Ahead of the release of the Property Council Australia’s (PCA) vacancy rate figures, Knight Frank’s office leasing heads and leaders offer insight into the state of the national development and construction market.
On a national level, Knight Frank leaders observe high construction costs, soaring interest rates and a strong likelihood of reduced vacancy rates existing alongside a growing and resilient office market – particularly in Perth, the Australian Capital Territory (ACT) and Brisbane.
An impending development drought
Knight Frank national head of leasing Andrea Roberts celebrates the substantial improvement in tenant demand across all markets over the past year – made even more impressive by the fact that predominant markets in Sydney and Melbourne continue to manage a return to post-pandemic norms.
Roberts is hopeful for the market but says the ongoing trend of leasing performance being reliant on the location of an asset is a concern. Additionally, she fears the national development pipeline is veering towards an “impending drought”.
“This is most measurable in Sydney and Melbourne with the vacancy and incentive disparity between office buildings located in the core and east end of these cities, respectively,” she says. “It is very much a tale of “the best and the rest” – coming back to the fundamentals of real estate [where] address and amenity is everything.”
Knight Frank head of office leasing for New South Wales Al Dunlop speaks on the increase in prime net face rents in the Sydney CBD. “Prime net face rents in Sydney’s CBD rose by 2.1 percent in the second quarter, led by the Midtown precinct with 3.6 percent growth,” he says.
“Meanwhile, incentives rose from 35 percent to 36 percent, largely offsetting the impact on effective rents, which edged up by 0.3 percent.”
Spec fitouts a popular choice
Brisbane leads the charge for the highest rental growth. However, this ascension occurred alongside high construction costs for Queensland, which has affected strategy for spec fitouts across the rest of Australia.
“As building costs continue to increase, incentives are not likely to dramatically decrease as tenants require the funding to construct their fitouts,” predicts Roberts.
Roberts witnesses a general appetite from office suppliers for workplace fitouts that are conducive to productivity, collaboration and a general sense of wellness.
“Poorly located offices with aged fitouts are very challenging to lease at any price point,” she says. “Occupiers are still focused on delivering new workplaces that will encourage high productivity, collaboration, employee wellbeing and are well-credentialed with ESG ratings.”
Knight Frank head of office leasing for Queensland Mark McCann reports Brisbane’s prime net face rents have also grown, alongside occupier preference for spec fitouts. “Prime net face rents in Brisbane’s CBD have grown 4.9 percent since January 2024 [3 percent in the second quarter] led by sustained uplift in the premium and upper A grade assets,” he says.
“Spec fitouts continue to be of appeal with occupiers as it mitigates risks associated with cost blowouts on new fitouts and delivery delays.”
McCann says development possibilities are at risk of waning due to a slew of obstacles. “New development feasibilities continue to be a challenge due to increases in construction costs, pre-commitment thresholds, extended delivery programmes, economic rent levels, cap rates and access to capital.”
However, McCann hints at the potential for growth for major corporate occupiers with lease expiries from 2028 onwards. “For these occupiers, there is a need to activate and engage with the market now to ensure delivery programs are able to meet their respective expiry dates in this period,” he says.
Pre-COVID levels reached despite decreased vacancy rates
Knight Frank head of office leasing for Victoria Hamish Sutherland also comments on prime net face rents.
“Prime net face rents have risen by 0.7 percent in the last quarter following no change in the first quarter, but this has been driven predominantly by the eastern core [up 2.6 percent],” he says. “Incentives have risen 100 basis points to 47 percent, so net effective rents have fallen 1.1 percent.”
Sutherland says although vacancy rates are high, enquiries continue to filter through.
“After a quiet end to 2023, we have seen two quarters where enquiries are back to their normal post-COVID levels,” he says. “Demand continues to be concentrated around the better buildings and the best locations, as shown by the continued growth in eastern core rents.”
Sutherland echoes Roberts’ assessment of a slow development pipeline due to high and limited construction costs. “The development pipeline is slowing rapidly, with below ten-year average deliveries coming out annually for the foreseeable future.”
Challenges and rewards unique to states and territories
Knight Frank head of office leasing for South Australia Martin Potter says the challenges and triumphs of vacancy rates are pertinent to each state and territory.
“Adelaide has had high levels of activity during the last 12 months,” he says. “The continuing demand for new buildings has seen positive rental growth in excess of 3.5 percent in both prime and secondary stock over the period,” says Potter.
Potter predicts the Adelaide rental market will continue to grow over the next few years as new buildings establish precedents for rent and produce positive impacts on the remainder of the market.
Additionally, the ACT office market has demonstrated resilience and adaptability despite facing “uniquely Canberran challenges” and the possibility of a “two-tier rental market”, ACT head of agency Nathan Dunn confirms.
“Australian Public Service department heads have been told in no uncertain terms to downsize reliance on contractors and you can now start to see the on-flow effect of this,” says Dunn. “Private Sector firms reliant on government work are looking for shorter term lease deals, shorter renewals and certainly exploring rationalisation options.”
Despite such challenges, Dunn is optimistic about the future of Canberra’s office market.
“Vacancy still sits at the lowest level nationally of all core markets, as are incentives, with rental growth already underway, so we see a positive outlook for Canberra long-term.”
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