Research and

Forecast Report

Accelerating success.

CBD
OFFICE
First Half 2019

1
EXPERTS
IN PROPERTY DATA & INSIGHTS
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Anneke Thompson
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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 2019 3

CBD OFFICE SNAPSHOT
NET FACE NET EFFECTIVE
VACANCY RATE NET SUPPLY (SQM) RENTS INCENTIVES RENTS YIELD
($/SQM) ($/SQM)

Year to Year to
Current Jan-20 Current Jan-20 Current Jan-20 Current Jan-20 Current Jan-20
Jan 2019 Jan 2020

SYDNEY 4.1% 4.4%

Premium 3.8% 3.6% $1,134 $1,209 21% 21% $862 $917 4.8% 4.8%
-26,806 12,229
A Grade 3.6% 2.7% $874 $924 19% 19% $673 $717 5.3% 5.2%

B Grade 4.5% 6.2% $743 $764 18% 18% $582 $596 5.6% 5.5%

MELBOURNE 3.2% 3.4%

Premium 3.8% 3.5% $746 $819 26% 26% $551 $605 4.7% 4.6%
82,703 58,200
A Grade 2.7% 2.5% $585 $639 29% 29% $416 $454 5.1% 5.0%

B Grade 4.3% 5.1% $479 $508 26% 26% $350 $376 5.3% 5.3%

BRISBANE 13.0% 12.5%

Premium 10.4% 5.6% $668 $669 36% 34% $367 $386 5.3% 5.1%
-28,369 30,243
A Grade 9.9% 11.2% $575 $583 36% 35% $306 $319 5.7% 5.6%

B Grade 27.4% 17.3% $460 $463 39% 38% $230 $235 6.5% 6.5%

PERTH 18.5% 19.3%

Premium 4.5% 6.7% $700 $700 45% 43% $385 $390 6.0% 6.0%
-9,819 61,509
A Grade 16.3% 17.0% $565 $656 53% 53% $268 $268 6.8% 6.8%

B Grade 30.2% 31.7% $383 $383 50% 50% $191 $191 7.5% 7.5%

ADELAIDE 14.2% 14.0%

Premium 2.6% 8.2% $397 $405 33% 28% $222 $252 6.3% 6.2%
4,771 34,636
A Grade 14.3% 15.4% $396 $406 33% 28% $228 $260 6.8% 6.7%

B Grade 14.6% 12.0% $331 $337 37% 32% $170 $193 7.5% 7.5%

CANBERRA 12.2% 14.6%

(Civic precinct)

A Grade 1.7% 1.0% 2,323 15,894 $395 $394 18% 15% $309 $319 6.0% 5.9%

B Grade 21.0% 26.6% $285 $283 22% 22% $198 $196 7.8% 7.7%

AUCKLAND
($NZD)

Premium 1.4% 5.8% $540 $548 7.0% 12.0% $502 $482 5.5% 5.3%

A Grade 4.0% 4.3% 600 27,500 $434 $442 10.8% 12.8% $387 $386 6.4% 6.1%

B Grade 6.9% 9.1% $325 $331 12.3% 12.3% $285 $290 6.9% 6.6%

* Net incentives quoted for Melbourne and Perth. New Zealand data is based on December average rates. Gross incentives for all other markets.
NATIONAL OVERVIEW
By Anneke Thompson
National Director | Research Colliers International Tenant Advisory WIP by industry
Anneke.Thompson@colliers.com
Retail and

Finance & Insurance Wholesale

Trade, 6%

industry lead Colliers’ tenant Legal, 6% Finance & Insurance,

advisory work
18%

Co-working, 7%
Whilst the whole nation eagerly anticipated the findings of
the Financial Services Royal Commission in early February
2019, the commensurate impact on the nation’s office Government, 7%
Media &
markets was a less talked about outcome. However, analysis Communications,
of Colliers’ Tenant Advisory team’s work in progress data 16%

indicates that nationally, the finance and insurance industry

All others, 11%
now lead the work in progress – with 18 per cent of all work
being undertaken by Colliers’ Australian team linked to this
industry. This data closely aligns with Job Vacancy data Information Technology,
published by the ABS in January 2019, which shows that Manufacturing, 12% 13%

finance and insurance jobs available now are at their highest

level since in the series began in 2009. Other industries
that dominate Colliers’ Tenant Advisory work in progress
include the Media & Communications industry (16 per cent), Source: Colliers International
Information Technology (13 per cent) and Manufacturing
(12 per cent) – although most of these requirements are
for metro office markets. Co-working and government or
government related bodies, both industries taking up large
amounts of space in our CBD markets currently, represent 7
per cent of work in progress respectively, although it should
be noted that a number of the larger requirements from
these bodies are handled ‘in house’.
The implication to be taken from this data is that the major
CBD markets – particularly Sydney and Melbourne, each
home to two of our big four banks – are due to receive a
further boost to demand, in an already tight market. Whilst
each requirement will have their own set of circumstances
behind them, by and large, we are seeing the finance and
insurance industry increase employment, separating wealth
departments from their main premises and reshuffling space
to deal with additional regulations placed upon them. While
we are in the early stages of this industry transformation, it
seems that space occupied by finance and insurance groups
will, in aggregate, increase over time.
Given how few options are available to large occupiers in
Sydney and Melbourne currently, the question will arise, will
these occupiers start looking to alternative locations to house
non-core departments? Already we are seeing the early
stages of groups in finance and insurance enquire on cost
and availability in non-traditional markets such as Adelaide
and suburban markets in Sydney. We expect that in the
longer term, demand from these groups will spread further
from the Sydney and Melbourne CBDs, as cost and space
availability become fundamental issues.
Poly Centre, 210 George Street, Sydney
(Leased and Managed) On behalf of Poly Australia

