Office landlords in two of Australia’s biggest cities, Sydney and Melbourne, are about to get hit by several challenges: the upcoming office supply, the booming co-working trend, and the reconfiguration of retail spaces.
Sydney and Melbourne are expected to be flooded with new supply come 2020, and analysts at NAB are projecting that the two cities will face the largest net addition of floor space since the 1990s.
"The recent experience of the Sydney and Melbourne office markets has seen business absorb vacant and new space. However, this positive absorption cycle has only been in place since 2014 or so, and prior to that there was a relatively shallow period of negative net absorption," NAB analyst Andrew Jones said.
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While the two cities are still able to perform strongly despite the under-investment, tell-tale signs of a slowing have started to manifest. In fact, Sydney and Melbourne's office absorption rates have already sunk into the red in the first half of 2019. Jones said this would have a substantial impact on rents and vacancy rates.
Office landlords will also face the threat of the growing co-working trend.
While the co-working phenomenon has been keeping vacancy rates low, co-working groups seem to have moved too far too quickly by taking up vast spaces, said Michael Cook, group executive at Investa.
Should economic conditions weaken and co-working operators are not able to secure tenants to fill the space, landlords would be left highly exposed, he said.
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Aside from the co-working trend, the changing tenancy compositions of shopping centres are also likely to make the office landscape more challenging to landlords.
"While previously highly unlikely, the rationalisation plans of large retail anchor tenants, including Myer, David Jones, BigW, and Target, have created more office space," Jones said, "The conversion of more anchor retail space into office cannot be downplayed given a co-working hub is set to replace Myer's lease at Emporium in May 2020 and with WOTSO's entry last year into Scentre's Westfield Chermside, which is a non-CBD shopping centre in Brisbane."
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