Signs that Australia’s office market is on the verge of a 'pronounced recovery'

Learn more about the well-defined cycle observed in the market.

According to a recent report from Dexus Research, there are many reasons to believe the Australian office sector is in the early stages of what could be a pronounced recovery.

“Capitalisation rates appear to have topped out and asset values are bottoming. Rents are growing, and over the past year all four of the major CBDs recorded positive net absorption. A lack of new construction means that vacancy rates are likely to decline over the next few years,” the report said.

Here’s more from Dexus Research:

As the chart below shows, office markets follow a well-defined cycle. After periods of high vacancy, supply slows, and over the next 3 to 4 years, space is absorbed, leading to falling vacancy rates and above-average rent growth. Since the 1970s, there have been four such cycles. Effective rent growth per annum during past absorption cycles has ranged from 5% to 20% per annum.

Driving the recovery will be a reduction in the forward supply pipeline. Upcoming supply levels are unlikely to meet the required demand. Total completions in the Sydney CBD and Melbourne CBDs over the next three years are estimated at around half of the long-term average. In addition, we estimate that market rents are 10-20% below the rent required to commence a new building and the average build time is 3-4 years, so new supply is still some way off.

On the demand side, ongoing population and employment growth will be positive for take-up over the next few years. In addition, the stock market is at record highs and the return to office continues with anecdotal evidence that some companies simply do not have enough desks on the peak days of the week.