Research and Forecast Report Accelerating success. CBD OFFICE First Half 2018 1
EXPERTS IN PROPERTY DATA & INSIGHTS Colliers Edge is a subscription service developed by our in-house property research specialists, drawing on the expertise of our national network of operators. DEEPER INSIGHTS Largest data set on market today LIMITLESS SUPPORT Analyst not operators FAIRER PRICING Tailored to your needs Want better insights, faster? Talk to a Colliers Edge expert today Anneke Thompson National Director Research +61 412 581 647 anneke.thompson@colliers.com colliers.com.au/colliersedge Accelerating success.
CONTENTS CBD Office snapshot 4 National overview 5 CBD Office market snapshots Sydney 6 Melbourne 9 Brisbane 12 Perth 15 Adelaide 17 Canberra 19 Auckland 21 Our experience CBD office 22 CBD Office Research & Forecast Report First Half 2018 3
CBD OFFICE SNAPSHOT VACANCY RATE NET SUPPLY (SQM) NET FACE RENTS ($/SQM) INCENTIVES NET EFFECTIVE RENTS ($/SQM) YIELD Current Jan-19 Year to Jan 2018 Year to Jan 2019 Current Jan-19 Current Jan-19 Current Jan-19 Current Jan-19 SYDNEY 4.6% 5.3% Premium 6.9% 6.1% $1,025 $1,094 22% 19% $767 $858 5.0% 4.7% -54,606 23,303 A Grade 3.7% 4.4% $787 $840 20% 17% $602 $673 5.6% 5.3% B Grade 4.8% 6.6% $666 $711 21% 17% $502 $563 5.8% 5.5% MELBOURNE 4.6% 4.9% Premium 5.9% 5.0% $698 $763 27% 24% $510 $582 4.8% 4.6% -10,399 64,000 A Grade 3.3% 4.4% $545 $595 29% 25% $384 $446 5.2% 5.0% B Grade 7.1% 6.8% $404 $424 29% 28% $285 $304 5.7% 5.6% BRISBANE 16.2% 15.1% Premium 12.0% 10.3% $670 $673 37% 36% $365 $377 5.5% 5.4% -24,662-9,200 A Grade 13.0% 12.5% $566 $567 37% 36% $296 $300 6.0% 5.9% B Grade 22.0% 20.9% $454 $452 40% 39% $220 $222 7.3% 7.1% PERTH 19.8% 19.3% Premium 6.3% 8.9% $700 $700 48% 48% $362 $368 6.2% 6.1% 1,296 54,000 A Grade 18.0% 17.5% $560 $542 53% 48% $266 $285 6.9% 6.9% B Grade 31.1% 29.5% $383 $370 48% 43% $201 $213 7.5% 7.5% ADELAIDE 15.4% 13.3% Premium 9.3% 7.7% $397 $411 36% 30% $216 $251 6.3% 6.1% 3,360 - A Grade 14.7% 10.6% $390 $400 35% 30% $213 $244 7.0% 6.7% B Grade 14.6% 13.9% $327 $329 38% 35% $163 $174 7.7% 7.6% CANBERRA 11.3% 10.4% A Grade 4.5% 1.8% 7,993-3,000 $368 $370 20% 18% $278 $288 6.0% 5.8% B Grade 17.0% 17.4% $295 $293 20% 21% $216 $210 8.0% 7.8% *Net incentives quoted for Melbourne and Perth. Gross incentives for all other markets.
NATIONAL OVERVIEW By Anneke Thompson National Director Research Anneke.Thompson@colliers.com Tenant flexibility the number one impact in Australian CBD Office markets While the recently released vacancy figures tell the story of supply and demand in the major office markets around Australia, our view is that the most significant change impacting office markets currently is occupiers drive towards flexibility. Over the last two years in particular, the relationship between occupier and landlord has become more about customer and provider, as major corporates view their accommodation strategy as a key driver in the changing way they do business, and indeed interact with their own customers. Over the next supply cycle, those landlords that proactively meet this demand for customer focussed and flexible working environments (shared facilities, customer experience technology platforms, expansion space, end of trip services, health & wellness spaces etc.) will attract and retain the top occupiers, and in turn, build the most attractive investment portfolios in the market. education worker, given that space is required for students, as well as staff a far cry from the reducing floorspace ratios we are seeing across the legal, finance, government and communication sectors. Adelaide is also a market which has experienced positive net absorption over the past year, with the education sector a key demander of space here as well. Over 2017, education related tenants accounted for 8 per cent of all enquiry the same proportion as Melbourne. In Brisbane, the finance and government sector are dominating enquiry, accounting for 31 per cent of the total enquiry profile for 2017. There are a number of large requirements in the Brisbane CBD market across these industry categories, and we expect 2017 enquiry activity to flow through to deal flow in 2018. The drive towards customer focussed working environments is indeed a market wide phenomenon, however, the CBD markets are also being very much impacted by local dynamics, and the exceptional employment growth that we are seeing in most states isn t necessarily flowing through to good demand across the country. In Sydney, net absorption over the second half of 2017 was a subdued 345sqm, although the vacancy rate still dropped from 5.8 per cent to 4.6 per cent, due to the withdrawal of almost 100,000sqm of space predominately in the CBD core precinct. Our view is these net absorption numbers are hiding underlying demand, which is being absorbed by increased use of landlordowned shared facilities, co-working spaces and by more efficient use of existing space. In Melbourne, the education sector in particular is driving high demand, and also largely responsible for demand outperforming the other CBD markets. An analysis of Colliers enquiry data over 2017 tells us that while only 4 per cent of all enquiry in nationally was from the education sector, almost 8 per cent of enquiry in Melbourne was from education users. In fact, the education sector was the second largest source of enquiry in Melbourne, behind Business Services. Education is also countering much of the efficiency impacts that is reducing floor space ratios for other corporate users, as the sector is a big user of space. Education users typically demand some 60sqm of office floorspace per 20 Hunter Street, Sydney Sold by Colliers International on behalf of TH Real Estate CBD Office Research & Forecast Report First Half 2018 5
Research & Forecast Report SYDNEY CBD Office First Half 2018 By Kristina Mastrullo Associate Director Research kristina.mastrullo@colliers.com MARKET HIGHLIGHTS Heightened investment activity and further compression expected to continue throughout 2018. Is the rental shock over? We still have a way to go. Vacancy expected to fall to lowest point since 2008, and rise again as Sydney CBD approaches its next supply cycle in January 2020 Capital markets CorVal s 9 Hunter Street purchased for $202 million by Ashe Morgan at a passing initial yield of 5.10 per cent. Sydney CBD s investment market experienced a strong end to the year as transaction volumes increased over the last six months to December 2017, compared to the first six months. As a result, average market yields compressed across all grades over 2017 with a reduction of 35bps in premium grade, 45bps in A Grade and 55bps in B Grade. Despite yields already trending towards historical lows, the 20-year Prime average spread of 1.86 per cent suggests there is still room for further compression with the current spread over the risk-free rate of 2.70 per cent for Prime assets. The ongoing strength of the Sydney office market underpinned by a forecast shortage of supply over the next two years is likely to encourage domestic and offshore interest moving forward, stimulating more sales throughout the year, with an expectation of 2018 transaction volumes to supersede 2017 s. A strong end to 2017 Average Market Yields Premium A Grade B Grade Recent investment activity, produced some significant sale results which has further compressed our average yield series for the Sydney CBD. In the latter half of 2017, several big-ticket sales