Demand Eases, Office Markets Still Strong

Demand for Australian office space has moderated, resulting in the first national vacancy rate increase since January 2004, according to the Property Council's latest Office Market Report (OMR) research.

However, office markets across Australia remain extremely tight. The OMR shows a national office market vacancy of just 4.2 percent at July 2008, the second-lowest level since the 1980s.

"Demand for office space in Australian markets has been running very hot for several years, and a wind-back in demand has been anticipated for some time," says Property Council chief executive Peter Verwer.

"Net absorption for the six months to July was 199,559sq m, which is in line with the 15-year average of 205,020sq m."

"Supply to Australian office markets has eased in line with demand. In the six months to July 393,488sq m of space was added to office markets, down from 597,109sq m introduced in the half-year to January."

Mr Verwer says CBD office markets performed comparatively better than the non-CBD markets in the six months to July. The CBD vacancy rate is 3.4 percent, up slightly from the 3.0 percent recorded in January 2008.

With the exception of Canberra, all Australian CBD office markets are below 4.5 percent vacancy. By vacancy, the tightest CBD markets are Perth, Brisbane and Melbourne. Non-CBD market vacancy increased from 5.9 percent to 6.1 percent over the six months to July 2008.

Based on net absorption, the best-performing markets were the Melbourne CBD, Brisbane Near City, Brisbane CBD and the Adelaide Core.

Mr Verwer says while supply to Australia's office markets eased over the six months to July 2008, developers should be mindful of the risk of over-supply.

"Stock withdrawals have played only a minor part in the market in the past 12 months. It has simply not been effective for building owners to withdraw stock while demand has been extremely strong and vacancies have been at record lows," Mr Verwer says.

"Buoyant market conditions in the past two years have also prompted the commencement of new office buildings, many of which will be delivered over the next three years."

"In the latter half of 2008 more than 670,000sq m of office space is due to be added to Australian markets, which is more than double the 15-year average. In 2009 just over
1 million square metres is due to be delivered, although some rescheduling of projects is on the cards."