This article is from the Australian Property Journal archive
A STEADY pipeline of new office stock in nation’s capital means incentives could rise slightly further as landlords race to attract tenants, while net effective rental growth is still working upwards.
Knight Frank Canberra Office Market Report showed A-grade net face rents in the Civic and Parliamentary precinct increased by 4.7% over the 12 months to January to measure $443 per sqm – at $541 gross – while secondary rents lifted 2.7% to $353 per sqm, or $455 gross.
Civic and Parliamentary precinct average prime incentives remain at all-time highs measuring 26% having remained steady since the beginning of the year. This has resulted in net effective rental growth of 3.6% over 12 months to measure $299 per sqm.
“With a steady pipeline of new development stock there is scope for incentives to rise slightly further as landlords look to attract new tenants and seek pre-commitments,” said Knight Frank partner, office leasing Nicola Cooper.
Demand will need to remain elevated to compete with the stock set to come online in the coming years, and following the highest yearly influx of supply in a decade. Some 113,467 sqm was added to the market in the 12 months to January.
The office vacancy rate edged slightly higher over six months, from 8.6% to 8.9% due to new supply, according to the Property Council of Australia. However, the vacancy rate is still the lowest amongst the eastern seaboard capital cities, and below its 10-year average of 11.6%.
More than 95% of the new supply last year was prime stock forcing A-grade vacancy up from 6.6% to 7.3%.
New supply came from one new development, being Civic Quarter Stage with 33,000 sqm, while the other space comprised refurbishments including 26 Brisbane Avenue, 5 Constitution Avenue and 9 Gordon Street.
New developments expected to be delivered over the next 18 months include 90 Denison Street, Deakin, 9-11 Molonglo Drive and Morris Property Group’s One City Hill spec development, while QIC’s development, Section 96, is expected to be delivered by late 2026 or early 2027.
Secondary vacancy, which, after stagnating around 15 to 17% for some years, has dropped to 11%, its lowest level since 2012.
Cooper said while the competitive tension in A-grade stock had been due to the sustained high level of demand from government tenants, demand was also coming from the private sector.
“The uptick in private sector demand for space in the sub-500 sqm market has also gained some momentum and is contributing to the reduction in secondary vacancy,” she said.
Meanwhile, investors were active in Canberra’s office market over 2022 with $1.1 billion in transactions across eight assets, following record high transaction activity in 2021 of $1.6 billion and remaining above the long-run average.
“Canberra assets are sought after by investors given their typically strong tenant covenants and competitive yield advantage against other eastern seaboard capital cities,” Knight Frank’s head of institutional sales, Australia Ben Schubert said:
“The impact of higher debt costs on pricing is apparent and with inflationary pressures and continued interest rate rises, we have seen yields soften.”
Prime yields have risen from about 5.25% to just over 6% in the year to January, while secondary yields followed a similar curve, up from about 6.2% to 7.25%.
Recent sales have included German fund manager Real I.S. divesting the federal government-occupied 21 Genge Street, Civic to Charter Hall for $290 million, on a yield of 7.5%.
Charter Hall has been a major driver of transactional activity in the national capital of late, betting on federal government tenants flocking to modern buildings.
Charter Hall set a record for the city with the $363.5 million purchase of the Geoscience Australia HQ property, on a 7.4% yield, also from Real. I.S.
It also teamed up with GIC for the $335 million buy of the Marcus Clark building, home to the Department of Education, Skills and Employment, and bought the six-level campus-style Services Australia building in the ACTs Tuggeranong for $306 million, as well as the Doris Blackburn Building that was purpose-built for Services Australia, and a Symonston building central to a plan to protect the Prime Minister and Governor-General and keep government operations continuing in the event of a catastrophic attack.