occurred, including; T-C 20 Hunter Street Pty Ltd s 20 Hunter Street - purchased for $192.5 million by Silvervision Investments Pte Ltd at a passing initial yield of 3.92 per cent; Centuria s 10 Spring Street purchased for $270.05 million by APPF Commercial at a passing initial yield of 3.90 per cent; Trust Capital Advisors 50 Pitt Street purchased for $165 million by AEW on a passing initial yield of 4.66 per cent; GDI Property Group s 66 Goulburn Street purchased for $252 million by Ascendas-Singbridge at a passing initial yield at 5.74 per cent; Bright Ruby s 231 Elizabeth Street purchased for $342 million by Charter Hall at a passing initial yield of 5.10 per cent; Dec 17 5.01% 5.60% 5.75% Leasing market Is the rental shock over? Colliers believes there are only few buildings within the CBD that have not yet realised any rental reversion and that rental shock has largely washed through the tenant market, however it appears face and effective rents still have a little way to go in reaching their ceiling. As the reshuffling of displaced and pre-committed tenants settle, however, landlords are now more likely to factor in leasing and refit costs to determine their negotiation path with tenants. Short term leases aren t as favourable and long-term security is more valuable as this will assist landlords in future proofing their assets in anticipation of the next supply cycle (2020-2022). 6
The decentralisation conversation While the announcement of the part-relocation of Herbert Smith Freehills from their premises in Castlereagh Street to Macquarie Park raised eyebrows, Pfizer s announcement of their future relocation from their long-term West Ryde premises to Investa s new Barrack Place development at 151 Clarence Street (due for completion later this year) suppressed theories of an impending decentralisation trend. Furthermore, infrastructure improvements such as the Sydney Light Rail and Metro projects are crucial to attracting organisations in relocating to the Sydney CBD, as evidenced by Pfizer, or at the very least to remain in the CBD despite the significant rental growth experienced. With the Sydney Light Rail and the Sydney Metro projects under construction, infrastructure upgrades continue to assist organisations with staff attraction and retention. Strong rental growth expectations Quarterly net effective rental growth market wide is still trending above 10 year historical averages (1.0 per cent QoQ). Broken down by grade, the Premium market grew 1.6 per cent with A Grade attracting the softest increase at 1.2 per cent and B Grade increasing at 2.2 per cent. For the 12 months to December 2017, A Grade net effective rents recorded the strongest growth, with Premium grade the weakest, although still strong relative to previous periods. Average Annual Net Effective Rental Growth Premium A Grade B Grade Total Average Dec 17 11.1% 18.5% 15.4% 15.0% Incentives across all grades fell one percentage point over the second half of 2017 to an average of 22 per cent for premium, 20 per cent for A Grade and 21 per cent for B Grade assets. The average net effective rental gap between A and B Grade buildings narrowed to a record low of $68 per sqm in Jun16 when the withdrawal of B Grade space started to impact the market. By the December 2017 quarter, however, the A-B rent differential reverted back to $100 per sqm as A Grade vacancy continues to decline off the back of B Grade tenants being displaced into a A Grade space, placing upward pressure on rents. Number of Sydney CBD Office Transactions vs Average Yields 35 30 25 20 15 10 5 5.45% 7.00% 0 0.00% 2007 H1 2007 H2 2008 H1 2008 H2 2009 H1 2009 H2 2010 2010 H1 H2 2011 2011 H1 H2 2012 2012 H1 H2 2013 2013 H1 H2 2014 2014 H1 H2 2015 2015 H1 H2 2016 2016 H1 H2 2017 2017 H1 H2 Employment Forecasts persons 335,000 330,000 325,000 320,000 315,000 310,000 305,000 300,000 295,000 290,000 Number of Office Transactions Average Yield (RHS) Jul-17 Jan-18 Jul-18 Jan-19 Jul-19 Jan-20 Jul-20 Jan-21 Jul-21 Jan-22 Jul-22 White Collar Employment Projection Net supply vs Vacancy rate Net Supply (sqm) 150,000 100,000 50,000 - -50,000-100,000 Change in White Collar Employment (RHS) Jul-06 Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 Jul-17 Jan-18 Jul-18 Jan-19 Jul-19 Jan-20 Jul-20 Jan-21 Jul-21 Jan-22 Jul-22 Jan-23 Jul-23 Net Supply /PCA OMR Jan 2018 Vacancy Forecast Net Face Rents vs Net Effective Rents (all grades) $1,200 $1,000 $800 Forecast 9.00% 8.00% 6.00% 5.00% 4.00% 3.00% 2.00% 1.00% 4,500 4,000 3,500 3,000 2,500 2,000 1,500 1,000 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% persons Vacancy Rate Average Premium net face rents increased 1.0 per cent for the half with A Grade growth recorded at 5.4 per cent. B Grade outperformed its prime counterparts with a 6-monthly increase of 6.0 per cent. $/sqm $600 $400 $200 $- Dec-95 Dec-96 Dec-97 Dec-98 Dec-99 Dec-00 Dec-01 Dec-02 Dec-03 Dec-04 Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 Dec-13 Dec-14 Dec-15 Dec-16 Dec-17 Dec-18 Dec-19 Dec-20 Dec-21 Dec-22 Dec-23 Average Net Face Rents Average Net Effective Rents CBD Office Research & Forecast Report First Half 2018 7
Vacancy expected to fall to lowest level since 2008 For the July 2018 period, Colliers International forecasts vacancy to drop marginally to 4.5 per cent, falling from 4.6 per cent (Jan18) as reported by the Property Council of Australia. For the Jan18 period, net supply fell dramatically by -62,000sqm with total withdrawals nearly reaching 100,000sqm. For the next 6 months, we re expecting positive net supply as withdrawals ease and Darling Park 2 s partial refurbishment reaches completion. Moving forward, vacancy is forecast to breach 6.0 per cent by July 2020 as the Sydney CBD enters its next supply cycle. Vacancy is then expected to drop under 6.0 per cent as latent tenant demand takes up both backfill and new development space. For four consecutive periods over 2020 and 2022, net supply will average +55,000 sqm per 6 months (total of +220,000sqm), and despite our view that demand will increase from current levels, vacancy is forecast to increase to 6.4 per cent near the end of this period (January 2022) as supply outweighs demand. Vacancy Total Market Premium A Grade B Grade Jan 18 4.6% 6.9%* 3.7% 3.7% * Premium vacancy is skewed by International Towers, albeit is now gathering pace and take up is looking positive for 2018 Rents: net face up, net effective down Average net face rental growth of circa 7 per cent is forecast for 2018 across all grades, as vacancy continues to tighten. The three year outlook, however, is more subdued, with rental growth of just under 4 per cent YoY forecast. Sydney CBD will then enter a period of above average net supply between from 2020 as major projects are delivered, such as Wynyard Place, Quay Quarter Tower and Circular Quay Tower. Incentives are expected to reach their floor by the end of 2019 as the market continues to tighten (at a market average of 15 per cent). As a result of continued growth in face rents, and a reduction in incentives, average net effective rents are forecast to increase by 11 per cent over the next twelve months. 333 Kent Street, Sydney Leased on behalf of ipg 8
