John Sears leads Cushman & Wakefield’s Research team in Australia and New Zealand. John and his team are responsible for driving research, insights, and thought leadership to support the growth of Cushman & Wakefield in Australia and New Zealand. John and his team also help clients with market data and analysis to help them identify suitable investment opportunities. Prior to starting at Cushman & Wakefield, John was head of research at Vicinity Centres.
Economic Overview
The COVD-19 pandemic caused a short sharp recession in Australia during Q1 and Q2 2020. Data to March 2021 indicates the Australian economy returned to growth in Q3, rising 3.4% over that quarter with a 3.2% increase in Q4 and a 1.8% increase in Q1 2021.
Demand in Victoria did not follow the same trend, due to the lockdown restrictions in place. Assuming the pandemic is contained globally, both Victoria’s and Australia’s economic growth rates are expected to remain positive over the forecast horizon with relatively strong growth expected over the next few years. Deloitte Access Economics forecast real gross state product (GSP) to increase by 6.3% over calendar 2021 and 3.5% in 2022 and 3.2% in 2023. Over the past 10 years, Victoria GSP annual growth has averaged 2.0%.
Melbourne CBD
Supply and Demand
After 351,900sqm of stock was added in 2020 and 65,500sqm was withdrawn, the first six months of 2021 saw a mere 13,200sqm added and 13,500sqm withdrawn. A further 157,400sqm of new and refurbished space is due for completion in 2021, of which over 66% is pre-committed. A further 185,900sqm is due for delivery in 2022 though some of this supply may be delayed.
In terms of current and future demand, business confidence is strong and smaller, local businesses are making decisions on three and five-year terms. Larger tenants are slower to commit with many opting for short term extensions. Workers return to the office has been kept to a maximum of 25% by Government decree. The rollout of the vaccine over the final quarter of 2021 can be expected to see the lockdown end and a return to higher levels of occupancy in 2022.
Rents
Net incentives stabilised in Q3 2021 and are expected to remain at these levels for the remainder of the year before falling as the recovery gathers pace in 2022 and workers return to the CBD.
Premium grade net incentives are 39%. The average A grade net incentives were stable at 41%. Currently, B grade net incentives are 38%.
Premium grade net face rents were up slightly over the quarter to average $695/sqm, A grade were also up slightly and average $635/sqm. There was also a slight rise in B grade net face rents with rents averaging $530/sqm.
Metro Melbourne
Supply and Demand
2020 saw eight metro office projects reach completion, delivering 128,000sqm of floor space to market. Looking forward there is some uncertainty around the medium and longer term pipeline with COVID creating disruption and uncertainty around the delivery of projects. Nevertheless, there are ten projects being completed in 2021, delivering over 140,000sqm of new space to the fringe office market and well over half is pre-committed.
In terms of current and future demand, business confidence is strong and smaller, local businesses are making decisions on 3 and 5 year terms. The rollout of the vaccine over coming quarters can be expected to see an acceleration of business commitment.
Rents
Despite the turbulent year across the city, the metro markets net face rents have remained relatively stable over 2020 and 2021. Upward movement in net incentives has placed downward pressure on net effective rents, with Southbank recording a 9.3% year on year (YoY) fall to reach $362/sqm. For St Kilda Road it is a similar story with net effective rents dropping 14% YoY to reach $284/sqm. It is expected that incentive increases have now run their course, helping to stabilise net effective rents across Metro Melbourne.
