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Melbourne, Sydney office rental growth slows as leasing market turns

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2019 marked a significant decrease in the rate of rental growth in the Melbourne and Sydney CBD prime office markets, as tenant demand slowed on softer business conditions, according to the latest Cushman & Wakefield quarterly Office Marketbeat.

The slowdown in rental growth was most pronounced in the Melbourne CBD market ahead of major supply additions, totalling 335,000 sqm expected in 2020. Prime net effective rents of $465 per sqm were recorded at the end of 2019, representing a 4.9% year-on-year (YoY) increase compared to a significantly higher 12.1% annual rise in 2018.

Annual growth in prime gross effective rent (2014 – 2019)

Annual growth in prime gross effective rent 2014 – 2019

In the Sydney CBD, average prime gross effective rents increased 5.1% during 2019 to $1,045 per sqm compared to a 7.6% gain in the previous year. A moderate rise in incentives confirmed findings from the recent Cushman & Wakefield 2020 Office Leasing Trends & Outlook Survey, where tenants and landlords indicated a potential increase in vacancy and a swing back to more tenant favourable conditions.

The Survey also shows that rental growth expectations have moved backwards compared to this time last year. Just59% of respondents expect rents to increase in 2020 compared to 90% last year. In addition, Cushman & Wakefield data shows that landlords are more flexible around incentives, with an increase of around 1% in the past 12 months, and sub-leases across the market having decreased by 20,000 sqm as tenants seek quality fit outs and flexible terms.

John Sears, Head of Research, Australia and New Zealand, Cushman & Wakefield, said: “While office leasing markets in the Sydney and Melbourne CBDs continue to grow, we are starting to see the effects of softer tenant demand amid lower business confidence.”

“Office rental growth rates in Sydney and Melbourne recording some of the slowest growth since 2014. We are witnessing the continuing signs that the office leasing market has reached a turning point, which supports our view that the capital growth cycle for many Australian CRE markets has already reached its peak.”

Cushman & Wakefield’s Head of Office Leasing NSW, Tim Courtnall said: “Although slower face rental growth is forecast, it follows a sustained rally in Prime Grade rents, lifting more than 50% over the past 5 years.”

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