Research & Forecast Report MELBOURNE CBD Office First Half 2018 By Anika Wong Manager Research anika.wong@colliers.com MARKET HIGHLIGHTS Strong demand sees vacancy fall dramatically to 4.6 per cent Supply and demand factors are unbalanced Transactions continues to rise, resulting in continued yield compression Leasing market Conditions in favour of landlords Strong rental gains over 2017 show no signs of slowing down over 2018 and 2019, with both large and small tenants competing for limited options. Net effective rents for Premium, A and B Grade assets all saw double-digit growth at 11.7 per cent, 10.5 per cent and 11.6 per cent respectively, underpinned by strong face rental growth of circa 10 per cent across all Grades over the twelve months to December 2017. The flurry of leasing activity, in combination with continued strength in white-collar employment will further push rental growth in the CBD, predominantly in the prime grade market. Looking ahead, we forecast effective rents to rise by an average of 12 per cent across prime grade assets, as a result of both face rent growth and decreasing incentives. On average, incentives dropped to 27 per cent for Premium grade and 29 per cent for both A and B Grade as at December 2017. We are forecasting incentives will continue to trend downwards. On average we forecast incentives to fall to 24 per cent, 25 per cent and 28 per cent by mid 2018 for Premium, A Grade and B Grade space respectively, before trending back up as the new wave of major backfill and new developments enter the market in 2020 to 2022. Vacancy hits near record lows Over the second half of 2017, Melbourne s CBD total office vacancy rate recorded a strong result, shrinking from 5.9 per cent in July 2017 to 4.6 per cent in the six months to 2018. The last time vacancy was this low was in 2008 sitting between 3.0 per cent to 4.2 per cent. This is well below the long-term average of 6.6 per cent, falling by 1.30 percentage points in line with Sydney CBD. This was fuelled by strong demand predominantly for A Grade space, as well as a negative net supply figure of -8,822sqm unusual for Melbourne, as over the past 10 years net supply has increased by an average of 40,000sqm every six months. Melbourne recorded a very strong net absorption figure of 51,376sqm over the second half of 2017 quite remarkable given negative net supply and demonstrative of the very strong demand side conditions. Over the next 12 months, there is only over 62,000sqm of backfill space due to be added to the market. A number of these backfill opportunities, however, have either already been committed to, or are being looked at closely by tenants needing to move or expand over the next year. Our forecast net supply for 2018 is 64,000sqm, still well below the 10-year average net supply rate. With the upcoming supply in 2018 being fully pre-committed, and a number of larger backfill spaces already leased, the limited short-term supply environment means the vacancy rate should fall to 3.9 per cent in the first half of 2018. At this stage, we are forecasting our peak vacancy rate to be 7.7 per cent by January 2021, although the unusually high demand conditions means that this figure is more likely to be revised down as more deals are cemented. Development pipeline continues to secure pre-commitments Construction has begun on Wesley Place at 130 Lonsdale Street (55,000sqm) which is expected to be completed in April 2020. The project being developed by Charter Hall s Prime Office Fund has recently struck commitments with Vanguard Investments, Cbus Super and Telstra Super, resulting in 55 per cent of the project being pre-committed at this very early stage of development. Due to be delivered in the same year, QIC s South Tower at 80 Collins Street is underway, underpinned by a CBD Office Research & Forecast Report First Half 2018 9
Average Net Effective Rents by Asset Class $/s qm Forecast $700 $600 $500 $400 $300 $200 $100 $- Dec-07 Jun-08 Dec-08 Jun-09 Dec-09 Jun-10 Dec-10 Jun-11 Dec-11 Jun-12 Dec-12 Jun-13 Dec-13 Jun-14 Dec-14 Jun-15 Dec-15 Jun-16 Dec-16 Jun-17 Dec-17 Jun-18 Dec-18 Jun-19 Dec-19 Jun-20 Dec-20 Premium A Grade B Grade Average Yields by Asset Class 10.00% Forecast 9.00% 8.00% 7.00% 6.00% 5.00% 4.00% 3.00% Dec-07 Jun-08 Dec-08 Jun-09 Dec-09 Jun-10 Dec-10 Jun-11 Dec-11 Jun-12 Dec-12 Jun-13 Dec-13 Jun-14 Dec-14 Jun-15 Dec-15 Jun-16 Dec-16 Jun-17 Dec-17 Jun-18 Dec-18 Jun-19 Dec-19 Jun-20 PREMIUM A GRADE B GRADE commitment from Macquarie Bank, with several new commitments likely to be announced shortly. ANZ Bank have committed (28,500sqm) as the anchor tenant at the new 839 Collins Street tower (40,000sqm). Located in the Victoria Harbour section of Docklands, the new tower is due to be completed in the first half of 2019. In total, there are 13 current projects is set to complete over the next three to four years. By 2020, a total of 560,000sqm of office supply will be added to the market, with 66 per cent of the total space already pre-committed by far the healthiest precommitment levels in the country. Looking beyond 2020, when the Docklands precinct comes very close to completion for office development, the estimated net supply is forecast to be an average 36,500sqm over the four 6 month periods to 2022. As large development sites are built out in Melbourne s CBD, refurbished backfill such as 500 Bourke Street, 550 Bourke Street and 100 Queen Street - will be the surrogate for new office space. The low supply environment over this period will contribute to a decline in vacancy post 2020 to a vacancy rate back to long term average levels by 2023. Melbourne CBD Office Vacancy Rate and Net Absorption Vacancy Rate % 12.0% 300,000 Forecast 10.0% 250,000 8.0% 7.9% 200,000 6.0% 150,000 4.0% 4.3% 100,000 2.0% 50,000 0.0% - -2.0% -50,000 Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 Jul-17 Jan-18 Jul-18 Jan-19 Jul-19 Jan-20 Jul-20 Jan-21 Jul-21 Jan-22 Jul-22 Jan-23 Jul-23 6 Mth Net Absorption Vacancy Rate (%) 10 Yr Average Source: Colliers International, PCA OMR Jan 2018 Supply by Type s qm 350,000 300,000 250,000 200,000 150,000 100,000 50,000-2017 1H 2017 2H 2018 1H 2018 2H 2019 2H 2020 1H 2020 2H 2021 1H 2021 2H Backfill Full Refurb Mooted New Development Partial Refurb s qm Flexibility trend will continue into 2018 The co-working trend is spilling over into traditional offices as it provides more for tenants in terms of accommodating flexible fit out and expansion space. Demand for efficient space that is able to cater for business expansion means co-working providers are now competing with traditional landlords for corporates. In this regard, co-working groups have taken up over 10 per cent of the vacant space leased over the second half of 2017. This is evident with Regus (IWG) successfully securing 4,500sqm of space at Pembroke s newly refurbished T&G Building at 161 Collins Street on a ten-year term. Landlords integrating speculative fitted suites have been attractive for tenants seeking space below 1,000sqm. A recent example of the continued demand for small turn-key fitted suites and quality sub-500sqm space in Melbourne s CBD has been at DEXUS s 360 Collins Street, where a total of approximately 12,000sqm was rolled out as turn key suites, which are now 100 per cent committed. Typically, these suites have obtained premiums of up to 15 to 20 per cent above what would have been achieved for a whole floor lease. This was also evidenced at 470 Collins Street where Colliers International successfully secured seven new tenant commitments on behalf of Suleman Group, totalling 866sqm. This strategic suite strategy attracted a diverse range of tenant industries including law, technology, education and engineering firms. 10