CBD Office | Research & Forecast Report | First Half 2019 5

Research &
Forecast Report
SYDNEY
CBD Office | First Half 2019
By Alex Pham
Director | Research
alex.pham@colliers.com
MARKET HIGHLIGHTS
Total investment activity increased by 13 per cent from the prior
year, reaching $17 billion for the calendar year of 2018
The market recorded a record low 4.5 per cent core market
yield for the fund through transaction of 275 George Street
The vacancy rate tumbled to 4.1 per cent in January 2019,
which is the lowest level of vacancy in over a decade
Investment Market
Investor demand remains largely undeterred
by strong pricing
Investment activity in the Sydney CBD office market continued to
build momentum into 2018 following on a strong 2017 with yields
remaining firm and capital values continuing to grow across the
board. The total investment value increased by 13% from the prior
year to reach $7.17 billion for the calendar year of 2018. The recent
rise in investment volumes can be attributed to several trophy
assets and large portfolios being transacted throughout the year
while the pool of capital from offshore and institutional investors
remained fluid.
Sydney is strengthening its position as a global investment
destination and a gateway city to the Asia Pacific region, further
supported by an unprecedented level of infrastructure investment
along with the private development of several new premium
office skyscrapers. The NSW Government is delivering the largest
transport infrastructure program in Australia with $41.4 billion of
investment committed over the next four years. The strong pipeline
of infrastructure investment is expected to support rapid population
and employment growth in Sydney over the next decade. As at
the 2018 September quarter, the unemployment rate in the City of
Sydney was only 3.5 per cent, which is one of the lowest levels of
unemployment in Australia.
6
Underpinned by solid market fundamentals and a positive outlook,
Sydney continues to offer an attractive value proposition compared
to other Asian gateway cities such as Tokyo, Singapore and Hong
Kong. Global investment funds with an APAC mandate continue
to target quality assets in the CBD market, adding pressure on
yields and competition. Canada, the US, Hong Kong and Singapore
were the largest sources of offshore capital landing in Sydney
last year. Domestically, demand from institutional investors and
superannuation funds was solid with a strong focus on Premium
and A Grade assets as well as fund through deals. Over the past
12 months, domestic investors acquired a total of $3.9 billion worth
of assets in the CBD, while offshore buyers were responsible for a
total of $2.4 billion over the same period.
Investor demand remains undeterred by
strong pricing
Yields in the Sydney CBD reached a record low of 4.5 per cent
(core market) for the fund through transaction of 275 George
Street, resulting in a sale rate of $31,834 per sqm. This is the
highest per sqm rate for investment grade stock recorded in the
country. In addition, the equity buyout of the Investa Office Fund
from Oxford Properties (real estate investment arm of OMERS, one
of Canada’s largest pension funds) saw seven assets change hands
in the Sydney CBD totalling $1.59 billion. This transaction was the
largest single investment in the Sydney CBD since the CIC buyout of
the IPT in 2015.
On average, core market yields for Premium assets in the CBD
have declined by 18 bps over the past 12 months to stand at around
4.78-4.89 per cent as at Q4 2018. Combined with rising rents, yield
compression has led to a 15 per cent increase in capital values
of Premium office space to now stand at circa $19,700-27,500
per sqm. A Grade office buildings are expected to trade at sharp
yields of around 5.25 to 5.40 per cent as at Q4 2018, 28 bps lower
than Q4 2017. Transaction volumes for A Grade stock jumped by
16.5 per cent over the year to December 2018 to range between
$14,800 and $18,400 per sqm. The strong transaction results were
also recorded in the secondary market, where B Grade sales were
achieving yields of around 5.48 to 5.63 per cent as at the end of
2018, which represents a 20 bps annual compression. Investors
are pricing B Grade office space in the CBD at roughly $12,345 to
$14,648 per sqm, 15.5 per cent higher than a year ago.
 Sydney CBD Net Absorption vs Total Vacancy
Leasing market Forecast

150,000 12%

Vacancy is at the lowest in a decade 100,000 10%

50,000 8%
The Sydney CBD office market is in the midst of a supply drought
0 6%
with the vacancy rate tumbling to 4.1 per cent in January 2019,
-50,000 4%
down from 4.6 per cent six months prior and 4.8 per cent in
-100,000 2%
January 2018. This is the lowest level of availability in over a
-150,000 0%
decade and is only slightly higher than the historic low of 3.7 per

Jul-20
Jul-06

Jul-08

Jul-09

Jul-22
Jan-20
Jan-06

Jan-08
Jul-07

Jan-09

Jan-22
Jan-07

Jan-23
Jul-10

Jul-12

Jul-21
Jul-14
Jan-10

Jul-16

Jul-18
Jul-15

Jul-19
Jul-13
Jan-12

Jan-21
Jan-14

Jan-16

Jan-18
Jan-15

Jul-17

Jan-19
Jan-13

Jan-17
Jul-11
Jan-11
cent recorded in January 2008. The continued decline in vacancy
6 mth Net Absorption Vacancy Rate (%)
over the past six months was due primarily to the high level of stock
Source: Colliers Edge
withdrawal. In total, 55,147sqm of existing office stock was taken
offline between July 2018 and January 2019. This is equivalent to Average Gross Face Rents
1.1 per cent of the stock base of 5,036,168sqm as at July 2018. The Forecast

total office stock in the Sydney CBD has declined from the peak of $1,800
$1,600
5,098,358sqm in July 2017 to now stand at 5,009,233sqm. $1,400
Premium A Grade B Grade
$1,200
Most of the office buildings withdrawn over the past six months $1,000

were taken offline for either redevelopment or refurbishment $800

$600
purposes. These include the two adjoining buildings at 210-220 $400

George Street with an existing area of 14,732sqm currently being $200

$0
redeveloped into a brand-new office tower with 16,500sqm of NLA
Dec-00

Dec-02

Dec-20
Dec-04

Dec-06

Dec-08
Dec-05

Dec-09

Dec-22
Dec-03

Dec-07

Dec-23
Dec-98
Dec-99
Dec-97

Dec-01

Dec-10

Dec-12

Dec-21
Dec-14

Dec-16

Dec-18
Dec-15

Dec-19
Dec-13

Dec-17
Dec-11
and due for completion in 2021. In addition, the entire building at
Premium A Grade B Grade
388 George Street (35,500sqm) is undergoing a full refurbishment
Source: Colliers Edge
following the departure of IAG for Darling Park Tower 2 and is
set to return to the market in 2020. It is understood that over Average Incentives
20,000sqm of this backfill space has been spoken for as at early 35%

2019. 30%

25%

Near-term supply is considerably limited 20%

15%
Availability of new office supply in the Sydney CBD remains
10%
extremely tight. Only 28,212sqm of new stock was added during the 5%
second half of last year. The new supply came from the delivery of 0%
Dec-00

Dec-02

Dec-04

Dec-06

Dec-08
Dec-05

Dec-09
Dec-03

Dec-07
Dec-98

Dec-99
Dec-97

Dec-01

Dec-10

Dec-12

Dec-14

Dec-16

Dec-18
Dec-15
Dec-13

Dec-17
20,795sqm at Barrack Place (151 Clarence Street) which was fully
Dec-11

leased to Pfizer, Mills Oakley and ARUP by the time of completion. Premium A Grade B Grade

Additionally, 1,829sqm of refurbished space came back online Source: Colliers Edge
at 222 Clarence Street. New supply is anticipated to remain low
over the next 12 months with expected new additions including 60 Average Yields
Martin Place (38,600sqm), 100 Broadway (5,447sqm) and 1 Sussex 10%

Street (10,000sqm). These developments are achieving exceptional 9%

8%
pre-leasing results with 60 Martin Place being about 63 per cent
7%
leased to Norton Rose/HDY, Spaces and Banco Chambers while 6%
100 Broadway is fully pre-committed to UTS Graduate School of 5%

Health. Meanwhile, the timber building at 1 Sussex Street (Daramu 4%

House) has been fully secured by WeWork, which is expanding 3%

Dec-00

Dec-02

Dec-04

Dec-06

Dec-08
Dec-05

Dec-09
Dec-03

Dec-07
Dec-98

Dec-99
Dec-97

Dec-01

Dec-10

Dec-12

Dec-14

Dec-16

Dec-18
Dec-15
Dec-13

Dec-17
Dec-11

aggressively across the Sydney CBD. The building is expected to

reach practical completion in November 2019 and WeWork is due to Premium A Grade B Grade

