There’s a lot of hand wringing at the
vacancy rates being reported for office markets at the moment but in more than
20 years, the analysis hasn’t progressed much beyond basic questions of new
supply and gross demand. Other factors are at work.
The
latest Property Council office
market survey reports Brisbane CBD vacancies as ‘the
highest level on record’ at 14.2%. That’s up from 12.8% the year before. The
report attributes this to weak demand, specifically a “reflection of the impact
of the Queensland Government’s continued withdrawal from leased space, coupled
with the mining sector’s revaluation of its office space requirements.”
No,
it’s not a pretty number and according to the PCA figures it’s at present the worst of major markets in the
country:
But
these are just headline figures. Sure the Queensland Government has reduced its
requirement for space, but that followed a sustained period of bloated public
sector growth under the previous government. And sure the mining sector isn’t
on fire any more, but no one seriously thought it would ever stay that way.
That’s why mining related businesses were only taking space on 5 year leases:
they knew themselves this wouldn’t last.
So
beyond the headlines, what are some of the other things that might be driving
change in the market?
First,
remember that a 14.2% vacancy rate is the same as an 85.8% occupancy rate. Most
industries with that sort of capacity utilisation would be over the moon. It’s
a quirk of history that office markets have always reported on vacancies rather
than focus on the occupancies. That’s unlikely to change but what it means to
seasoned observers is that this isn’t the calamitous disaster media headlines
might have us believe. Plus, take into account that a fully occupied market is
generally regarded to be around 95% occupied; that 5% vacancy being required
for normal movement. Any less and the market is under supplied. So really we’ve
got about 10% of surplus space sloshing around in the market now.
Much
of that space is sloshing around in lower grade buildings and what typically
happens is that these are withdrawn from stock because they can’t compete with
contemporary space and the facilities it provides. Owners can refurbish older
buildings, or convert them to alternate uses such as residential or short term
accommodation. Expect a lot of both to happen in coming years. Those stock
withdrawals will to an extent offset stock additions through some of the new
projects under construction.
On
the demand side, apart from blaming a downsizing by government and mining
tenants, what other factors are in play?
Rents
are surely one. Talking about office space demand without mentioning rents is a
bit like talking about demand for petrol without mentioning the price. High
construction costs, site acquisition costs and development costs mean that
delivering new CBD office buildings is not a cheap exercise. Our CBD rents are
some of the highest in the world. This
Cushman & Wakefield report makes for interesting reading. According to
the report, Brisbane is roughly 80% of Manhattan Grade A prices, is more than Melbourne,
is 50% more than Houston Texas and three quarters of Sydney rents. Sydney rents
are higher than New York. Go figure that one. Ask Holden, Ford or Qantas about
the globalisation of markets and what happens to Australian product that is
overpriced. Will that affect demand for office space if companies simply shift
operations elsewhere, or are they faced with no choice but to pay globally high
rents for what are not global scaled cities?
The
other effect of high CBD rents is also force some hard thinking about the
relative benefits of CBD over fringe. A lot of companies have recently opted
for the latter. This could also be affecting demand for space in key CBD
markets.
Floorspace
ratios are another factor at play. New tenancies for major business are often
being designed around per person space ratios as low as 10 metres per person.
Concepts like ‘hoteling’ where staff don’t have their own desk and where
personal effects are discouraged, have fad surfers enthralled and financial
controllers impressed. Personally, I can’t see this lasting. We’re human beings
after all. Plus, it’s only ever a handful of companies that explore the
boundaries of these management fads and seek publicity for doing so. The silent
majority of office tenants are as inefficient as ever, with spare desks and
large common areas so the average in my opinion still works out at around 20
metres per person. Either way, it’s an important factor on the demand side
which isn’t discussed much.
Parking
costs are another factor. This is more a problem for casual parkers than
permanents but both are paying exorbitant prices. If you are CBD based and have
clients visiting your office, you should feel some sympathy for the $50 they’ll
shell out just for a two hour visit. These are some of the highest costs in
Australia and equally some of the highest in the world. Those urban planners
wanting to ‘keep cars out the city’ may succeed if this pricing response to
limited supply keeps following the same trajectory. But if you keep the cars
out of the city, you’ll keep the people out too, and along with them, their
business. The very high cost of parking, both for tenants and customers of
those tenants, could be another factor weighing against demand for CBD space.
These
are just some of the considerations that reach beyond the basic numbers. There
are more but the point is that a 14% vacancy rate owes itself to a wider range
of market forces than superficial reports deal with.
Is
14% a cause for concern? That depends on where the vacancies are… in someone
else’s building or yours.
