Graham Postma, National Head of Office Leasing & Managing Director, WA at Savills Australia, “This is clearly evidenced by the continued demand for office assets across the country from institutional & private, local and international investor groups, be they seeking the more core to core plus opportunities offered in the Sydney and Melbourne markets or the value add opportunities offered in the recovering markets of Brisbane and Perth.”

“A number of common themes are emerging across the country in terms of tenant demand.  Each market is experiencing the impact of the growth in the coworking sector, with both small and large tenants seeking flexibility and a less traditional office environment to strengthen their ability to attract, engage and retain talent.” 

“The importance of staff engagement attraction and retention in terms of the office environment is further evidenced by the focus of tenant demand across the country, on either new development opportunities or existing buildings that have been proactive and undertaken refurbishment works to enhance the working environment, services and amenity offered to their occupants. This flight to quality will continue to feature in 2020 and beyond.  Accordingly owners of older buildings with backfill vacancy will need to strategically assess and upgrade their assets to ensure they are in a position to compete for tenants.”

“Given the overall economic climate, occupancy costs remain a major driver in the tenant decision making process in all markets. Unless there is a fundamental business reason to relocate, the trend of tenants to renew in their existing premises, and take the respective market incentives as a rent abatement and thus lower effective costs applies across the country,” he said.

NSW Commentary

The fourth quarter of 2019 was much like the previous three quarters for the Sydney Office Leasing market; patchy demand, misaligned tenant and owner expectations all within a market with vacancy at historical lows. 

According to Tom Mott, State Director – NSW Office Leasing at Savills Australia, “Tenant demand was largely centred on finding value through quality fitted premises whereby the incentive could be allocated against a rent rebatement to counter punch the surging face rents. 

“One new prime grade development reached practical completion with near 100% commitment being Investa and Gwynvill’s 60 Martin Place, Sydney, where they achieved a rent of $1,830 net for the top floor.” 

The world class Quay Quarter Tower (50 Bridge Street, Sydney) development ended 2019 with circa 98% commitment despite completion not anticipated until 2022.

Leasing volumes in the Sydney CBD remained below historical averages in 2019.  A number of factors influenced this, which included coworking disruption to the 100-500sq m market, lack of attractiveness around deals enticing tenants to move, owners renewing leases well in advance of expiry and at times, a sense of uncertainty around the economy.

“There were however a number of significant leasing deals, those included Deloitte who secured 32,000 square metres in AMP Capital’s development Quay Quarter Tower (50 Bridge Street), Wework at 320 Pitt Street where they will occupy 11,000 square metres & Lend Lease has secured Salesforce to anchor 24 floors of its 53 floor $1.9 billion Circular Quay development. 

“There were also a number of significant deals which occurred in advance of lease expiry, QBE, Boston Consulting Group and First State Super all committed to new premises and left behind sublease space or premises to be assigned. The combined Net lettable area of these three moves was approximately 25,000sq m.

“The outlook for 2020 is strong for our clients, we are forecasting 3% vacancy in the Sydney CBD, we have also seen strong qualified demand in the early parts of the year and anticipate leasing deal volumes to increase,” said Mr Mott.

QLD Commentary

As anticipated at the end of last year, 2020 is expected to continue the positive net absorption trend experienced during 2019 in Brisbane.

According to David Howson, State Director - QLD Office Leasing at Savills Australia, “The Prime sector continues to be the shining light with A Grade vacancy expected to continue to tighten for the foreseeable future.

“The continued investment in South East Queensland infrastructure, by the State Government, is likely to provide significant impetus to the local market with the State Government themselves tipped to add significantly to net take-up. 

“Rental growth is predicted to continue within the A Grade sector, however for the short to medium term, the secondary sector continues to face challenging conditions with high incentives and terms more favourable to the occupier. 

“We do expect this trend to change in the later part of the year with well positioned assets, supported with local amenity, likely to be the earliest to benefit,” he continued.

SA Commentary

The 2019 South Australian Office Leasing market has provided a mix of positive activity and reduced business sentiment, as we saw a continued increase in net absorption that ultimately provided another year of progressive results.

Adam Hartley, State Director - SA Office Leasing at Savills Australia said tenants across a variety of industries have been attracted to SA because of economic factors (cost effective rental rates) and business infrastructure, including the 10 Gigabit Network, providing the fastest and most cost effective internet connection. The expansion of companies in the Defence and Mining industries have also contributed to the reduction in vacancy.

“Prime grade space remains hard to find, particularly for large corporations seeking multiple floors in newer buildings, causing an increase in tenants renewing in their current location,” said Mr Hartley. 108 Wakefield Street, Adelaide (due for completion in Aug 2020) is the only new development able to address the pent-up demand in providing larger tenants with a new building solution.

“The fringe market is also changing. There are two multi-storey office buildings under construction with the Thomas Foods development now complete, and another project underway at 210 Greenhill Road for Bridgestone Australia.

