Office vacancy rates in Sydney and Melbourne, already tight, are expected to remain lower for longer as healthy pre-commitment rates coupled with strong demand to soak up space.
Demand conditions have strengthened further in most office markets over the past six months, especially in Sydney and Melbourne, according a Colliers International report on CBD office space.
The Melbourne vacancy rate, the tightest in the country, is now at a 10-year low of 3.6% and will remain virtually steady at 3.7% by July 2019, on the Colliers forecast.
Sydney’s vacancy rate is at 4.6% and will tighten to 3.5% by the middle of 2019, according to the report.
Research director Anneke Thompson said Sydney’s 20-year and 10-year average vacancy rates equalled 7.3%.
In Melbourne, the 10-year average is 6.6%,while the 20-year average rate is 7.2%.
“It is reasonable then to say that a vacancy rate of between 7% and 7.5% in both markets is a ‘balanced’ market,” she said.
“Both markets are currently well below this rate, with rental growth in each reflecting the markets’ tight vacancy.”
Sydney CBD’s 10-year prime grade average face rent growth rate is 4.7%, according to the analysis, with the past 3 years recording growth rates of almost double this rate at 8.8%.
It is a similar story for rental growth in Melbourne. The city registers long-term prime grade net face rent growth of 4.3%, with 8.6% recorded over the past three years.
Simon Hunt, managing director of office leasing, said there were several factors contributing to what would become a long, low vacancy cycle, effectively re-rating what a balanced market is considered to be.
“The first is the length of time until the next major supply cycle – the largest tranches of new supply will complete in 2020,” he said.
“The second is the strong commitment levels of this upcoming supply – 60% in Sydney and 70% in Melbourne.
“The third is the continued strong population and jobs growth in both cities continuing to drive the white collar employment market.”