_2020 Outlook: Office markets observation
Total returns in the Australian office market have averaged 13% over the past five years according to MSCI. This has reflected a potent combination of under-supply, driving rental growth, and the structural lowering of interest rates, driving yield compression.
However, while the aggregate performance has been striking, there has been substantial geographic disparity, with growth in Sydney and Melbourne substantially outstripping Brisbane, Adelaide and Perth.
Outlook for more even growth
Looking ahead, we expect this sharp contrast in performance to gradually shift to a more even pattern of growth. Brisbane, Perth and Adelaide have each benefitted from a sustained run of positive absorption which has lowered vacancy and exposed a shortage of prime stock after several years with limited supply additions. Related to this, strong employment growth and an improving economic outlook for Queensland, Western Australia and South Australia have buoyed sentiment.
As a result of lower vacancy and a lack of choice for occupiers seeking larger units of space, these cities have each seen improved rental performance. Face rents are now rising, and stronger sentiment is also leading to a narrowing of incentives that looks set to continue in 2020.
Rising values to spur more development
With a seismic drop in interest rates driving renewed yield compression, rising office values and a spate of recent capital risings point to the likelihood of a pickup in development starts in 2020.
Yield compression will act to boost the expected value of completed assets, and recent capital raising speaks to the appetite and confidence of major institutions looking to boost their exposure to the office sector, and development will play an important role in this.
With Sydney heavily undersupplied, and other cities now seeing stronger confidence owing to declining overall vacancy and a lack of prime product, the market will welcome a measured expansion of the pipeline.
For more information read our 2020 Outlook report.