“These two new structures in addition to the residential towers and recent refurbishment of several others has raised the bar, and is creating pressure on the owners of older buildings to undertake building upgrades,” said Andrew Ingleton, Director of Office Leasing at Savills Australia. 

“I expect that the bulk of the vacancies will be in the older unrefurbished buildings that lack disabled access to upper levels. I also expect the owners of fringe buildings will follow the successful CBD model and undertake necessary upgrades, improving building visual appeal and performance to increase leasing demand.”  

Mr Hartley explained that during the middle of the year the local government announced changes to Land Tax, which inadvertently caused confidence in the business sector to fall, and leasing activity noticeably slowed. Now that the initial proposed changes have been reviewed to a more positive position, enquiry and business sentiment has started to return. Adelaide’s Office Leasing is looking forward to another positive year in 2020.

“Whilst we may see a slight increase in overall vacancy due to the new GPO tower coming on line in October 2019, and the planned new building at 108 Wakefield Street in August 2020, the outlook for 2020 is for further positive absorption, with increased tenant movement in both the Adelaide CBD and fringe market, stemming mainly from Defence, Technology, Education and coworking.”

VIC Commentary

The 2019 Melbourne office market produced a stellar performance for landlords with increasing rents, falling vacancies and steady demand. Rents have risen in the order of 10% + across all grades, and whilst there has been downward pressure, lease incentives have remained stubbornly high given the strong market conditions.

The lack of choice in the market and increasing costs have resulted in many tenants choosing stay put in their current premises and look to increase efficiencies. This will be reflected in the net absorption figures for the second half of 2019. 

“The steady demand has come from a wide range of sectors with Business services, IT, Education and coworking being the leading lights,” said Mark Rasmussen, State Director of Office Leasing at Savills Australia. “Unlike Sydney, the small suite market remains strong. The wide-ranging demand provides Melbourne with a future solid base.

“Melbourne’s new Silicon Valley, the Richmond/Cremorne markets, have consolidated further with Bunnings, Uber and Afterpay likely to join Reece, Seek, REA, Domain and MYOB to establish the area as a preferred alternative to the CBD, offering creative spaces helping the IT sector to attract and retain staff. Effective rents achieved for these tenants has been comparable to CBD transactions.

“St Kilda Rd, Southbank, and Docklands markets have also delivered solid performances during 2019. It should be noted the low cost Docklands supply pipeline has ended, effectively removing the glass ceiling off CBD and other fringe market rentals. Melbourne rents are now gradually moving upwards toward levels in line with comparable CBDs.”

Mr Rasmussen stated that vacancy rates are expected to remain in the mid 3% for early part of 2020, coinciding with steady demand. Melbourne office markets will peak during the first half of 2020 as the new supply is delivered to the market (approximately 200,000sq m in the second half of 2020).  

“The majority of the new supply is leased. Well-informed landlords used late 2019 and are now using early 2020 to upgrade stock and be in the box seat to compete to lease the back fill space created as a result of the new supply. The majority of the 2020 backfill stock is A and Premium Grade. 

“During the second half of 2020, the backfill supply will slow rental growth and put upward pressure on incentives. We forecast prime rents to remain steady assisted by the pent up demand, quality options for tenants and steady economy. Downward rental pressure is likely to increase on lower grade, poorly presented buildings with the usual flight to quality expected. Marketing of the next cycle of new office stock planned for 2022 onwards is well underway,” said Mr Rasmussen.

WA Commentary

According to David Evans, Director of Office Leasing at Savills Australia, the Perth Office Leasing Market continues on its recovery path. The key trends of 2019, ‘Flight to Quality’ and ‘recentralisation’ back to the CBD, are continuing to provide positive absorption for the CBD.  Buildings such as 240 St Georges Terrace, Kings Square and 140 St Georges Terrace were arguably the biggest beneficiaries of these trends for 2019, either achieving or approaching 100% committed status during 2019.

“The declining vacancy within the prime market is now translating into effective rental growth as landlords look to reduce incentives as occupancy levels within their assets reach for better key market metrics,” said Mr Evans. “Buildings with larger contiguous vacancies are also facing less competition as opportunities diminish, which should provide for the opportunity to improve terms over the course of 2020.”

“Strong competition remains within the B Grade sector, particularly in the smaller ‘spec suite’ space, which is also feeling the effects of increasing competition from the coworking expansion.”

“The coworking sector has had a strong impact in 2019 with both expansion of existing players and significant new entrants opening in Perth. WeWork’s commitment to over 11,000sq m at Central Park and William Square, and Spaces to a further 3,000sq m in The Wentworth Building were the most notable.” 

“There has been significant speculation during recent months around the potential for growth in the education sector within the CBD.  Murdoch University is now exploring this option for a significant 15,000sq m requirement, which may well lead to further activity in the sector going forward.”

“Likewise, we saw a number of smaller resources-based project requirements enter the market during the year, but encouragingly, these all appear to be increasing in size as confidence grows and projects are awarded. This confidence will likely grow in 2020.”

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