Metro markets – yields soften, rents hold up

By Charlotte Cossar
Editor - realcommercial.com.au
Rents are holding up despite a national decline in investment sales in the first quarter of 2008. Although nervous investors are taking a 'wait-and-see' approach, rents stack up as both CBD and metropolitan vacancy rates remain tight, according to Colliers International’s latest metropolitan office market research.

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The Metropolitan Office Market Indicator Reports from Adelaide, Brisbane, Melbourne and Sydney found consistently strong economic growth was continuing to fuel demand for office space in the fringe and suburban markets. 

Director commercial research (NSW) Felice Spark says while the global credit squeeze has an impact on the investment market, the underlying strength of the Australian economy, including white-collar jobs growth, continues to drive demand for office space on the fringes and state capitals' suburbs.

"While there have been some serious financial sector problems in the US, which has affected some Australian institutions, there has been, as yet, no clear indication that the Australian economy will be seriously affected.

"There has been some fall-out with some nervous businesses putting expansion plans temporarily on hold, as have investors, however, the massive growth of the Chinese and Indian economies appears likely to continue to underpin the growth in the Australian economy," Ms Spark says.

"In terms of what is happening in our markets at the moment, what needs to be remembered is that we are coming off record highs and some softening in the markets has been inevitable, and, in markets like Brisbane, welcomed by businesses hitherto constrained by limited opportunities for expansion.

"What we have is a very strong market going through a period of US sub-prime induced introspection which will ultimately lead to a more mature, less frenetic and predictable market," she says.

Ms Spark says white-collar jobs growth aside, the current historically tight CBD vacancy rates will also continue to drive metropolitan market demand as tenants seek alternative accommodation.

"Tight CBD vacancies will see continued upward pressure on metropolitan and fringe rents although it is unlikely to be at the same levels as we have witnessed in the previous 12 months," Ms Spark says.  

Adelaide

Adelaide Fringe office market’s historically low vacancy rate is underpinning a rapidly emerging business park sector as demand for modern office space and business expansion space continues to drive a strong market.

The rents have increased an average of $20/m² across all grades, with the greatest rises in A and B grade stock where increases averaged $25/m², while incentive falls and tighter yields reflected a landlord’s market, according to Colliers’ research.

Brisbane

Brisbane’s inner fringe office market is predicted to come off the boil slightly in 2008 as global economic uncertainty feeds through to the Queensland state economy.

Colliers International state director office leasing Matt Kearney says this might come as a relief for many businesses whose expansion plans were curtailed in recent years by a lack of supply throughout the commercial office market.

Mr Kearney says the vacancy rate across the entire Brisbane fringe office market, including Spring Hill, Milton, Toowong, the Inner South and the Urban Renewal precinct, is extraordinarily low, at just 2 per cent.

Melbourne

In Melbourne, the strength of the economy and indications that white-collar employment will continue to grow throughout 2008 are likely to maintain the downward pressure on metropolitan office vacancy rates and upward pressure on rents, at least in the short term.

Colliers’ research found the ongoing tenant demand will continue to drive the market and that lower vacancies and higher rents will combine to drive both pre-commitment and speculative development.

Sydney

Predicted take-up will see a decline in the overall metropolitan office vacancy rate by mid 2008, moderate net face rental growth is expected to continue, and yields are expected to soften, while increasing costs may delay some speculative developments in 2008.

The research found general economic conditions indicate some softening in the market heading into 2008, which may have an impact on leasing across Sydney.

Mr Spark says based on forecast white-collar employment growth data from Access Economics, it was likely that positive net absorption levels will continue until at least the end of 2008 before a decline.

 

 

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