Capital Markets Melbourne has sustained high transaction volumes over CY2017 totalling $3.89 billion, with the strong demand for opportunities to place capital resulting in good yield compression. During this period, we saw premium, A Grade and B Grade yields compress by 36 basis points, 45 basis points and 85 basis points respectively. The spread between the risk-free rate and Prime assets grew closer to 2.39 per cent, given the long term historical average is 1.78 per cent, suggesting there is still room for further compression over the current cycle. This translated through to prime grade capital values recording an annual growth rate of 18 per cent, making Melbourne a clear outperformer across the major CBDs. Deals over the course of 2017 saw offshore investors accounting for 15 of the 22 deals (or 68 per cent) (above $10 million). We expect offshore groups to remain active in 2018, particularly given the strength of the leasing market and the opportunity to capture rental growth upside. One of the largest transactions in the second half of December was Singapore-based TrustCapital Advisors (TCA) s portfolio. TCA sold five institutional grade office towers along the Eastern seaboard totalling over $727 million. Included were three (3) Victorian assets 850 Collins Street (17,337sqm) and 575 Bourke Street (16,152sqm) a recently refurbished asset, both purchased by PA Realty and joint venture between Mitsubishi Estate and CLSA real estate for $156.1 million and $140.2 million respectively. The third asset, 469 La Trobe Street (19,864sqm), a recently upgraded building sold to AMP Capital on behalf of a European Private Client Mandate for $160.5 million. This was one of the largest single asset-transaction in the last quarter reflecting a 5.25 per cent yield on a 4.33-year WALE. Another notable transaction that occurred in December 2017 was Zone Q development acquiring 637 Flinders Street for $122 million, transacting at sub 7 per cent from Anton Capital. The Flinders Street tower changed hands with potential redevelopment opportunities. Currently occupied by Victorian Police, the tenant will vacate circa 2010 and will occupy Cbus Property and Keppel REIT s 311 Spencer Street development. Moving forward, as competition for limited stock remains fierce, capitalisation rates are yet to reach the bottom of the cycle, particularly in the prime grade market which has experienced aggressive yield compression following recent transactions in the second half of 2017. 750 Collins Street, Docklands Leased on behalf of The GPT Group CBD Office Research & Forecast Report First Half 2018 11
Research & Forecast Report BRISBANE CBD Office First Half 2018 By Helen Swanson Manager Research helen.swanson@colliers.com MARKET HIGHLIGHTS Renewed optimism for Brisbane s office leasing market as the level of enquiry increases from the finance and government sectors Positive rental growth forecast for 2018 across all office grades, as deal flow starts to increase Offshore capital represented 61 per cent of all 2017 transactions. Leasing market Forecast positive rental growth The Brisbane CBD office market has recorded a modest recovery in gross effective rental rates across most grades since 2015-16. This trend is anticipated to continue throughout 2018 and beyond. Gross effective rents for A and B Grade property rose YoY to December 2017 by 2.6 per cent and B Grade 7.1 per cent respectively. A number of secondary grade assets have now completed capex works, and this has contributed to the recent rise in B Grade gross effective rents. Additionally, we also project that as limited new supply of quality office product enters the market and white collar employment improves, we anticipate strong improvements in rental growth, in particular for Prime Grade product. Vacancy to decline According to the Property Council of Australia (PCA), the Brisbane CBD office vacancy rate increased from 15.7 per cent in July 2017 to sit at 16.2 per cent as at January 2018. A Grade vacancy rose from 11.6 per cent in July 2017 to 13.2 per cent in January 2018. This is despite recording 1,829 sqm of net absorption for the six months to January 2018. The rise was due to additional new supply that was added over the period. Additionally, B Grade vacancy also rose slightly from 20 per cent in July 2017 to 22 per cent in January 2018 whilst Premium declined slightly from 12.1 per cent to 12.0 per cent over the respective period. Net supply additions for the 6 months to January 2018 totalled -24,339 sqm. Contributing to this result was the withdrawal of the Health and Forestry buildings (circa 26,000 sqm) to make way for redevelopment plans ( Mid Town Centre ) as well as 80 Ann Street being withdrawn (14,500 sqm). 310 Ann Street (18,303 sqm) was the only building to be added to the stock list (18,303 sqm). Settling in late 2017, the new owners of the Health and Forestry buildings, Ashe Morgan/DMC Projects have a proposal for the repurpose and redevelopment of the two (2) existing towers (Levels 7 20), the proposed extension of additional tower levels 21 26 and the infill between the towers which will see the gross floor area become 36,168 sqm. On a positive note and despite the increase in vacancy, Colliers International are optimistic for 2018 due to the significant number of enquiries in the market from small suites through to whole building requirements, such as Suncorp s search for its global headquarters. Additionally, the re-election of the State Government means continued momentum for planned infrastructure projects such as Cross River Rail and this improvement in infrastructure will likely have positive flow-on effects for the Brisbane CBD market. Current Major Market Leasing Briefs Tenant Australian Taxation Office Suncorp Size Requirement 24,000sqm 35,000 45,000sqm Current Address 18 Banfield Road & 28 Macgregor Street KROP, CP1, 123 Albert Street & 266 George Street WeWork 2 x 4,000sqm None in Brisbane Westpac 6,000 7,000sqm 260 Queen Street Source: Colliers International Office Leasing department Timing ~2020 2021-2022 Ongoing requirement Currently in the market 12
Capital markets Offshore capital dominates There was $1.47 billion worth of CBD office sales which took place in the CBD during 2017. This was 24 per cent higher than what was transacted in 2016. Offshore capital continues to dominate Brisbane s CBD office transactions this year representing 61 per cent or $891 million of the total $1.47 billion worth of office sales. The dominant capital emanated from Germany, the USA and Asia, most commonly through Singapore-based managers. Of the 11 transactions above $5 million in the Brisbane CBD in 2017, five had a buyside-connection to Singapore. We anticipate that given the scarcity of product in the southern capitals and difficulty in achieving core-plus and above returns, offshore interest in Brisbane s direct property is expected to remain strong with Singapore being the dominant conduit point for capital. YoY Gross Effective Rental Growth Rates (%) $1,200 $1,000 $800 $600 $400 $200 $0 Dec-95 Dec-96 Dec-97 Dec-98 Dec-99 Dec-00 Dec-01 Dec-02 Dec-03 Dec-04 Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 Dec-13 Dec-14 Dec-15 Dec-16 Dec-17 Dec-18 Dec-19 Dec-20 Dec-21 Dec-22 Premium A Grade B Grade Domestic Vs Offshore Office Sales 3,500,000,000 3,000,000,000 2,500,000,000 2,000,000,000 1,500,000,000 1,000,000,000 500,000,000 0 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Domestic Offshore Brisbane CBD Office Cap Rate Compression by Grade 250.00 200.00 150.00 100.00 50.00 0.00 Premium Grade CRC A Grade CRC B Grade CRC 1 year 2 years 3 years Santos Place, 32 Turbot Street, Brisbane Sold on behalf of Permodalan Nasional Berhad (PNB) A major sale to take place over Q4 2017 included 32 Turbot Street selling for $370 million to Charter Hall. Known as Santos Place, 32 Turbot Street was transacted exclusively by Colliers International for $370 million (headline price) in December 2017. The sale reflected a market yield of 5.7 per cent and capital value of $10,757 per sqm. Santos Place was the first highly competitive on market test for Brisbane Prime Grade pricing benchmarks in the last two years since the sale of Waterfront Place. The A Grade office building included circa 34,500 sqm of accommodation, on a site area of 2,196 sqm in Brisbane s CBD north quarter precinct. The core investment asset offered a 3.9 year WALE by income, prime location and world leading design and sustainability along with strong tenant covenants. There was strong buyer interest, both domestically and offshore, particularly from Asia. New CBD Office Research & Forecast Report First Half 2018 13
