By Antony Belcher

In May, Australia’s commercial auction clearance rates leaped to levels not seen since October 2009, with sales figures for the March quarter recording more than $3.5 billion in transactions, representing almost half of the total sales reported in 2009.

Recent activity indicates that, while the commercial property market remains much weaker than its buoyant residential counterpart, confidence has begun to return in some commercial sectors.

Since mid-2009, the lead indicators have firmed. Retail turnover figures have remained robust and container movements across Eastern Seaboard ports reached record levels in late-2009. This is a precursor to stronger pre-lease and design and construction activity from mid-2010. Completions are forecast to be below long-term averages and the bulk of the space is pre-committed. During 2010 demand for industrial space will be rising at a time when new supply is running below trend. By 2011, these trends will result in rising rents, falling vacancy and a likely resurgence in construction activity.

The national office market has entered the recovery stage of the cycle. Leasing enquiries have increased in all markets since mid-2009 and this is a precursor to a rise in leasing activity. However, this does not translate into an immediate recovery in net absorption.

Tenants are taking advantage of the lower rents (and higher levels of leasing incentives) to upgrade or consolidate their requirements. Hence, vacancy is just being displaced to poorer quality space.

Overall, the industrial sector has emerged from this cycle better than we expected and many sub-markets have performed better than in the early 1990’s downturn. Nevertheless the unprecedented drawdown in inventories between Q4/08 and Q2/09 led to an increase in hidden vacancy. Pre-lease activity plummeted and the bulk of movements were within existing stock or owner-occupiers seeking vacant possession opportunities.

Furthermore, a number of tenants have hidden vacancy within their portfolios and this space will be absorbed in the first stage of the recovery. A further consideration is that the GFC, commencing in late 2007, slowed development across CBD office markets, while tenant demand was not adversely impacted until mid-2008. This has resulted in a lower vacancy rate for Sydney and Melbourne than in most previous downturns
(excluding the early 1980s recession).

In Brisbane and Perth the current vacancy factor is favorable to landlords relative to previous downturns. Although with considerable new supply yet to complete, vacancy is forecast to rise above 12 percent in both these markets. Supply is the key indicator for determining the vacancy outlook across CBD office markets.

As in previous cycles, the Sydney and Melbourne CBD office markets will be the first office markets to recover. This in part reflects the concentration of finance and insurance sector in both markets and the fast reaction of that industry to the business cycle.

Sydney and Melbourne, in addition to Adelaide, have a relatively benign outlook and vacancy is expected to tighten in 2011. Perth (15.4 percent), Canberra (11.0 percent) and Brisbane (8.2 percent) have large development pipelines as a percentage of total stock and vacancy is expected to rise in all these markets over the next three years. However, the bulk of space is pre-committed and vacancy pressures will be more evident in secondary grade assets rather than prime stock.

The years 2011 and 2012 will witness strong net absorption across the CBD office markets. However, the low overall CBD office vacancy rate at the cyclical trough, particularly in Sydney and Melbourne, suggests that the impending recovery may be linked to slower than usual growth in net absorption, but faster rental growth than in previous recoveries.

For all commercial real estate enquiries contact Antony Belcher on 0408 373 483.

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