open in April 2020. Source: Colliers Edge

CBD Office | Research & Forecast Report | First Half 2019 7

Net absorption is constrained by the lack of
stock
While tenant enquiries have remained strong, realised demand -
which is measured by the amount of space absorbed - has been
constrained by the lack of stock available. Availability of contiguous
space in the CBD is particularly scarce. As a result, tenants with
current space requirements are being encouraged to be more space
efficient or seeking alternative solutions such as co-working and
flexible workspaces. A small number of cost-conscious tenants
have opted to relocate to non-CBD locations.
According to Colliers International’s Office Demand Index, the total
number of enquiries for the Sydney office market increased by 32
per cent YoY in Q4 2018, although businesses in this market are
seeking smaller office spaces. Demand for office accommodation
under 1,000sqm and between 1,000 to 2,999sqm increased by 7
and 66 per cent respectively in the same period, while enquiries for
3,000sqm plus space moderated. The net absorption figure for the
Sydney CBD over the 6 months to January 2019 was 1,299sqm.
It is estimated that tenant expansion was responsible for almost
30,000sqm of space being absorbed over the past 6 months,
however, was offset by an equally strong amount of space being
vacated due to tenant relocation out of the market or contraction.
Face rents continue to rise
On the back of limited availability and record low vacancy rate, face
rents continue to rise in the Sydney CBD. On an annual basis, gross
face rents for Premium and A Grade office buildings in the CBD
have increased by 11.2 and 11.0 per cent respectively to $1,300 per
C1, Barangaroo South, Barangaroo
Valued on behalf of Lendlease IMT
8
sqm and $1,030 per sqm respectively as at Q4 2018. Incentives for
Premium and A Grade spaces have declined by approximately 1 per
cent over the past 12 months to 21 and 19 per cent to boost gross
effective rental growth to 13 and 12.1 per cent YoY respectively. For
B Grade space, gross face rents have increased by 11.5 per cent
with incentives falling from 21 per cent to 18 per cent over the past
12 months. Effectively, B-Grade gross rents have increased by 14.9
per cent over the year to December 2018.
Tenant demand to remain positive, although
rental growth is expected to moderate
Conditions in the Sydney CBD office market are expected to remain
favourable to landlords over the next 12 months. We predict vacancy
rates will continue to trend down toward 3.1 per cent by the end
of 2020 amid the continued lack of new supply and high levels of
stock withdrawal. Beyond 2020, the vacancy rate is forecast to
increase gradually to around 6.5 per cent as the next supply cycle is
being delivered. However, availability is anticipated to remain below
the long run equilibrium as many of the developments have already
achieved strong pre-commitment levels, and a significant proportion
of refurbished space is also being committed to prior to completion.
Investor demand is forecast to remain strong, with capitalisation
rates being driven by both the strong rental growth and reduced
leasing risk due to the low vacancy rate. Investment volumes,
however, are expected to be constrained by the lack of quality stock
on the market and due to a number of large portfolios having been
brought forward in 2019. Nevertheless, uncertainty surrounding
global events and interest rate movements will be an important
consideration for investors in the CBD market going forward.
Research &
Forecast Report

MELBOURNE
CBD Office | First Half 2019

By Sarah Walker Melbourne CBD Office Vacancy Rate and Net Absorption
Manager | Research 12.0% 300000

sarah.walker@colliers.com 10.0% 250000

8.0% 200000
6.0% 150000
4.0% 100000
MARKET HIGHLIGHTS 2.0% 50000
0.0% 0
-2.0% -50000

Jul-20
Jul-04

Jul-06
Vacancy forecast to continue declining this year to reach record

Jul-08
Jul-05

Jul-09
Jul-07

Jan-20
Jan-04

Jan-06

Jan-08
Jan-05

Jan-09
Jan-07

Jul-10

Jul-12

Jul-14

Jul-16

Jul-18
Jul-15

Jul-19
Jul-13
Jan-10

Jul-17
Jan-12

Jan-21
Jan-14

Jan-16

Jan-18
Jan-15

Jan-19
Jan-13

Jan-17
Jul-11
Jan-11
low levels 6 month net absorption Vacancy rate (%) 10 year average

Face rent growth to remain robust and strongest amongst the Source: Colliers Edge, PCA OMR Jan 2019

CBDs
CBD Office Net Face Rents
B grade assets recorded the strongest capital growth and yield $1,000
Forecast

$900

reduction over 2018 $800

$700

Leasing market
$600
$/sqm

$500

$400

$300

$200

Vacancy to remain well below long term

$100

$-

average

Jun-20
Jun-09

Dec-20
Dec-08

Dec-09

Jun-10

Jun-12

Jun-21
Jun-14

Jun-16

Jun-18
Jun-15

Jun-19
Jun-13

Jun-17
Dec-10

Dec-12

Dec-21
Dec-14

Dec-16

Dec-18
Dec-15

Dec-19
Dec-13
Jun-11

Dec-17
Dec-11

Premium A grade B grade

The past calendar year was another active one for the Melbourne
Source: Colliers Edge
CBD office market, with strong rental growth recorded and declining
vacancy levels. Supply remains tight and availability of stock will CBD Development Supply Pipeline
be limited for the remainder of 2019. Despite this, incentives on
70,000
2019 2020
average are forecast to remain at 26 per cent, 29 per cent and 26
2021
60,000

per cent for premium, A grade and B grade respectively, as the

Net Lettable Area (NLA)

50,000

40,000

bulk of rental growth activity will be through an increase in face 30,000

rents. We may experience small increases in incentives next year

20,000

10,000

as backfill comes to market however, the biggest impact will not be 0

405 Bourke Street
276 Flinders Street

180 Flinders Street

271 Spring Street

311 Spencer

Two Melbourne Quarter

80 Collins Street, South
447 Collins Street (Collins Arch)
839 Collins Street (Victoria Harbour)

477 Collins Street (The Olderfleet)

130 Lonsdale (Wesley Place)

until 2021 when larger amounts of refurbished space return to the

market after some major Tenant relocations to new developments.
These include, 550 Bourke Street (Deloitte approx. 18,000sqm) and
600 Bourke Street (King & Wood Mallesons, Gadens and Lander & Available Precommitment

Rogers, creating a combined total approximately 22,000sqm). We

Source: Colliers Edge
forecast vacancy to decline further and remain at sub 3 per cent
levels through to January 2020. Given the sustained levels of low
vacancy, even once new completions start hitting the market in late
2019 through to late 2020, we still expect vacancy to remain well
below the long term average of 6.5 per cent, as demand conditions
are robust thanks to a very active jobs marketand the strongest pre-
commitment activity the market has ever recorded.