generation prime-grade office assets are very tightly held in the Brisbane CBD and are rarely traded. The opportunity to acquire an asset of this scale in a precinct being rapidly transformed by over $12 billion of city-shaping major projects and infrastructure was a major attraction to capital. Looking forward 2018 is likely to see increased transaction volumes take place in Brisbane s CBD, as investors with core strategies are increasingly seeking to rotate out of current positions. We anticipate that the majority of the investment supply this year will be secondary grade stock which has been largely stabilised. Q1 2018 on-market campaigns will include: No 1 Brisbane (60 Queen Street, 217 George Street, 231 George Street) 127 Creek Street Premium Grade office yields for Brisbane assets currently sit at 5.25 to 5.75 per cent and A Grade office yields 5.75 to 6.25 per cent. The degree of cap rate compression across all grades in Brisbane s CBD has slowed in the last year. We anticipate that Brisbane is approaching the end of the cap rate compression cycle and that increased valuations will need to be supported by rental growth as opposed to cap rate compression only. Brisbane average Prime grade office yields are at a cyclical low, however the yield premium over the 10 year bond rate is still quite high. This spread needs to cater for a small amount of cap rate compression together with higher risk free rates. We anticipate a further 25-50 basis point compression by December 2018 for Prime Grade office assets in Brisbane s CBD. 120 Edward Street, Brisbane Valued on behalf of Deutsche Asset Management 14
Research & Forecast Report PERTH CBD Office First Half 2018 By Quyen Quach Senior Research Analyst Research quyen.quach@colliers.com MARKET HIGHLIGHTS Vacancy continues its gradual improvement, down to 19.8 per cent Net absorption driven by a resurgent resources sector Long term investors seeking assets with good repositioning potential Two consecutive periods of vacancy contraction has led to Perth CBD landlords confidence improving as peak-vacancy appears in the rear-view mirror. However, the current market is moving more like a truck than a Ferrari - the gears are shifting but the pace won t cause you whiplash. The headline CBD office vacancy rate moderated to 19.8 per cent, at the end of December 2017. This is down from 21.1 per cent, recorded by the Property Council of Australia (PCA), in July 2017. 197,795sqm. B Grade stock now holds the highest vacancy rate with 31.1 per cent, or 149,126sqm, physically vacant. Notwithstanding the recent improvements, at 130,657sqm, A Grade vacancy remains the second highest in terms of aggregate space vacant. Enquires continue to be dominated by smaller tenants; although there has been a notable increase in major tenants distributing briefs seeking accommodation options for pending lease expiries. Over the year to December 2017, good absorption levels underpinned more stability in rental rates for Premium grade space. The flight to quality and resultant high vacancy rate in secondary stock continued to exert downward pressure on net face rents in this segment. Notwithstanding improving market conditions in the Premium and A grade segments, market incentives have remained stable, at an average 48.25 per cent for Premium and 52.5 per cent for A Grade during the December 2017 quarter, as vacancy remains well above the long term equilibrium level. As anticipated, supply additions for 2017 were negligible, with just 1,150sqm of new space added. The PCA reported 22,178sqm of net absorption during the six months ending December 2017. This was the second highest absorption recorded nationally amongst the major CBD markets. Melbourne CBD recorded the highest absorption at 51,376sqm. Business conditions stabilised and began a gradual improvement over the latter half of 2017. Notably, project spending started to rise and this is expected to continue. This led to stronger employment conditions and job creation in WA over the twelve months to December 2017. Various tenancy alternatives continue to underpin a flight to quality and centrality, evidenced by a second period of robust Prime space absorption and a further rise in secondary grade vacancy. There was a minor 266sqm of negative net absorption in B Grade space, while C Grade experienced 5,616sqm of negative absorption. Secondary (B, C & D) stock vacancy accounted for 56 per cent of CBD vacancy at the end of December 2017, with a total of 34-50 Stirling Street, Perth Leased on behalf of Wespre Pty Ltd CBD Office Research & Forecast Report First Half 2018 15
The backfill space from the upcoming Woodside relocation from 240 St Georges Terrace added over 40,000sqm of competition to the leasing market in the latter part of 2017. The owner of 240 St Georges Terrace is actively negotiating with prospective occupiers, and we understand they are very close to securing commitments to a significant portion of this pending void. Foreign buyers and institutions spent over $350 million acquiring assets in Perth during 2017. In total, five major CBD office assets changed hands for an estimated $592.2 million. The most recent being the sale of 45 St Georges Terrace, which was under contract for $54.2 million in December 2017. During 2017, buoyant demand for institutional investment grade assets continued to push yields lower for Perth s Prime grade (Premium & A) assets. More particularly, Premium market yields averaged 6.15 per cent during the December 2017 quarter. This is 20 basis points lower than the December 2016 average of 6.35 per cent, while A grade asset yields averaged 18 basis points lower at 6.88 per cent. The lower yields in Prime assets also flowed through to some secondary grade assets, with B grade falling 10 basis points to record an average yield of 7.48 per cent. We anticipate the recent rosier economic outlook to translate to improved office leasing conditions in the year ahead. But make no mistake, the economic improvements are once again largely underpinned by strong demand for commodities, the resurgence in metal and energy prices and the resultant recovery in resource sector investment spend during 2017. The Perth CBD vacancy rate is benefitting from the continued flight to quality and centrality, with tenants migrating from fringe and suburban locations. But the benefits have not been shared. Secondary