THE time is right for Melbourne CBD office tenants to negotiate lease renewals because conditions are in their favour, according to Ernst & Young partner Richard Bowman, who was speaking at the annual Australian Property Institute/REIV State of the Market.
Ernst & Young real estate advisory services partner Richard Bowman told the API/REIV audience that Melbourne CBD office vacancy rates have risen to 6.9%, because of new stock coming on the market.
Video interviews from the 2013 Australian Property Institute REIV State of the Market.
- API REIV State of the Market Luke Dixon
- API REIV State of the Market Sam Nathan
- API REIV State of the Market Stephen Andrew
- API REIV State of the Market Richard Bowman
- API REIV State of the Market Alan Oster
- API REIV State of the Market Justine Jacono
At the same time, the market has also been inundated by backfill space left by tenants moving to new buildings.
Bowman said the Melbourne CBD office market is dotted with vacant spaces because of tenants consolidating their space requirements as chief financial officers focus on efficiency and cost control.
Here is a small list of the vacant backfill space.
· The Australian Taxation Office leasing 42,000 sqm 735 Collins St Docklands, moving out of 33,254 sqm of existing space at 380 Latrobe St – 6,092 sqm, 2 Lonsdale St – 12,244 sqm, World Trade Centre – 6,416 sqm, 414 La Trobe St – 5,595 sqm, 350 Queen St – 2,907 sqm;
· Melbourne Water have leased 13,000 at 990 La Trobe St Docklands, leaving 100 Wellington Pde East Melbourne, which has been purchased by an owner occupier;
· 357 Collin St, 66% pre-leased to a number of tenants including the Commonwealth Bank and Service Stream, who are vacating 8,500 sqm and 7,500 sqm at 355 Spencer St respectively;
· 555 Bourke St, 29% pre-leased to law firm Holding Redlich leasing, who are vacating 6,000 sqm at 277 William St
· Pearson moving from outside the CBD to Good Shed South, which is now 80% pre-committed;
· Aurecon also moving from outside the CBD to 850 Collins St, which is now 62% pre-leased;
· At 735 Collins St Docklands, it is 90% pre-committed after signing Mercer and Commonwealth Bank, who are vacating 12,000 sqm at 11 Exhibition St and 18,000 sqm at 385 Bourke St, respectively;
· BHP and Evans & Partners’ move to 171 Collins St, will see them release 12,000 sqm and 1,690 sqm into the market;
· Westpac’s move to 150 Collins St, will result in 14,000 sqm added to the market at 360 and 367 Collins St;
· Medibank relocating to 720 Bourke Docklands will leave 12,000 sqm of vacant space at 700 Bourke St Docklands;
· and finally the National Australia Bank’s leasing an additional 60,000 at 800 Bourke St, freeing up room at 120 Spencer St – 10,000 sqm, 383 King St – 12,975 sqm, 311 Lonsdale St – 1,013 sqm, 500 Bourke St – up to 43,000 sqm, 555 Collins St – 22,000 sqm, 330 Collins St – 5,800 sqm.
Bowman said landlords are aware that the current market conditions have changed and demand for space will only improve when the Victorian economy does.
Bowman said incentives will also improve in favour of tenants, he predicts they will peak at 25% in 2013 compared to 20% in 2012.
In the retail property sector, Colliers International’s retail national director Stephen Andrew said 2013 will be similar to last year and will continue to be a two-tiered market as investors continue to gravitate towards quality assets.
According to Colliers, 2012 saw 92 transactions totalling $5.31 billion up from $3.17 billion over 99 deals in 2011.
Andrew said prime assets exhibiting sound investment fundamentals will continue to transact as demand strengthens for defensive assets, particularly those with strong future growth profiles and those in the neighbourhood centre submarket exhibiting a long term WALE
Meanwhile the gap between prime and secondary yields will continue to widen in 2013. Already regional prime yields sit between 5.50-6.50% compared to regional secondary at 6.50-7.50%. The gap is more pronounced in sub-regional where prime is 7.00-7.75% versus secondary of 7.75%-10%. Also in neighbourhood, prime yields are at 7.75%-8.00% compared to 8.00-12.00%.
In addition, Andrew predicts secondary property values could potentially soften due to the weight of assets offered to the market, which remains unsold.
In the industrial sector CBRE’s national industrial markets senior research manager Luke Dixon predicts rents are stabilising and will increase by 3.5% in 2013 and capital growth is forecast to be rise by $65 per sqm.
Grade A warehouse capital is forecast to steadily increase from $1,000 per sqm to approximately $1,100 per sqm. At the same time, rents will nudge closer to $90 per sqm
Yields compression is expected to continue, with a 50-100bps tightening of spread between primary and secondary assets.
Dixon said Victoria’s relative economic performance will stabilise in 2013, with some downside risk in Q1. However manufacturing will continue to soften and the demand for space will come from the logistics, transport and resources sector.
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