CBD Office | Research & Forecast Report | First Half 2019 9

As predicted, deal flow increased through to the end of 2018 for
the already limited opportunities available in the CBD, ensuring that
rental growth has continued throughout the second half of the year.
Late in the year, The Australian Financial Complaints Authority
(AFCA) committed to 7,000sqm at Wesley Place (130 Lonsdale
Street), a premium grade development by Charter Hall. The projects
focus on technology and placemaking at Wesley Place has enabled
this development to attract a number of major tenants including
CBUS, Vanguard and TelstraSuper. This deal brings the overall pre-
commitment level of Wesley Place to near 70 per cent, 12 months
before the building is completed. We expect this percentage to
increase with strong interest in the remaining floors.
Effective rents to grow through strong
increases in face rents over 2019
Average net effective rents for Premium, A and B grade assets all
experienced strong growth at 8.1 per cent, 8.1 per cent and 23.0
per cent respectively over the 12 months to December 2018 which
are well above long term average rates. Currently, net effective
rents average $551 per sqm, $416 per sqm and $350 per sqm for
Premium, A and B grade respectively. With incentives to remain
flat this year and supply limited, we expect to see strong face
rental growth for both prime and secondary grade assets. We are
forecasting face rent increases over 2019 of between 8 and 10
per cent for prime grade space, and between 4 to 7 per cent for
secondary grade.
Pre-commitment level of 80% across eleven
new developments (2019 to 2021)
In a boost for Melbourne CBD landlords, the January 2019 vacancy
rate of 3.2 per cent was the lowest of all Australian CBD markets.
Vacancy fell from 3.6 per cent in July 2018, which was already at a
10 year record low for the Melbourne CBD. This reduction was due
to high net absorption levels in Melbourne – significantly higher than
any other CBD. Melbourne’s demand cannot keep up with current
supply as tenants must compete for limited spaces or look to fringe
locations – which is itself experiencing very low vacancy.
Over the 6 months to January 2019, the PCA recorded net
absorption of 69,898sqm. The completion of Tower 5 Collins Square
and One Melbourne Quarter towards the end of 2018 added almost
70,000sqm to total stock. In the next development wave, there are
still limited opportunities available at 839 Collins Street, 447 Collins
Street and 477 Collins Street, however these are all expected to be
100 per cent committed by mid 2019.
Total
January 2019 Premium A Grade B Grade
Market
Vacancy 3.2% 3.8% 2.7% 4.3%
Source: PCA OMR Jan 2019
10
Over the next two years to January 2021, eleven new developments
are to be completed, supplying approximately 455,000sqm of
new office supply. An extraordinary 80 per cent of this space is
already committed, or a total of almost 365,000sqm. Over the next
12 months, we are forecasting very strong net absorption levels -
approximately 148,000sqm – cementing Melbourne as the ‘demand’
capital of the country. Given the strong pre-commitment levels, and
the upcoming withdrawal of some vacated space for refurbishment
– including 100 Queen Street (30,000sqm) and 500 Bourke Street
(48,000sqm) – we are expecting vacancy to peak at a still very low
4.7 per cent in January 2021.
C270 set back
Two years ago the Victoria Government introduced new planning
controls into the CBD, known as C270. Included in the new policy
was a new plot ratio of 18:1, which significantly impacts the
floorplate size achievable in new high rise development across
all asset classes. A report by planning consultancy group Urbis –
commissioned by the PCA’s Victoria Division - identified a number
of new developments currently under construction that would not
have been approved under the C270 regulation, including 80 Collins
South Tower, Wesley Place (130 Lonsdale Street), The Olderfleet
(477 Collins Street) and Collins Arch (447 Collins Street). Urbis also
reported that since the introduction of C270 two years ago, only 4
planning permits have been issued in the CBD.
The effect of the new regulation is such that it is difficult for
developers to create a product that tenants have traditionally
sought – which is largely buildings with circa 1,800 to 2,000sqm
floorplates. Tenants – particularly Melbourne’s larger occupiers –
have been spoilt for choice in the past and have been able to secure
developments with larger floor plates so that their premises can
be over as few floors as possible. Melbourne has traditionally been
able to accommodate this preference, it can’t be underestimated
just how much these large floorplates contribute to strong tenant
commitments (and resultant employment growth).The State
Government Planning Department doesn’t appear to be making any
wholesale changes to these planning controls any time soon, so
we see major tenants having to reconsider their desire for larger
floorplates. The decline in demand for residential apartments,
which is a concern for the Melbourne residential market, has seen
several developers consider commercial use for their site or in fact
sell these sites to commercial developers, which was evident with
the sale of 435 Bourke Street (corner Bourke & Queen) to Cbus
Property and 555 Collins Street to Charter Hall. The construction
industry will be reliant on commercial development for the
foreseeable future and the current planning controls do not address
the needs of major occupiers.
Over the last 10 years, Melbourne has recorded an average of
120,000sqm of gross new supply per annum. This space has
primarily been built in Docklands, which is now close to complete.
Given Melbourne’s current low vacancy rate of 3.2 per cent, this
is strong evidence that Melbourne is a market with very good
underlying demand fundamentals. The affordability factor, as well
as strong population growth, good infrastructure investment and the
emergence of new market participants such as the education and
co-working sectors, have all helped to contribute to this demand.

Investment market
In the 12 months to December 2018, Melbourne recorded healthy
sales volume totaling $3.01 billion. This was coupled with yield
compression from Premium, A and B grade stock. In particular, B
grade being the strongest performer reducing by a 39 basis points
in the 12 months to December 2018. This was followed by Premium
compressing by 17 basis points and A grade by 10 basis points. This
translated to strong capital value growth with B grade again being
the strongest performer. Annual growth rates for premium capital
values grew 10.7 per cent, A grade 9.5 per cent and B grade 27.4
per cent.

A breakdown of deals over 2018 show that 46 per cent (over $10
million) of total volumes sold to offshore investors and 54 per
cent to domestic investors - these primarily being to large local
institutions. One of the largest single transactions was the sale
of 595 Collins Street which was sold by South Korea’s National
Pension Service and purchased by Foo Hang Jewellery, of Hong
Kong origin. The property sold for $315 million on an initial yield of
5.0 per cent. We expect the strength and interest of offshore groups
to continue during 2019, given the strength of the leasing market
and the solid long term market fundamentals.

Further to the abovementioned deals, other larger transactions were

two large portfolio sales with buildings located in Melbourne. The
Oxford/Investa transaction included 19 assets, two of which were
in Melbourne. 567 Collins Street (50%) and 242 Exhibition Street
(50%) - both transacting at a book value capitalisation rate of 5.0
per cent. The second portfolio sale to Centuria Metropolitan REIT
included 4 properties, with the Melbourne CBD asset located at 818
Bourke Street in the Docklands. This was purchased for $223.25
million on an initial yield of 5.33 per cent and 3.48 year WALE.

December Premium A Grade B Grade

2018

Average 4.66% 5.07% 5.29%

Market Yields

Source: Colliers Edge

130 Lonsdale, Wesley Place, Melbourne

Leased on behalf of Charter Hall

CBD Office | Research & Forecast Report | First Half 2019 11

Research &
Forecast Report
BRISBANE
CBD Office | First Half 2019
By Karina Salas
Manager | Research
karina.salas@colliers.com
MARKET HIGHLIGHTS
Yield compression continued throughout 2018
Overall vacancy rate at 5-year low (13 per cent)
Demand from tenants of prime office on the rise, with vacancy
rate at 10 per cent
Investment market
Highest sales volumes recorded in a decade
The volume of office transactions (above $5 million) has reached
the highest level recorded in a decade, with circa $2.35 billion in
office sales taking place in 2018 compared to circa $1.47 billion
in 2017 (an increase of 60 per cent). Acquisitions from offshore
investors dominated the market, increasing from $891 million in
2017 to $1.77 billion in 2018.
We expect increased interest from offshore and domestic
institutional investors in 2019 as the value proposition of the
Brisbane CBD office market lays on the AAA Australian credit rating
and the spreads in the range of 25bp to 120bp compared to Sydney
and Melbourne CBD office markets. Generally, the Brisbane yield
spreads with Sydney and Melbourne tend to widen as the grade of
the building decreases.
One of the largest 2018 transactions was the sale of 50 per cent
ownership of 80 Ann Street, acquired by the London-based M&G
Real Estate for $419.2 million and at a yield of 5 per cent. Suncorp
has committed to lease 39,600 sqm of space in the premium grade
tower over a ten-year lease and consolidate operations into the new
building.
12
Another notable sale was Charter Hall’s purchase of 61 Mary Street
for $275 million. The sale was transacted at an initial yield of 5.42
per cent with a 10.5 year WALE.
Yields continue to tighten
We have noticed a large proportion of investors have a more bullish
view about the CBD office market, which is generally supported
by the improved Queensland economic fundamentals including the
mining sector recovery, the large infrastructure pipeline and the
strong interstate migration. We expect constrained supply of new
developments will continue in 2019 on the back of low risk appetite
from Australian developers holding the start of new developments
until pre-commitments are confirmed. This is a positive from an
investor perspective.
Yields for prime and secondary assets compressed for the past
12 months to December 2018. Premium grade and A-grade yields
compressed in the range of 25 to 38bp, while the compression for
B-grade yields was about 75bp for the past year. This is a trend
seen throughout the Australian CBD office markets – although
Sydney and Melbourne are more further advanced through the yield
compression cycle - and partially explained by the low interest rate
environment and lack of alternate investment option.
Leasing markets
The leasing market performed more strongly in 2018, with Colliers
recording circa 175,000sqm of deal activity (including renewals).
The forecast growth of white-collar employment is set to support
further leasing activity and tighter vacancy over the years ahead.
According to Deloitte Access Economics, the white-collar
employment market in Brisbane CBD is set to gradually grow at an
average of 2,820 persons a year over the next seven years to 2025.
Colliers International estimates that the forecast increase in the
white-collar workforce will result in absorption of circa 30,000sqm
of additional office accommodation annually. With the forecast
absorption sitting above the 10-year average absorption rate (circa
15,200sqm), the outlook of the leasing market is for increased deal
activity in 2019 and beyond.
Low supply of contiguous office space Brisbane CBD Office Sales (>$5million)
$4,000
Leasing demand for contiguous space (>2,000sqm), particularly
in the prime-grade market, predominated in 2018. High incentives $3,000

in the range of 30 to 40 per cent remain well above the 10-year

AUD $million
$2,000
average of 28 per cent for prime grade space. These incentives
support the implementation of a more proactive relocation strategy $1,000
by large corporate and public-sector tenants looking to reduce fixed
costs and improve the quality of their workspace. $0
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