grade and some A grade assets that underinvested in maintenance and service modernisation during the boom years, continue to suffer higher vacancy. Cheaper occupancy costs and historically high incentives in Prime space has led to major tenants turning their backs on less tenant-friendly options. Higher vacancy in dated and tired assets continues to present opportunities for long-term investors and counter-cyclical players, who are seeking out assets with good re-positioning potential. Foreign and institutional investors are actively looking to exploit this window of opportunity before it closes. We anticipate that, as the vacancy rate slips lower, investor sentiment will consolidate and this window will begin to close. Colliers International modelling continues to indicate vacancy rates trending lower over the next five years, albeit gradually. We are currently forecasting vacancy to slip to 17 per cent by the end of 2020. Although we note the prospect of downward revisions to this forecast, should the recovery accelerate over the next six to twelve months. Perth CBD average net face rents Net Face Rent ($/m²) $1,000 Forecast $900 $800 $700 $600 $500 $400 $300 $200 $100 $0 Dec-12 Jun-13 Dec-13 Jun-14 Dec-14 Jun-15 Dec-15 Jun-16 Dec-16 Jun-17 Dec-17 Jun-18 Dec-18 Jun-19 Dec-19 Premium A Grade B Grade Perth A Grade yield range 10% 9% 8% 7% 6% 5% Jun-12 Sep-12 Dec-12 Mar-13 Jun-13 Sep-13 Dec-13 Mar-14 Jun-14 Sep-14 Dec-14 Mar-15 Jun-15 Sep-15 Dec-15 Mar-16 Jun-16 Sep-16 Dec-16 Mar-17 Jun-17 Sep-17 Dec-17 Perth CBD office supply, net absorption & vacancy rate Supply & Net Absorption (sqm) 160,000 32% Forecast 140,000 28% 120,000 24% 100,000 20% 19.8% 80,000 16% 60,000 12% 40,000 8% 20,000 4% 0 0% -20,000-4% -40,000-8% Jul-04 Jan-05 Jul-05 Jan-06 Jul-06 Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 Jul-17 Jan-18 Jul-18 Jan-19 Jul-19 Jan-20 Jul-20 Jan-21 /PCA Perth CBD office supply Total office space (sqm) Total Supply 6 mth Net Absorption (sqm) Total Vacancy Rate (%) 80,000 2015 2016 70,000 Completed 161,111sqm 60,000 50,000 40,000 30,000 20,000 10,000 0 2017 2018 U/C - 54,000sqm Mooted - 289,932sqm Vacancy Rate 16
Research & Forecast Report ADELAIDE CBD Office First Half 2018 By Kate Gray Director Research kate.gray@colliers.com MARKET HIGHLIGHTS Sustained jobs growth in Adelaide, despite low population growth Offshore interest in Adelaide assets driving investment Vacancy falls in the Adelaide market Leasing market Demand continues to improve The Adelaide unemployment rate has continued to decline during 2017 with a rate of 5.9 per cent recorded in December 2017. This has seen SA s unemployment rate fall from being the worst in Australia to being the third best performing labour market over the last 12 months. This was a result of sustained growth in employment over the last 12 months, even though there has been headline grabbing factory closures, including Holden s Elizabeth plant, which closed in October 2017. This sustained growth in jobs has resulted in positive net absorption in the Adelaide office market. The second half of 2017 recorded the second consecutive period of positive net absorption, at 9,696 sqm. This was driven by higher than average net absorption for Grade B and C stock, with Prime Grade seeing a slight increase in vacancy over the period. This resulted in total vacancy falling to 15.4 per cent down, from 16.1 per cent in January 2017. Despite the current high vacancy rate, the options for contiguous space are starting to narrow. This is particularly the case for tenants looking for more than 2,000 sqm of contiguous space in a relatively new A grade building. The depth of stock in Grade A space is narrow, with small increases in demand for Grade A space resulting in vacancy tightening quickly. Forecasts for job growth in South Australia are far more positive than they have been over the past three years which supports a more positive view on net absorption take up over the next two years. This fall in vacancy is also supported by the lack of new supply to be delivered over the next 18 months, with no new buildings to be completed in this time. There is only one project under construction, which is Tower 7 development (24,500 sqm) - developed by Charter Hall. This project is likely to be completed by July 2019 and is understood to be largely pre-committed by the Attorney General s Department and BHP. There are several other projects which have been mooted, but are unlikely to proceed without pre-commitment. Net face rental growth remains stalled for Premium and A Grade accommodation, and incentives increased slightly, with an average of 37 per cent on an average lease. B Grade accommodation has seen a slight fall in net face rents as well as an increase in incentives, which has negatively impacted net effective rentals for B Grade space. This is likely to lead to increased refurbishment activity for B Grade and secondary assets as landlords are moving towards tenant retention strategies. Although we have seen some withdrawals in C and D Grade space last year, the residential conversion market fundamentals are unlikely to support conversion of use from commercial to residential space over the next two to three years. There is still a strong supply pipeline for residential CBD units and plentiful development sites which means Secondary Grade stock is likely to have a drag on market vacancy in the medium term. There are several reasons to be more positive in the forecasts for demand for the Adelaide office market over the next 12 months. Sustained forecast job growth is likely to be driven by small to medium enterprises in the areas of education, health care, defence and IT. There is also a higher level of larger lease expiry over the next two years, so the number of leasing transactions are expected to improve over the next 12 months. The roll out of the 10-gig city project is likely to drive new demand into the Adelaide office market. This project is a world first and offers companies a secure and fast business to business network and is likely to result in new entrants into the Adelaide market. Giving this technology the most likely areas that will drive this demand are security, medical and defence, but certainly demand will not be limited to these sectors. CBD Office Research & Forecast Report First Half 2018 17
Capital markets Offshore capital drives investment volumes The fourth quarter saw the largest transaction for 2017, with the sale of 11 Waymouth Street. This asset was sold by Dexus in December for $202.5 million and was reportedly purchased by the Singaporean based Mapletree. This sale has seen sales volumes reach $474 million which is above the sales volume of $410.97 million recorded in 2016. Over the last 12 months, the Adelaide market has seen a significant shift in the source of capital for major office transactions, with off shore sources of capital accounting for 84 per cent of the total sales volumes. We have seen Swiss, Singaporean and US capital invest in the Adelaide market over the last 12 months. Other major sales in the second half include 45 Pirie Street, and 99 Gawler Place and 121 King William Street. This increase in activity has resulted in a tightening of the lower end of the yield range by 25 basis points for A Grade assets to 6.25 per cent, with a high end average of 8.25 per cent. The large range of yields is a result of the historic weakness in the leasing markets, however we are expecting that this will turn over the