This article is from the Australian Property Journal archive
THE office market in Australia’s capital resisted the impacts of the global pandemic, with net absorption exceeding expectation, while most major office markets saw demand shrink.
According to Bis Oxford Economics’ latest Canberra Office Property Prospects report for the next decade, Canberra’s office market was supported by a 2020 of strong growth in underlying office employment, enabling net absorption to reach a 10 year high.
Net absorption was stronger than previously predicted for the second half of 2020, especially for non-civic. The Property Council reported net absorption 67,200sqm, 50,100sqm of which was in the second half.
This was balanced by supply, leaving the metro vacancy rate stable, at 10.1%, with the civic vacancy rate at 12.8% and non-civic at 8.9%.
A grade stock had a lower than market total vacancy rate of 6.4%, absorbing most of the demand, while B grade rates were at 11.2% and C at 17.4%.
Net absorption is expected to improve between FY22 and FY25, for an average of 24,000sqm per annum, with civic representing 10,000sqm of this figure and non-civic the remaining 14,000sqm.
Completions will fall over 2021, though will see over 100,000sqm over the 18 months to June 2023, with three buildings at the airport scheduled for completion, as well as the 32,000sqm Civic Quarter.
The report also forecasts a pause in new stock after 2023, leading to a decline in vacancies to the year 2027, where both civic and non-civic vacancies should fall to less than 7%.
Over the medium time there will be a predicted 96,000sqm of withdrawals between now and 2023, both permanently and for refurbishment. This will lead to a reduction in net additions, with only 30,000sqm of metro stock expected in the next two and a half years.
Gross face A grade rents should remain flat, though rents will rise, but not for another three to four years, when gross face rents are expected to rise by 3%, while effective rents are set to climb by 6%.
“The subsequent two to three-year recovery in demand should be reasonably healthy as the national economy recovers, although major government briefs have the potential to cause substantial short term volatility,” outlined the report.
Between 2026 and 2027, will be the greatest period of effective rental growth for the decade, with gross A grade rents rising by 20% for face and 23% for effective over the 10 and half years to June 2031.
Incentives are predicted to peak at 25% in 2021, after reaching 24% in the second half of last year, while in the longer term A grade leasing incentives are likely to drop after 2024, with a 2027 low of 16%.
Yields are likely to firm in the investment market, with A grade yields dropping by 40bps by 2023 to 5.2%, hinging on bond rate movements, which could create upwards pressure.
Until 2027, growth will be limited for A grade capital values, with a predicted rise of around 18%, which could fall if yields soften as forecasted by 80bps late in the decade.
Returns from Canberra will be moderate over five and ten years, at 5.7% and 5.8% respectively.
A major risk to the decade’s market would be a greater number of workers continuing to work from home, compared to the current predicted small shift. A larger percentage would have significant impacts on demand and likely play with forecasted vacancy rates and rents.
The current forecast for workspace ratios, however, is modest drop from 19.8/18.7 sqm/person at December 2019 to 17.7/16.1 sqm/person respectively by June 2031.