In 2018, a few large corporate tenants have been able to secure Domestic Offshore

better quality office premises, which offer attractive incentives for Source: Colliers Edge
long-term leases, in most cases by way of capital contributions
Brisbane CBD White Collar Employment Additional
towards fit-out. Some of the significant leasing deals concluded in
Workers (6 monthly)
2018 were:
6,000

• 6,750sqm premium space at Riverside Centre (123 Eagle 5,000

4,000
Street) leased by Westpac to move in during 2019 3,000
2,000
• 4,500sqm A-grade space at 259 Queen Street leased by 1,000
0
Australia Post as a result of the Brisbane Transit Centre -1,000

withdrawal. The lease will commence in April 2019. -2,000

-3,000
-4,000
• 3,370sqm A-grade space at 414 George Street leased by DHL,
-5,000
also as a result of the Brisbane Transit Centre withdrawal, with

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the lease to commence in March 2019.

Net absorption on the rise Source: Deloitte Access Economics, Q3 2018

Average Incentives
The PCA reported vacancy tightening by 1.6 percentage points from 50%
14.6 per cent as at July 2018 to 13 per cent as at January 2019. Net 45%

absorption of circa 47,000sqm of space was recorded over 2018 40%

which sits above the long-term average net absorption for the past 35%

10 and 20 years. 30%

25%
Co-working operators, including WeWork, were one of the largest
20%
contributors to the fall in vacancy. Colliers International has
15%
estimated that Brisbane is the Australian capital city with the largest 10%
percentage of co-working occupancy of CBD stock at 2.6 per cent. 5%

This development will be one to watch closely, as there are still a 0%

number of co-working operators with active requirements in both

the CBD and Metro markets. Premium A Grade B Grade

The A-grade submarket attracted the highest demand in 2018, Source: Colliers Edge

absorbing 27,157sqm out of a total market absorption of 46,931sqm. Brisbane CBD Office Vacancy by grade
The strength of the market has put downward pressure on A-grade 24%

vacancy, falling from 11.7 per cent in July 2018 to sub 10 per cent
20%
in January 2019. Premium vacancy increased slightly for the past
16%
six months, from 10.1 per cent to 10.4 per cent (due to negative net
absorption of 954sqm), however we expect the premium vacancy 12%

to decline rapidly this year due to Department of Veterans Affairs 8%

moving into 480 Queen Street (6,413sqm), and Westpac moving into 4%

Riverside Centre (6,750sqm). An increase in demand of secondary- 0%

grade assets pushed vacancy down to 16.9 per cent, with a 2018
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net absorption of 12,345sqm driven by higher demand for B-grade Pre miu m A grad e B grad e Tota l

space.
Source: Colliers Edge

CBD Office | Research & Forecast Report | First Half 2019 13

Our current forecasts indicate prime vacancy reaching sub 8 per
cent in 2021, with vacancy remaining below the 20-year average
of 9.8 per cent over the years ahead as office supply for contiguous
space above 2,000sqm remains constrained. The high vacancy in
the secondary market will moderate gradually over the next few
years, but it will likely remain within double digit levels. Colliers
International have the view that a significant improvement on
secondary vacancy will not occur until further withdrawals open the
opportunity for future refurbishment and new developments, which
is required to meet the increasing demand for contiguous prime
space.
No new supply of premium assets until 2022
Low-risk appetite from developers has driven and will continue
driving the limited supply of new developments over the years
ahead. This trend has had an impact on vacancy rates and may
continue to put downward pressure on yields. Brisbane CBD office
new supply will be limited over the next three years. Only four
development projects are proceeding to construction stage, adding
circa 155,000sqm (the equivalent to nearly 7 per cent of the current
stock) of supply over the next three years.
Out of the four new developments under construction, only 80 Ann
Street meets the (current) criteria of a premium building and has
already secured a pre-commitment from Suncorp, equivalent to 68
per cent of the available space (39,600sqm).
Practical completion of 300 George Street is scheduled in Q3
2019, adding 47,000sqm to the market. New supply in 2020 will
be limited to 7,200sqm at 12 Creek Street, while Midtown Centre
(42,000 sqm) has an official completion date of Q3 2021, but it still
needs a pre-commitment to proceed.
Three developments adding 122,000sqm to the A-grade office
market (360 Queen Street, The Regent and 62 Mary Street) have
achieved development approval. Commencement of these projects
is subject to pre-commitments. There are also four more projects
in the pipeline (Waterfront Precinct, Albert Street Over Station
Development, Brisbane Square 2 and 343 Albert Street) potentially
adding circa 200,000sqm over the medium term. However, they are
at preliminary stage and timing is still uncertain.
Effective rents on the rise
Net effective rents increased moderately from the past year for all
grades. In the case of A and B grade stock, average net effective
rents increased in the range of 3 per cent to 5 per cent for the
year to December 2018. As the market continues to experience
further withdrawals and a lack of new supply, incentives have
commenced a gradual decline since the second half of 2018.
Colliers International’s view is that incentives will continue to fall
gradually until 2021 when it will most likely flatten due to the new
supply forecast to be released in 2020 and 2022.

Riverside Centre, 123 Eagle Street, Brisbane

Leased on behalf of The GPT Group

14
Research &
Forecast Report

PERTH
CBD Office | First Half 2019

By Quyen Quach Perth CBD Average Net Face Rents

Senior Research Analyst | Research $1,000
quyen.quach@colliers.com $900
Forecast

$800

Net Face Rent ($/m2)

$700

MARKET HIGHLIGHTS
$600
$500
$400
$300
Gradual improvement in vacancy continues $200
$100

Large tenants seeking suitable space finding it increasingly difficult $0

Jun-20

Dec-20
Jun-14

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Jun-18
Jun-15

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Jun-13

Jun-17
Dec-12

Dec-14

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Dec-18
Dec-15

Dec-19
Dec-13

Dec-17
Competition for assets continues to heat up Premium A Grade B Grade

Source: Colliers Edge

A Grade Yields
Private investment to start increasing 10%

In its December 2018 Business Outlook, Deloitte Access Economics

9%
(DAE) revised their forecast for WA private investment spending to
increase to $34.4 billion in 2019-20. This will be an improvement on 8%

the $32.5 billion estimated for the 2018-19 financial year.

7%
The flurry of projects announced, and major project migration to
production stage over the past year, have underpinned growth in 6%

white collar employment and a recovery in mining employment.

5%
According to the ABS, mining sector employment growth
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accelerated to 27.4 per cent in the year to December 2018, to reach

111,800. Meanwhile, white collar employment is estimated by DAE
Source: Colliers Edge
to have grown 2.23 per cent over 2018.