next 2 years which will support compression of yields for a sub segment of Prime Grade assets. High vacancy and let up risk has led to a two-tiered investment market, with fully leased, long WALE assets in high demand and any other asset with vacancy, capital expenditure or short lease terms becoming less attractive to purchasers. This sets Adelaide apart from other CBD markets in Australia, where investors are very interested in repositioning opportunities. This has also resulted in the large yield range for prime grade assets and the performance of newer generation buildings is masked by the broader trend of Prime Grade assets. The weakness in the Adelaide leasing market has hampered yield compression in the Adelaide CBD office sales volumes Millions $800 $700 $600 $500 $400 $300 $200 $100 $0 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 1st Half 2nd Half Adelaide CBD Supply and Absorption Thousands m² 60 50 40 30 20 10 0-10 -20 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18 Jan-19 Supply 6 month net absorption Adelaide market, but as vacancy falls and incentives tighten this is likely to see a case for further yield compression and a narrowing of the range of yields for Prime Grade. There is still a significant gap between the yields achieved in the Sydney, Melbourne and Adelaide office markets. The Adelaide market has some institutional and offshore investment, but is mainly driven by private investors. 33-37 Gilbert Place, Adelaide Leased on behalf of Gilbert Place Investments Pty Ltd & Lily Nominees Pty Ltd 18
Research & Forecast Report CANBERRA CBD Office First Half 2018 By Anika Wong Manager Research anika.wong@colliers.com MARKET HIGHLIGHTS Limited prime assets will support uplift in rents in the prime market into 2018 Preference for A Grade office space saw vacancy rise in the lower grade stock Continued flight to quality sees repositioning opportunities for tired A grade buildings and Secondary grade assets to cater to market needs Investment market Investment sales volume over CY2017 reached $786.2 million (Canberra Civic and Non-Civic) (sales over $10 million). These were the highest annual transaction volume levels recorded in a decade, with the majority of the sales occurring in the second half of 2017. One of the largest single-asset transactions was Childers Square, sold by a private investor for $92.2 million, reflecting a 7.52 per cent equivalent reversionary yield. Located in the City West precinct and across from the Australian National University, major developments and new supply additions have been added to existing stock within the area over the last decade. With WALE s typically longer in length for government tenants, the 15,000sqm office building is leased to a mix of private and government tenants on a 3.75 year WALE with major tenants including the Commonwealth Ombudsman, Sparke Helmore, BAE Systems Australia Limited and NAB. The sale of 44 Sydney Avenue, Forest was another standout transaction, purchased for $64.7 million from Quintessential Equity by Charter Hall PFA Fund, The asset has a 7.9-year WALE. The A-grade the building sits adjacent to Parliament House and amongst a variety of Commonwealth Government headquarters. Currently leased to the Department of Foreign Affairs and Trade, Minerals Council of Australia, Master Builders Association and Bellchambers Barrett, the office was recently refurbished and consists of 9,948sqm across four levels. Investment interest has gained considerable traction with an active foreign investor presence accounting for 48 per cent of the total transaction volume over 2017. The Civic precinct s average capital value has risen to $6,133 per sqm for Prime Grade buildings, remaining an attractive value proposition amongst Australia s CBDs. Over the twelve months to December 2017, Prime yields compressed 50 basis points to 6 per cent and secondary grade yields saw firming of 75 basis points to 8 per cent over the same period. Based on the historical long-term average spread across both asset classes we anticipate investment yields to stabilise before beginning their rise in June 2019. Leasing market Over the year to December 2017, gross effective rents grew 6.7 per cent for prime grade space whilst Secondary Grade assets experienced double-digit growth of 17.3 per cent. This was underpinned by the fall in average incentives to 20 per cent from 25 per cent for A Grade space and from 30 per cent to 20 per cent for B Grade space. This is a result of the lack of available Prime Grade stock trickling down into a greater take-up of Secondary Grade space. With the current supply pipeline not being available until 2019-2020, we expect positive net face rental growth to continue over the next three years, rising 3.6 per cent, given the limited availability of core products available on the market. Still, rentals in comparison to Sydney, Melbourne and Brisbane are trading at a discount for Prime Grade assets, with the average face rent for Canberra currently $368 per sqm. The average prime incentive for A grade accommodation is forecast to fall to 18 per cent for the second half of 2018 before declining to 15 per cent by 2020. This trend looks to continue CBD Office Research & Forecast Report First Half 2018 19
for secondary grade incentives also, which we are forecasting to decrease to 19 per cent by 2020. The lack of contiguous space in the market, in combination with rising white-collar employment in the CBD, is another factor placing downwards pressure on incentives, particularly within the Parliamentary Triangle. Average Vacancy Rate by Asset Class 25.0% 20.0% 15.0% Forecast Supply of A-grade space tightening quickly The ABS recorded solid improvement in the job market recorded and ACT has the lowest unemployment rate in the country, at 3.7 per cent as at December 2017. The nation s capital also recorded the second strongest annual population growth after Victoria, increasing by 1.7 per cent over the year to June 2017. An expanding workforce has resulted in white collar employment increasing by approximately 1,179 persons over the course of 2017. Deloitte Access Economics white collar employment forecasts an additional 2,102 employed persons in 2018, which equates to approximately 12,000sqm of additional space required. Civic vacancy rose slightly to 11.3 per cent from 10.1 per cent over the six months to January 2018. This was a result of the 9,635sqm of net supply and is mainly reflective of negative absorption in the C Grade market. Vacancy in the A Grade market remained virtually unchanged. The next supply wave is expected to come online mid 2019-2020 with 47,444sqm of new supply forecast to be delivered over this period., The first project to be delivered is Civic Quarter (CQ) (15,894sqm), which is on schedule to complete by mid-2019 and 44 Sydney Avenue, Forrest Sold on behalf of Quintessential Equity in November 2017 Leased on behalf of Quintessential Equity 10.0% 5.0% 0.0% Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 Jul-17 Jan-18 Jul-18 Jan-19 Jul-19 Jan-20, PCA OMR Jan 2018 A grade 10 yr Average Secondary Grade Total Domestic Vs Offshore Office Sales M illions $900 $800 $700 $600 $297 $379 $500 $80 $266 $7 $400 $411 $300 $467 $332 $200 $38 $421 $425 $407 $307 $100 $195 $170 $64 $34 $54 $85 $- $43 $36 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Domestic Offshore the two-stage development of Constitution Place (31,500sqm) to follow in late 2020. The most recent development put to the drawing board is the $160 million redevelopment of the Dickson Motor Vehicle Registry site, part of the Northbourne Avenue corridor comprising a multi-building precinct, including an ACT Government office block. Major refurbishments are also underway as well as upgrades to the building to achieve a 4.5-star NABERS Energy Rating and to enliven tired office space to meet increasing demand for prime space. There is approximately 58,290sqm of office expiries coming up in 2019 and given the scarce new supply current occupiers may look to renegotiate new commitments prior to initial lease expires as the strengthening demand in Canberra s market will likely result in tenants filling up the secondary Grade vacancies. Positive sentiment on the back of reducing supply of quality office stock coupled with continued underlying demand and major infrastructure investment, with the rolling out of the first stage of the Light Rail Network this year, will contribute to an ongoing tightening of vacancy rates. 20
