City fringe office rents in Sydney and Melbourne are catching up with core CBD rents, rising fast as stock levels in these areas contract in favour of residential development, Colliers latest metro office update shows.
While Sydney and Melbourne CBD office markets have been leaders in rental growth, metro office markets like Parramatta and St Leonards in Sydney and Hawthorn and Richmond in Melbourne are now equally competitive.
Adding more pressure to the metro areas, millennials and creative businesses are competing with traditional corporates for scarce offerings.
Sydney's CBD fringe market is the fastest growing in the country, with effective rents growing 30.7 per cent over the year to March 2017. Melbourne's city fringe also grew 22.7 per cent over the same period.
Sydney's city fringe net annual rent is now $650 a square metre while it is $400 a square metre in Melbourne.
"Both of these precincts are attracting creative industries and tech firms, who need a central location to attract younger Gen Y staff, but find it difficult to find the specific fitout options they prefer – such as exposed ceilings and polished concrete floors – in CBD locations," the report says.
Both the Sydney and Melbourne fringe areas suffer from the same malaise: withdrawal of office stock to accommodate residential development.
And despite a cooling in residential development, Colliers International head of investments services in Sydney, Matthew Meynell said A-grade metro yields would continue to be compressed.
"The investment by the NSW government [in these metro markets] in infrastructure is giving occupiers and landlords underlying confidence," he said.
In North Sydney, B-grade net face rents increased 17.8 per cent in the year to March 2017. A 5 per cent reduction in incentives, falling to 20 per cent, further drove a significant lift in net effective rents, increasing 29.6 per cent over the past 12 months.
Interestingly, some of the strongest rental growth in the country has occurred in markets where vacancy rates have increased, such as St Leonards.
"This is an unusual paradox of metro office markets, where the smaller nature of the markets means that current face rents and incentives both factor in future supply constraints to a far greater extent than CBD markets," the report says.
"For this reason, St Leonards, in Sydney's lower north shore, recorded the second-largest effective rental growth rate, 27.5 per cent, of any metro market in the country over the year to March 2017, despite the vacancy rate in that market increasing from 8.5 per cent to 10.5 per cent over the same period."
In Melbourne, the city fringe office vacancy rate declined from 4.96 per cent in September 2016, to 3.47 per cent in March 2017.
This is the lowest vacancy rate that Colliers International has ever recorded for the city fringe market, and is the outcome of strong demand and very low levels of supply.
The Brisbane fringe markets also had healthy rental growth levels. In Milton, Toowong and Spring Hill, rents rose. But the metro markets in Adelaide and Perth remain flat all round, with subdued tenant demand.
Read more: http://www.afr.com/real-estate/sydney-and-melbourne-metro-office-rents-continue-to-rise-20170502-gvxass