Net absorption still sluggish

Although improved, the pace of economic recovery has been
gradual, resulting in net absorption of vacant space being somewhat
sluggish. Another factor likely to be contributing to the slow
absorption is a moderation in workspace density. Colliers has
noted increasingly higher density office designs being delivered over
the past five years for both private and public tenants.
This trend was also embraced under recent State Government
Office Accommodation Standards (GOAS) guidelines. When
assessed in late 2006, State government office density was
estimated at 21sqm per person, well above the prevailing policy
standard of 15sqm per person. Since then, amendments have been
made to the GOAS to improve efficiency and occupancy cost, with
the target currently 13sqm or below per work-point.
This trend towards higher density via the utilisation of open-plan
and flexible workspaces may be contributing to a slower vacancy
absorption in Perth’s CBD going forward.

CBD Office | Research & Forecast Report | First Half 2019 15

Large tenants could underpin additional new
supply
There are a number of major Perth tenants with pending expiries
in the market seeking large chunks of space with prerequisites that
may be difficult to fulfil with existing stock.
The Western Australian Police are in the market for approximately
45,000sqm to be occupied between 2023 and 2026. FMG have
yet to announce an outcome for their requirement of approximately
12,000sqm of space after going to market seeking proposals for
relocation options back in Q4 2017.
Currently, there are numerous development sites in the Perth
CBD that could be progressed to construction should a sufficient
pre-commitment be obtained. These sites include locations within
Elizabeth Quay, Kings Square, Milligan Square, the QV precinct, Mill
Green, the FESA site and Bishop See.
The scale of this new supply cycle poses a risk that existing vacant
space will suffer slow absorption. Significant additional supply, in
combination with soft net tenant demand, could mean a prolonged
period of competition from backfill space effecting a slower office
market recovery.
Woodside Energy’s new 55,975sqm headquarters - Mia Yellagonga
campus at 11 Mounts Street - was officially added to stock during
the six months to January 2019. Subsequently, Woodside’s
relocation in September 2018 allowed the withdrawal of backfill
space at 240 St Georges Terrace, by owner Dexus, for capital works
as well as fit-out for incoming tenants.
Strong commitment activity on backfill space saw availability of
premium grade space moderate over 2018, allowing landlords to
hold rents and reduce incentive levels. Colliers expects the flight
to quality to continue applying negative pressure on secondary
rents over the short-term. However, looking forward, the gradual
contraction in the vacancy rate will likely assist in stabilising rents
over 2019/20, with the possibility that a moderation in incentives
will also flow through to better quality secondary grade assets.
Investment market
Yields outlook remains steady
Competition for assets remained robust over 2018 and we expect
this to continue through 2019. In particular, foreign investor interest
for Perth CBD assets has grown, accounting for 9 of the 14 major
CBD assets transacted in the past two years, with a total outlay of
approximately $811 million.
The increasing competitive bidding environment arising from more
positive sentiment about the Perth economy and office market is
expected to keep Perth market yields tight over 2019. The result of
the upcoming sale and leaseback campaign for the HBF building will
be a good guide as to the current market sentiment for prime Perth
assets. Meanwhile, Colliers anticipate that yields will likely sharpen
over the year to reach 5.5–6.0 per cent for Premium and 6.25–6.75
per cent for A Grade.

Strong commitment activity on premium

grade backfill space
According to PCA data, in the six months to January 2019, net
absorption in the Perth CBD totalled 6,752sqm. This was less than
the six months to July 2018 of 8,581sqm. Notwithstanding, vacancy
contracted from 19.4 per cent in July 2018 to 18.5 per cent. The
improvement in the vacancy rate was assisted by the highest ever
withdrawal of stock for refurbishment, at 64,819sqm. The large
withdrawal resulted in a net decline in active stock of 9,819sqm.

Net absorption appears be spread between prime and secondary

grade stock take-up; of note is that the largest absorption occurred
in B grade with 3,564sqm of space taken-up. In terms of the
prime grade, most of the net absorption appears to be a result of
Woodside’s move into its new larger head office at 11 Mounts Street.

Secondary assets, namely B Grade buildings, continue to account

for most of the available vacant space. Secondary vacant space
totalled 185,480sqm. However, this was down from 199,092sqm
in July 2018. Prime vacancy, dominated by A grade vacant space, 10 Kings Park Rd, West Perth
totalled 140,295sqm. Leased on behalf of Warrington. Tenant Sandfire Resources.

16
Research &
Forecast Report

ADELAIDE
CBD Office | First Half 2019

By Kate Gray Adelaide CBD Office Sales Volumes

Director | Research
$1,000
kate.gray@colliers.com
$900
$800
$700
MARKET HIGHLIGHTS
Millions
$600
$500
$400
Record sales activity in the Adelaide CBD over 2018
$300
$200
Adelaide CBD vacancy falling
$100
$0
Strong growth in job vacancies an indicator of positive demand 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

for the year ahead 1st Half 2nd Half

Source: Colliers Edge

Adelaide CBD 6 Month Net Absorption & Vacancy

Investment market 60 18%
Forecast
50
The Adelaide Office market recorded record sales activity over 40
16%

14%
2018. Sales in the CBD totalled $889.875 million across 11 assets 30
12%

(over $5 million). There are a number of reasons that demand from 20

Vacancy (%)
10%
Thousands m2

10

investors has increased, with one being the abolition of stamp duty 0
8%

6%
for commercial transactions, which became effective at 1 July 2018. -10
4%
-20
This has reduced transactional costs for commercial properties in -30 2%

Adelaide, which has partly contributed to improved sentiment in the -40 0%

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Adelaide office market.

6 Mth Net Absorption (total) Total Vacancy Rate (%)

Domestic purchasers were very active over 2018, accounting for 76

per cent of the total sales volume. Institutional investors accounted
Source: Colliers Edge
for 45 per cent, while private domestic investors accounting for 31
per cent. The major sales to offshore groups were the sales of 11
Waymouth Street and 132 Waymouth Street which were purchased
by Singaporean interests.

There are a several assets currently being marketed which are

expected to transact in 2019. We are seeing an increase appetite
from domestic (private and institutional) investors in the Adelaide
market, in combination with renewed interest from offshore
sources, particularly Singapore. The other major driver for the
increased interest in the Adelaide market is that there is a sustained
improvement demand in the Adelaide office market, which hasn’t
been evident for a number of years.
Significant yield arbitrage on offer
Yields in the Adelaide office market are also much higher than in
the east coast markets, which have seen significant compression
over the past few years. Yields for A Grade space range between
6.0 and 7.75 per cent. The ‘new generation’ – that is, newly built
A Grade space – market has experienced a narrowing of the yield
range over the last 12 months, to 6.0 to 7.0 per cent, although this is
still well above the yields achievable in the east coast.

