Companies wishing to lease office space in Sydney and Melbourne had better get the calls into leasing agents, pronto.
That's the message in the Property Council of Australia's most recent office market report, to be released on Thursday, which sees a combination of rising white-collar employment, residential conversions and limited new developments on the immediate horizon, as soaking up supply.
![Docklands, where office vacancy is very low.](http://web.archive.org./web/20170806101812im_/https://www.fairfaxstatic.com.au/content/dam/images/g/r/x/3/n/0/image.related.articleLeadwide.620x349.gxnky3.png/1501676651563.jpg)
Sydney's vacancy rate has dropped in the past six months from 6.2 per cent to 5.9 per cent, while Melbourne's CBD has remained steady at 6.5 per cent,
That has seen landlords take the opportunity to raise rents, with agents predicting face rents will lift by about 3.5 per cent a year out to 2020.
![NAB is to occupy 31,000 square metres as the anchor tenant at Wynyard Place Sydney, being developed by Brookfield ...](http://web.archive.org./web/20170806101812im_/https://www.fairfaxstatic.com.au/content/dam/images/g/t/6/4/3/y/image.related.articleLeadNarrow.300x0.gxnky3.png/1501676651563.jpg)
Keeping a lid on that growth is the prospect of some new supply in the longer term. In Sydney that will feature developments such as Wynyard Place, Quay Quarter Tower, Parramatta Square stage three and four and Macquarie University in Macquarie Park.
In Melbourne there are 10 new developments totalling just over 360,000 sq m already under construction, but not due for completion until 2020, including 80 Collins Street and Tower 5 at Walker Corp's Collins Square.
On top of a slight squeeze for space, traditional blue-chip tenants will also find themselves competing with new industries such as the tech groups, who want CBD-based offices to attract staff, and the wave of co-working specialists.
The new space gatherers are also helping to absorb space that was being sub-leased by companies and now need less after embracing agile work places, such as hot-desking.
Nationally the office vacancy rate stands at 10.2 per cent, for the six months to June 30. The mining-related states of Perth and Brisbane remained high, albeit with some signs of marginal retraction.
PCA chief executive Ken Morrison said new office supply across Australia is slowing to about half the historic average.
"Almost three quarters of the new CBD office supply over the next two and a half years is coming in Sydney and Melbourne, the cities which are best placed to handle it. In aggregate terms, Australia's CBDs will receive half the historic levels of new supply over the next two and a half years," Mr Morrison said.
According to Aaron Weir, head of office leasing, NSW, Knight Frank, 2016 was an out-of-line year in leasing in Sydney's CBD, where demand was largely fuelled by a one-off event in the compulsory acquisition of sites for the new Metro rail development.
"That demand was satisfied and we have returned to normal demand conditions in 2017. Rents have stabilised, as have incentives. With vacancy under the long-term equilibrium, we will see continued strength in the CBD leasing market. Until the new wave of larger towers reach completion from 2019, conditions will remain tight and companies will need to act swiftly to secure their preferred options," Mr Weir said.
Wild rides and hi-tech
Marc Mengoni, CBRE's state director, office leasing, said Melbourne's vacancy continues to tighten as white-collar employment drives tenant relocations and expansion, while trendy inner suburbs, including Richmond, continue to push new rental levels to be higher than that of the CBD in some instances.
"This next 12 months will continue to see competitive tension between occupiers as they vie for the remaining quality options in the market, with little to no new supply coming online until late 2019," Mr Mengoni said.
"Occupiers with a pending lease expiry would find it beneficial to consider options sooner rather than later, as a vacancy rate of 6 per cent or lower sways conditions in favour of it being a landlords' market."
Overall, government, education and co-working operators have been the most active tenants over 2017, in most capital cities, while flight to quality remains a dominant factor for tenants moving within the CBD.
Hamish Sutherland, Knight Franks' head of office leasing, Victoria, said recent large tenant commitments include WeWork leasing a combined total of 11,000 sq m at 401 Collins Street and London Stores at 345 Bourke Street. There are currently 37 co-working spaces in the Melbourne CBD, occupying 35,205 sq m.
"Between 2017 and 2018, gross new supply added to the market will average 1.3 per cent of total stock per annum – well below the historical average of 3.6 per cent. This in turn will see the overall vacancy rate likely to fall to around 4.1 per cent while rents will continue to rise," Mr Sutherland said.
According to Mark Rasmussen, Savills state director of office leasing in Victoria, the Melbourne CBD is in for a "wild ride", with vacancies tipped to continue the downward trend, the supply pipeline is limited until 2020 and demand continues to be strong.
"Tenants can expect higher rentals, lower incentives and lack of options, particularly in late 2018 and 2019," Mr Rasmussen said.
Dan Kernaghan, JLL's NSW head of office leasing, said the combination of office withdrawals and minimal completions over 2017/18 will continue to push the Sydney CBD vacancy rate down.
He said the increased competition for limited space options means that the Sydney CBD will have above average effective rental growth over this period of time.
"We have observed that the tightening space conditions in the Sydney CBD has led to some tenants choosing to either extend their leases or renew in their existing premises, particularly in the sub 1000 sq m cohort of the market," Mr Kernaghan said.