Commercial & Industrial Property News Update

Australia - Demand For Commercial Property Dip In Victoria

July 31, 2012

A sharp slowdown in the Victorian economy will affect the commercial real estate market in the short term, but mid-term prospects are brighter, said BIS Shrapnel.

Affected by a sharply slowing Victorian economy, particularly construction, the market will see demand lowering for retail, office and industrial space in the short term. However, medium-term prospects hold greater promise, said chief economist at BIS Shrapnel Frank Gelber during an economic forum last week.

"Last decade, Victoria used low-cost land for industrial, commercial and residential to attract business. That was an extremely successful economic development strategy, underpinning high levels of development across all sectors. Now we're paying the penalty for the strength of last decade," he said.

"We wonder whether this is the right time for the Victorian government's focus on fiscal responsibility to impact on infrastructure spending."

Dr Gelber noted that after growing strongly in 2010, stand-alone office growth had slowed down last year, and retreated in H2 2011. In Melbourne, leasing had also been weak in H1 2011, reflecting insipid employment growth and fragile business confidence.

"At the same time, net additions to stock have fallen. Completions in Melbourne slumped over the last two years to record their lowest levels since 2000," he said. Only 94,000 sq m were completed last year.

"This left the market enjoying the second lowest CBD vacancy rate, behind Perth, of 5.3% at December 2011. Despite this relatively low vacancy rate, there has been minimal rental growth over the last year," he said. This was in sharp contrast to the double-digit rental growth achieved through 2010.

However, Dr Gelber said that completions were forecast to pick up substantially this year and next as commencements had already rebounded. Nearly 300,000 sq m of space is primed to come on stream in the CBD and Docklands in 2012 and 2013.

"In contrast, activity in the suburban markets is subdued. After 2013, the pattern of new supply is uncertain and, given the current subdued mood in Melbourne, it is likely that completions will fall back in 2014 and remain muted for the two subsequent years," Dr Gelber said.

In view of the number of completions expected and low employment growth, Dr Gelber posited that the December 2011 vacancy rate may represent a temporary trough. "We anticipate the CBD and Docklands vacancy rate rising to a near-term peak of 7.4% by December 2013, notwithstanding that the CBD and Docklands will benefit from a number of tenants moving in from suburban locations over coming years."

"Thereafter, unless we see building sustained at the levels of 2012 and 2013, the vacancy rate should start to decline steadily, although we expect that it will take several years for it to fall below 6% again."

"Hand in hand with improvements in vacancies will be rising rental and capital growth. But the next few years will be weaker."

Tags: Investment properties, Commercial real estate, Business space

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