CBD Office | Research & Forecast Report | First Half 2019 17

Other than the abolition of stamp duty in the Adelaide market,
interest from investors is also being fuelled by the positive
investments in defence and space as well as growth in creative
industries. Many investors are taking the opportunity to position
themselves in the Adelaide market to take advantage of the growth
that is expected in the broader South Australian economy. We
anticipate 2019 will see a further tightening of yields, with a limited
amount of quality assets coming to the market.
Leasing market
The Adelaide CBD office market has recorded another half of
positive demand with 6,394sqm of net absorption over the second
half of 2018. This has brought total annual net absorption to
16,509sqm over 2018, which is more than three times the 10-year
average annual net absorption in the Adelaide CBD market. This
increase in demand has been supported by growth in white collar
employment, but also the relocation of several key tenants into the
Adelaide CBD from suburban markets. With the improvement in
net absorption and no new supply, vacancy has fallen from 14.7 per
cent in July 2018 to 14.2 per cent in January 2019 for the Adelaide
CBD.
Sources of demand widening
Demand has been driven by the defence, professional services,
health, and IT and communication sectors. These sectors have
accounted for circa 13,000sqm of the total 23,000sqm of net new
enquiry that Colliers International has recorded over the last 12
months. More tenants have opted to move rather than renew leases
this year, with most of these tenants taking the opportunity to move
to better quality accommodation. There is also more positive news
for the outlook, with continued growth in the ABS job vacancies
series (up 20 per cent year to November 2018) which will continue
to support demand over 2019.
63 Pirie Street, Adelaide
Leased on behalf of Raptis Investments
18
Our analysis of the market shows a lack of contiguous space
options available over 2019 and 2020. Currently there are only six
contiguous space options (over 2,000sqm) available and with new
supply there is only one additional new development able to offer
contiguous space. This project is to be completed by the end of
2020. For tenants looking for more than 4,000sqm, there are only
three options currently in the market. When this is aligned with the
lease expiry pipeline, there are likely to be a shortage of options for
larger tenants over the next two to three years. This is particularly
the case for space in newer generation buildings, which is the
preference for many major corporate occupiers.
Gross face rental growth for A Grade space has remained subdued
with only 0.6 percent annual growth recorded. However, gross
effective rentals have grown by 3.7 percent as incentives for A
Grade space start to tighten. ‘New generation’ space recorded a
3.6 per cent annual gross face rental growth, with gross effective
rental growth of 9.1 percent. Vacancy in ‘new generation’ buildings
was recorded at 8.6 per cent, which is higher than the 7.5 per cent
recorded in September 2018. This is due to additional sublease
available at 50 Flinders Street. Direct vacancy for ‘new generation’
A Grade space was 5.75 percent in December 2018.
Limited new vacant supply under
construction
There are two projects currently under construction in Adelaide,
with the first being GPO Tower, 2-10 Franklin Street (24,600sqm)
being developed by Charter Hall. This project will be occupied by
Attorney General’s Department and BHP on completion later in
2019, with only one floor expected to be vacant on completion.
The second project is mixed-use one, being developed by Uniting
Communities at 10 Pitt Street. This development is a mixture of
retirement residences, specialist disability accommodation and
office/retail space. It is expected that circa 4,000sqm of office
space will be available for lease, with the remainder of the office
space being owner occupied. There are several new developments
which are mooted with 108 Wakefield Street (14,000 sqm) expected
to start construction with no pre-commitment. Several of the other
developments are expected to bid for the market calls for DPTI and
DHS which are to be occupied in 2023.
The outlook for the office market is one of renewed tenant activity,
with above average net absorption expected to continue through
2019 supported by strong growth in job vacancies in SA. White
collar employment growth is forecast to continue to improve due to
the increase in defence spending, investment in 10 gigabit Adelaide
and increased mining activity. This is likely to result in above
average net absorption levels over the next two years and therefore
falling vacancy. We are already seeing much stronger enquiry and
requirements in the market which is a good leading indicator of net
absorption.
Research &
Forecast Report

CANBERRA
CBD Office | First Half 2019

By Sarah Walker Canberra CBD Vacancy Rate and Net Absorption

Manager | Research 18.00% 140000

sarah.walker@colliers.com 16.00%
14.00%
120000
100000
12.00% 80000
10.00% 60000
8.00% 40000

MARKET HIGHLIGHTS 6.00%

4.00%
20000
0
2.00% -20000
0.00% -40000

Jul-20
Jul-04

Jul-06

Jul-08
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Jul-07
Strong demand and enquiries from the beginning of 2018

Jul-10

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Jul-18
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Jul-17
Jul-11
translating to leasing deals 6 month Net Absorption Vacancy Rate (%) 10 Year Vacancy Average

Tight A grade vacancy of 1.7 per cent forecast to drop further Source: Colliers Edge

Increase in new residential buildings and hotels is transforming

the character of the CBD

Investment market
Investment sales volume for 2018 were circa $395 million ($10
million and over), not reaching the unprecedented high volume
in 2017. However, compared with the long term average, 2018
recorded healthy transaction numbers with 10+ sales >$10M.
14 Moore Street comprised 11,047 sqm of NLA, the vendor
Quintessential Equity purchased the property 4 years prior with a
high level of vacancy, and sold the property fully leased. Tenants
in the building include Leidos Australia, CBRE and Fair Work
Commission.
Another notable transaction was 17 Moore Street purchased off
market following a recent full refurbishment, for a price of $20.65
million. A particular trend noticed in 2018 was the number of off
market sales for major office assets. 13 major properties were
traded in 2018, above the ten year average of ~10 assets p.a. Of
the 13 major transactions for the year, 9 of these were recorded
off market. This has been a popular sale method for vendors in
Canberra as they capitalise on strong buyer demand from privates
and institutional groups. As well as above average population
growth, low unemployment and major infrastructure works have
underpinned growth that is driving demand in the CBD. Investors
are attracted to Canberra’s high quality assets, secure long term
leases and favourable pricing compared with other eastern
seaboard cities.
Over the year, yields tightened to 6.0 per cent for A grade and
7.75 per cent for B grade. Looking forward, yields are expected to
remain stable through 2019. A grade is now at historic lows, with
an average of 6.0 per cent being the tightest yield recorded in over
20 years for A grade in Canberra. A grade assets are considered
to be a sought after asset due to Canberra’s long lease terms with
strong covenants and continuing rental growth. Sales volumes are
expected to be greater in 2019 with two or more sales in excess of
$100 million expected to be transacted.
Leasing market
Following on from a number of enquiries for the first half of 2018,
the second half of the year saw a number of deals taking place.
Strong demand and enquiries translated into several transactions,
14 Childers Street leased to a Private tenant comprising of
2,294sqm and 10 Moore Street leased to Optus comprising
2,277sqm.
The overall vacancy level for Canberra Civic Precinct as at January
2019 is 12.2 per cent, once broken down A grade vacancy level is
only at 1.7 per cent illustrating that it is a much tighter market. The
A Grade market declined from 2.6 per cent in July 2018, a very
positive result for Canberra. It is expected that over the next 6 to
12 months that the vacancy levels for A grade will drop further due
to lack of upcoming stock. B grade on the other hand is expected

CBD Office | Research & Forecast Report | First Half 2019 19

to increase, raising the overall vacancy level for Canberra. Early
to mid-2020 Home Affairs will relocate to the Canberra Airport
creating a backfill of approximately 34,000sqm in the B grade
market which will see the overall vacancy increase. In addition,
the ACT Government has pre-committed to two new buildings
(20,000sqm in the CBD and 14,000sqm in Dickson) creating further
backfill in mid-2020 when they move.
Incentives are expected to remain steady for the remainder of this
year - 18-20 per cent for A grade and 25 per cent for B grade
stock. As the influx of backfill comes to the market we expect to see
B grade incentives push upwards.
Repositioning of older assets
Canberra is undergoing a transformation from a typically 9am to
5pm Monday to Friday environment. New mixed use developments
are changing the city to become a full week destination. This
transformation is achieved with older style office buildings being
121 Marcus Clarke Street, Canberra City
(Managed and Leased) On behalf of MTAA Superannuation
20
developed into residential. The Barracks, a residential development
on London Circuit, previously a carpark, will comprise approximately
1,300 apartments across four buildings including ground level retail
and commercial office space. Once completed, the development
will regenerate this part of the city. In proximity, Zapari Group are
developing an 11 storey office building into The Sebel boutique
hotel. The ground floor will comprise of retail shopping and a
high end restaurant. The repositioning of assets will make the
CBD more diverse and the addition of more residential and hotel
accommodation will promote commercial activity outside office
hours. This will also place downward pressure on secondary
vacancy levels as stock is withdrawn.
January 2019 Total Market A Grade B Grade
Vacancy 12.2% 1.7% 13.9%
Source: PCA OMR Jan 2019
Research &
Forecast Report

