Vacancy rates of office space in Australia are likely to grow further due to new supply and should peak by the last quarter of the year, setting a stage of recovery in 2011, according to research conducted by Jones Lang LaSalle.
Office property yields peaked at 7.78 percent during the third quarter of 2009, with values falling to 25 percent from the the peak in December 2007. But with the completion of new office buildings, vacancy rates are expected to increase.
“There was a fairly large supply pipeline that was under construction before the financial crisis hit,” said David Rees, head of research and regional director for Jones Lang LaSalle (JLL).
“Although we are saying this is sort of the bottom of the cycle, we are not saying it’s going to be a big bounce back in 2010. It’s more of a ‘U’ rather than a ‘V’,” he added.
Office vacancy rates for central business districts (CBD) in major cities in Australia are expected to peak at 9.6 percent in Q4 this year, up from eight percent in the same quarter last year. CBDs in Melbourne and Sydney, which are both concentrated with insurance and finance companies, are expected to be the first markets to recover, said Mr. Rees.
“Banks and brokers are back in hiring again, so demand for space is rising. And secondly, both of those markets have quite limited supply construction pipeline. So they don’t have a big overhanging space.”
Office rental growth is likely to pick up by 2011, and Mr. Rees expects a high single-digit to a low double-digit growth over the next 2-3 years.
Additionally, the retail sector is recovering slightly, with yields on regional malls peaking at 6.6 percent in Q4 2009. But Mr. Rees noted that the government’s withdrawal of fiscal stimulus packages and rising interest rates will likely limit rental growth for retail properties and put a damper on consumer spending.