CBD office vacancies tipped to fall in 2014

While the recent GDP numbers proved disappointing, there’s a distinct lack of gloom in the CBD office sector, with many agents predicting a fall in vacancies in 2014.

At first glance, that outlook may appear a little  too sunny, with vacancies currently topping 10%, but Tony Crabb, Savill’s National Head of Research, told me that a close look at tenant movements and business conditions pointed to increasing absorption of new CBD offices.

“We monitor large city buildings floor by floor, tenant by tenant, for movements including those yet to be announced,” he said.

“When you add in to that analysis what’s likely to shape demand over the next six months, what you find is any uptick in business conditions will see the vacancy rate shift closer to 8% by the end of 2014.”

Savills’ prediction echoes those by Dexus, Knight Frank and others that it’s the recently completed office space which will be snapped up first in 2014.

If that’s right, the office market is shaping up to a year dominated by activity, tightening incentives and rents starting to rise in the second half of the calendar.

Crabb lists improved business confidence, low interest rates and a possible tapering in the US leading to a lower Australian dollar as prominent drivers of tenant activity.

“Large businesses are prepared to act and they are consolidating their operations into fewer sites in the CBD, where they can attract a workforce from across a metro area through public transport and the amenity of shops, restaurants and the like.”

This shift and consolidation trend is playing out a little differently depending on the fundamentals in each market. “In Perth, major tenants are shifting to a cost focus and consolidating their footprints into newer buildings with better accommodation,” Crabb said.

“Sydney is definitely at the start of a momentum phase of the demand cycle and running ahead of the rest of the country.  It’s home to the most headquarters and big businesses require big property solutions. But it’s difficult to add to new supply in Sydney unless you’re going to do it on the scale of Barangaroo.”

In Melbourne, Bupa recently moved into the CBD from suburban Hawthorn, NAB and Telstra have consolidated their footprint in the CBD and television networks Nine and Seven moved their operations to Docklands.

Of the major markets, Brisbane has the most challenges as it attempts to absorb a wave of new supply. Crabb tells me there is “a significant change there, mainly driven by a contraction of the state government and drop off in demand from mining sector, but this is mainly knocking around the secondary market”.

“In Adelaide and Canberra, there are fewer big businesses and not much new supply comes on, but there are significant government tenants, and the odd corporate like Santos.”

“Eventually the costs of an older building, like slow elevators and inefficient floor plates, force the tenant’s hand to seek out a new modern building and it becomes a business decision, not a property decision.”