AUCKLAND
CBD Office | First Half 2019

vacancy rate is 10.2 per cent. Current market conditions exacerbate

By Chris Dibble
Director | Research & Communications
chris.dibble@colliers.com
MARKET HIGHLIGHTS
New record low CBD office vacancy rate squeezing tenants’ options
Development activity rising, but not enough for the medium-term
Offshore investors ramping up their activity
Investment market
Tenants are finding current leasing market conditions challenging.
This is a positive for landlords who will likely experience greater
total returns from higher rents and firming yields in a bullish
investment environment spurred on by low interest rates and
strong offshore investor interest. Auckland prime office yields range
between 5.50 per cent and 7.00 per cent, firming by an average 25
basis points in the past six months.
the pressure on tenants who are already finding it challenging to
source suitable accommodation.
Tenants searching for good quality office space of scale anywhere
in Auckland will find the challenge harder and the rental rises
higher. In Auckland’s CBD there is just 18,000sqm of prime
(premium and A-grade) vacant space. Looking outside of the CBD
is also fraught with issues as the metropolitan prime office market
provides just under 21,000sqm of prime office space.
Development activity is underway to assist alleviate some of this
pressure. There is currently 63,000sqm of office space in the
Auckland CBD currently under construction and an additional
8,000sqm under refurbishment. These projects are likely to all be
completed by 2021. While this will alleviate some of the pressure,
the record low vacancy rates will cushion the market from any
significant medium-term impacts.
There is also a steady number of premises in the proposed
development category that will likely proceed and be completed by
~2025 once certain criteria are met. We estimate approximately
104,000sqm of additional office space in Auckland CBD could be
announced to proceed in the next 12-18 months.

Leasing market
Auckland’s CBD office sector is facing strong tenant demand, a
shortage of available office space and static net supply created from
a development pipeline keeping pace with ongoing stock reductions
from refurbishments and conversions.
Highlighting how strong demand has become and the lack of
available space is the new record low Auckland CBD vacancy rate
of 5.2 per cent (75,000sqm of vacant space) in the December
2018 survey. Total stock is at 1.3 million sqm. The 20-year average
With demand remaining high and little options for tenants over the
next couple of years, tenants will likely face higher rent rises than in
past cycles of pre-construction uplifts, upwards of 3-4 per cent p.a.
over the next few years. Premium quality office space rents typically
range between NZ$475 per sqm to NZ$640 per sqm. While top
quality space will have limited to no incentive, some of the trickier
leasing spaces or exceptional occupiers could potentially receive
(with strong negotiation) an incentive of one month per year of the
lease term. Operating expenses remain steady but rising. Premium
operating expenses typically range between NZ$100 per sqm to
NZ$170 per sqm.

Top 10 Commercial Sales 2018

Location Address Building Sector Sales price Purchaser
Auckland Viaduct and Wynyard Quarter VXV Portfolio Office $635,000,000 Blackstone
Auckland 660-670 Great South Road Central Park Corporate Centre Office $209,000,000 Oyster Property Group/KKR
Auckland 125 Queen Street QBE Centre Office Over $200 million Invesco
Auckland 23 Albert Street, Auckland ANZ Centre (1/2 Share) Office $181,000,000 Invesco
Auckland 96 St Georges Bay St George Corporate Centre Office $116,000,000 Augusta Capital
Wellington 195 Lambton Qy HSBC Tower Office $102,500,000 Credit Suisse Asset Management Ltd
Auckland 3/167 Victoria St West Spark Campus Office $77,000,000 SCORE+

Source: Colliers International Research NZ

CBD Office | Research & Forecast Report | First Half 2019 21

OUR EXPERIENCE CBD OFFICE
SOLD
104 Exhibition Street,
Melbourne
$37.1 million
On behalf of the Liberal
Party of Australia (Victorian
Division)
470 Bourke Street, The Barracks, 61 Petrie
Melbourne Terrace, Petrie Terrace,
$35.08 million Brisbane
On behalf of Law Institute $163 million
of Victoria On behalf of Challenger

MANAGED
12 Pirie Street, 431 King William Street 121 Marcus Clarke Street,
Adelaide Adelaide, SA Canberra CBD
6,180m² 11,871m² 26,500m²
On behalf of Private Client On behalf of Quintessential On behalf of MTAA
Superannuation Fund

LEASED
6 Chan Street, Two Melbourne Quarter, Riverside Centre,
Belconnen Melbourne 123 Eagle Street, Brisbane
29,340m² 21,157m² 6,747m²
On behalf of Challenger On behalf of Lendlease On behalf of The GPT
Wholesale Office Fund

VALUED
200 George Street, Darling Quarter, 1-11 Harbour Quay Quarter Tower,
Sydney Street, Darling Harbour 50 Bridge Street, Sydney
38,983m² 61,474m² 88,357m²
On behalf of AMP Capital On behalf of Lendlease On behalf of REST
Investors Limited

DESIGNED AND/OR PROJECT MANAGED

Level 10, 11-31 York Melbourne CBD, Melbourne CBD,
Street, Sydney NSW 200 Victoria Victoria
Phase 1 - 500m² Approx. 687m² Approx. 7,183m²
Phase 2 - 540m² On behalf of GFG Alliance On behalf of Administrative
On behalf of Microsoft Appeals Tribunal

How else can we help you?

Speak to one of our property experts today.
Accelerating success. au.office@colliers.com
 AUSTRALIA AND NEW ZEALAND
IN THE LAST 12 MONTHS
162 transactions equating to $5.1 billion worth of CBD office sales in 2019
275 George Street, 183 Clarence Street, 17 Moore Street,
Sydney Sydney Canberra, ACT
$240 million $180 million $20.65 million
On behalf of On behalf of Built On behalf of CorVal
John Holland Group

206 CBD office assets totalling over $1.06 million square metres of office space
221 London Circuit, U City, 43 Franklin Street, 343 George Street, Sydney
Canberra CBD Adelaide 2,581.2m²
8,647m² 20,000m² On behalf of City of Sydney
On behalf of Molonglo Group On behalf of Uniting
Communities

549 transactions for 459,819 square metres of office space in the last financial year
309 Kent Street, 80 Flinders Street, 197 St Georges Terrace,
Sydney, NSW Adelaide Perth
3,496m² 2,654m² 2,581m²
On behalf of Dexus & On behalf of Lendlease On behalf of GDI.
AMP Capital

5.4 million square metres totalling over $61.7 billion worth in value
52 Martin Place, Australia Square, 33 Alfred Street,
Sydney 264 George Street, Sydney Sydney
39,323m² 41,829m² 31,749m²
On behalf of REST On behalf of GPT RE Ltd On behalf of AMP Capital
Investors Ltd

Integrated property solutions delivered by our Project Management team

Grant Thornton Tower ViaSat, 6 Riverside Quay CGI, 40 City Road,
5, 727 Collins Street, Southbank, VIC Southbank, VIC
Melbourne, VIC 1,300m² 1,300m²
3,500m² On behalf of ViaSat On behalf of CGI
On behalf of
Grant Thornton

For more information about Colliers International

and working with us visit:
www.colliers.com.au
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OUR RESEARCH EXPERTS

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