Research & Forecast Report AUCKLAND CBD Office First Half 2018 By Leo Lee Manager Research & Consulting leo.lee@colliers.com Auckland Office Vacancy Rate 20% 18% MARKET HIGHLIGHTS A change in government and a shift in policy direction has created a degree of uncertainty and triggered a corresponding decline in investor confidence. Vacancy Rate 16% 14% 12% 10% 8% 6% 4% 2% Auckland s CBD office market remains in a period of low vacancy reflecting strong demand and absorption of new supply. 0% Dec-95 Dec-96 Dec-97 Dec-98 Dec-99 Dec-00 Dec-01 Dec-02 Dec-03 Dec-04 Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 Overall Prime Secondary Source: Colliers International Research Dec-13 Dec-14 Dec-15 Dec-16 Dec-17 Offshore interest hunting for CBD office assets, saw more key office assets transacting to Asian-based investors in the second half of 2017. A change of government A change of government and a shift in policy direction has created a degree of uncertainty and perhaps explains the dip in the Colliers commercial investor confidence survey results for December 2017. Overall net confidence in the Auckland commercial property market remains high at a net positive 32 per cent, down from 41 per cent in June 2017. Optimism in Auckland s office sector has reached a positive 35 per cent, sitting behind the industrial sector (positive 54 per cent). The government s proposed tighter restrictions around foreign ownership of property and land has so far been oriented towards the residential sector. This is unlikely to deter investors in the commercial property market where Auckland s population growth and positive economic outlook will continue to be the key fundamentals driving business growth and real estate investment in 2018. Vacancy remains low, rents will rise Auckland s CBD office market remains in a period of low vacancy, with the December 2017 survey up 0.2 per cent from six months ago now reaching 5.9 per cent. Prime vacancy has risen to 4.3 per cent from 3.8 per cent in June 2017, while secondary vacancy has held steady at 7.0 per cent. 51,300 sqm of new office has come onto the market in 2017, from developments in the Wynyard Quarter and Victoria Quarter precincts. Strong demand and absorption of new supply has left little prime space available. CBD office rents are continuing to rise from an already strong base. The supply of new developments will ramp up significantly in 2019, when the 39,000 sqm PwC Tower at Commercial Bay is expected to be completed. In addition, Mansons TCLM has started construction of a new six level office development expected to contribute 15,000 sqm at 155-167 Fanshawe Street in Wynyard Quarter. The 4,000 sqm freehold site was purchased in 2016 for $23 million. Offshore investors active Offshore interests, particularly from Asia, continue to hunt CBD office assets. Singapore listed property group Roxy-Pacific, purchased its second office building in New Zealand, the NZI Centre in Auckland for $63 million in October. The Overseas Investment Office has also approved the $175 million purchase of 205 Queen Street by Roxy-Pacific and Chip Eng Seng. While Augusta has sold its five level office building occupied by NZ Post for $30 million to a Hong Kong based investor. Auckland s strong growth story and the relatively high commercial property yields available in Auckland will ensure that it continues to attract more Asian, Australian, and European interest over 2018. CBD Office Research & Forecast Report First Half 2018 21
OUR EXPERIENCE CBD OFFICE SOLD 20 Hunter Street Sydney, NSW $192.5 million On behalf of TH Real Estate 59 Goulburn Street Sydney, NSW $158 million On behalf of Roxy Pacific 275 George Street Sydney, NSW $82.75 million On behalf of QIC MANAGED 380 La Trobe Street Melbourne, VIC 21,666m² On behalf of Wharf Street Family Investments Pty Ltd 1 King William Street Adelaide, SA 20,000m² On Behalf of Prime Super 99 Macquarie Street Sydney, NSW 6,306m² On behalf of Mulpha Transport house Pty Ltd LEASED 750 Collins Street Docklands, VIC 41,418m² On behalf of The GPT Group 180 Ann Street Brisbane, QLD 16,329m² On behalf of Daisho & Co. Limited 44 Sydney Avenue Forrest, ACT 7,789m² On behalf of Quintessential Equity VALUED Tower One, International Towers Sydney 100 Barangaroo Avenue, Sydney, NSW 107,967m² On behalf of Lendlease Grosvenor Place 225 George Street Sydney, NSW 84,477m² On behalf of Dexus Property Group 101 Collins Street Melbourne, VIC 83,570m² On behalf of Eureka Funds Management TENANT ADVISORY, DESIGN OR PROJECT MANAGEMENT Grant Thornton Tower 5, 727 Collins Street Melbourne, VIC 3,500m² On behalf of Grant Thornton Amcor 60 City Road Southbank, VIC 1,300m² On behalf of Amcor CGI 40 City Road Southbank, VIC 1,300m² On behalf of CGI Accelerating success. How else can we help you? Speak to one of our property experts today. au.office@colliers.com
AUSTRALIA AND NEW ZEALAND IN THE LAST 12 MONTHS $4.31 billion of CBD office assets 447 Collins Street Melbourne, VIC $414 million (50%) On behalf of Mirvac Group Santos Place, 32 Turbot Street, Brisbane, QLD $370 million On behalf of Permodalan Nasional Berhad Childers Square, 14 Childers Street, Canberra, ACT $92.15 million On behalf of Childers Nominees 132 CBD office assets totalling over 1.1 million square meters of CBD office space 285a Crown Street Surry Hills, NSW 4,517m² On behalf of LaSalle Investment Management 127 York Street Sydney, NSW 2,110m² On behalf of Number 127 York Street Pty Ltd 376-388 Flinders Street Melbourne, VIC 1,261m² On behalf of Wincrown Pty Ltd 942 deals for 785,253 square metres of CBD office space 33-37 Gilbert Place Adelaide, SA 3,500m² On behalf of Gilbert Place Investments Pty Ltd & Lily Nominees Pty Ltd 333 Kent Street Sydney, NSW 3,338m² On behalf of ipg 34-50 Stirling Street Perth, WA 1,983m² On behalf of Wespre Pty Ltd 7.1 million square metres totalling over $76 billion worth in value 447 Collins Street Melbourne, VIC 50,114m² On behalf of ISPT Pty Ltd One Melbourne Quarter 699 Collins Street Melbourne VIC 26,313m² On behalf of Lendlease 120 Edward Street Brisbane, QLD 15,271m² On behalf of Deutsche Bank Integrated property solutions delivered by our Occupier Services team ABN AMRO 580 George Street Sydney, NSW 1,190m² On behalf of ABN AMRO Expert360 14 Martin Place Sydney, NSW 880m² On behalf of Expert360 ViaSat 6 Riverside Quay Southbank, VIC 800m² On behalf of ViaSat For more information about Colliers International and working with us visit: www.colliers.com.au