Melbourne's window of opportunity"¦ Canberra supply tsunami"¦ Adelaide's rejuvenation.
Melbourne’s window of opportunity
The Melbourne CBD has long lived in the shadow of a large supply pipeline. Nevertheless, demand has continued to rise over the past few years to meet supply levels. In total, 420,300 sqm of new supply has been added over the past three years, which compares to even stronger net absorption of 470,000 sqm. More recently, a lull in the construction cycle over the latter half of 2006 and 1Q07 has seen Melbourne vacancy rate fall to just 6.5%.
This is the lowest vacancy rate in the city since December 2001 and has given landlords a widow of opportunity before new supply additions picks up again. Like Sydney, Melbourne prime rents have also grown 11.3% over the past 12 months.
Several projects due later in 2007 will see Melbourne’s new supply additions return to high levels and start to push the market back down towards being neutral. Nevertheless, high levels of demand are also expected to continue, and Melbourne is anticipated to remain a relatively well balanced market over the next few years.
Adelaide’s rejuvenation
Adelaide has traditionally been a high-vacancy market, but has enjoyed a relatively long period where healthy tenant demand has kept vacancy rate in single-digits for more than two years. The addition of 46,700 sqm of new space in 1Q07 brought this to an abrupt end, causing vacancy to jump from 7.3% to 10.0%. Nevertheless, even with further significant new supply due over the next few years, vacancy is not anticipated to rise much above the market’s long term average.
Consequently, the Adelaide CBD market now has a relatively balanced outlook for the entire forecast horizon. The main trend evident in the market at present is an upgrade in the quality of office stock.
Much of the new stock now being added to the Adelaide market is leading the way in terms of environmental ratings. More generally, this demand for quality stock may see the refurbishment of many ageing buildings and leave other ageing building uncompetitive in the leasing market, carrying high levels of vacancy.
Consequently, a two-tier market is emerging in Adelaide, with solid rental growth likely for quality space; however, the secondary market may slip well and truly into a tenant market.
Canberra supply tsunami
Canberra’s supply wave is here. Almost 29,000 sqm of space was completed in 1Q07, and more than 255,000 sqm will be completed in the market over 2007, which is 46% of all the stock due to complete in all the six major markets. This supply will push vacancy up significantly from its current low level (2.3%) by year-end and push the market into a tenant market. Nevertheless, given the magnitude of supply, the situation could have been much worse.
Much of the current construction activity was driven by public sector pre-commitments, which has led to fears of extensive backfill space upon completion of projects.
Nevertheless, tenant demand has been much stronger than expected over recent quarters, and it seems that much more backfill space will be absorbed than previously thought.
Like Adelaide, Canberra is a market clearly heading towards a two-tier market. Government tenants’ demand for high-quality, environmentally sustainable space has driven the construction cycle and this new stock has been well received in the market. Consequently, like Adelaide, the crunch from new supply will be felt most by ageing existing stock. In both markets, the ability and desire to pay more for quality space should see the top end of the market remaining relatively healthy.
