A 67% increase in Melbourne office leasing activity has fuelled positive growth in overall national office leasing volumes in the past financial year, according to new Savills research.
A 67% increase in Melbourne office leasing activity has fuelled positive growth in overall national office leasing volumes in the past financial year, according to new Savills research.
Savills research for the 12 months to June 30 2010 shows total national metropolitan office leasing activity was up 22% by sq m transactions to 1.5 million sq m.
The rise in overall national office leasing activity was led by Melbourne, which recorded a strong 67% increase to 674,993 sq m transacted in the year to June 30 2010.
Nicholas Farley, Savills Victoria Head of Office Leasing, said strong fundamentals in the Melbourne office market are driving a substantial amount of take-up.
“Recent pre-commitments to new buildings by the ATO (38,000 sq m), NAB (60,000 sq m), Melbourne Water (14,000 sq m ), and the expected pre-commitment by Marsh/Mercer (22,000 sq m) over the coming weeks, will deliver new stock to a market that is fast becoming undersupplied,” he said.
“Backfill opportunities are relatively limited and with delivery timeframes for the new buildings ranging between 24 and 30 months, it will be some time before fresh office accommodation options are available to occupy.
“Rental growth has been experienced across the board, with the best indicator being new buildings, many of which require mid to high $400/sq m net or higher, to justify development. This is a considerable jump from the last construction cycle, where asking rentals were up to $100/sq m cheaper. Incentives are trending downwards, and rentals upwards, in existing buildings as well.
“The second half of the calendar year always experiences stronger activity than the first half, so we’re expecting a lot of deal activity over the remainder of the year, which could set new benchmark rentals,” Mr Farley said.
“The Melbourne office market has long been considered the best value market in the country, with a high proportion of good quality buildings and an abundance of development sites keeping rentals low. Whilst that is still the case, the number of ‘core’ development sites, being those sites that are along the Collins/Bourke Streets axis in the CBD and Docklands, are reducing.
“In addition, many developers are proposing relatively small buildings, of 30,000 sq m or less, a factor brought about by the restrained capital supply from banks, and the paucity of larger pre-commitment size tenants that haven’t already made the move.
“Melbourne benefits from having an even spread of major industry sectors occupying office space in the CBD, unlike other capital cities that might rely heavily on single sectors, such as mining in Perth and Brisbane, and finance in Sydney,” Mr Farley said.
“It is that even spread that is expected to also prevent a massive surge in rental growth, such as that seen in Perth and Brisbane between 2003 and 2007, given the differing property requirements of those industry sectors. The decentralisation policy of the state government might benefit the outer suburbs, and the public transport system, but is a potential threat to the Melbourne CBD and those businesses that support it.”
According to Savills’ research, Brisbane was the only other metropolitan area to record positive office leasing growth in the past financial year. Total Brisbane office leasing transactions were up by 10.7% to 292,221 sq m, although much of this was pre-committed space being taken up as new buildings entered the market.
Total Sydney metropolitan office leasing for the past year was down 24% to 313,818 sq m; Adelaide down 19.67% to 102,550 sq m; and Perth down 29% to 98,697 sq m.
“Impending additional leasing announcements on the back of Westpac’s 10,000 sq m and Macquarie Bank’s 6,500 sq m deals should provide the continuing impetus in the Sydney market. Whilst there are moderate levels of supply, encouraging levels of demand are starting to create some competitive tension,” commented Rob Dickins, Savills National Head of Office Leasing.
On a national basis, government and community tenants accounted for 30% of all office leasing transactions in the year to June 30; finance and insurance 21%; property, business and finance 17%; and mining and utilities 12%.
Mining tenants are more prominent in the resources states of Queensland and Western Australia and uncertainty over new resources taxation measures has had an impact on office leasing sentiment in these states.
“Almost every building in the Brisbane CBD now has some form of mining sector tenant. They are currently the second biggest takers of space in the city, so any fluctuations in that sector have a flow-on to office leasing,” said Paul Day, Savills Queensland Head of Research.
“However, overall office leasing in Brisbane has held up well in terms of space taken. The number of transactions is down on the peak in 2007-2008, but generally in line with long-term averages.”
The average Brisbane metropolitan office lease size also increased over the past year, from 2,401 sq m in June 2009 to 3,076 sq m at June 30, 2010.
Savills Western Australia Head of Research Helen Swanson said the impact of the resources tax issue has probably been hardest felt in Perth, where 60% of all office leasing can generally be attributed to mining tenants.
“The resources tax uncertanty has caused some delay in expansion plans, but overall office leasing activity is still fairly stable and deals are still being done,” Ms Swanson said.
“The revised tax proposal should lead to greater certainty and business confidence in Perth and therefore improved market conditions for CBD office leasing.”