Canberra office vacancy rate likely to rise as government tightens its belt

The Canberra office market continues to deliver robust levels of stock, as has been the trend for a number of years. Despite equally remarkable net absorption, the flight to quality by large space users has maintained upward pressure on the overall vacancy rate.

Also, recent policy reducing work space ratios in the public service, as well as new requirements on Commonwealth tenants to meet certain "green"credentials in their tenancies, is affecting overall demand.

That said, the overall vacancy rate has decreased recently is under 10% for the first time since December 2009.

Significantly, a large government expressions of interest (EOI) program to secure a new building has ceased, due to financial constraints, in the second half of 2011.

Paradoxically, this type of decision may be a salvation for Canberra’s B-grade buildings, in that sitting government tenants may be forced to renew their leases in these buildings (subject to a refurbishment and an upgrade to 4.5-star NABERS).

Future supply remains robust over the medium to long term; however, only a small proportion of this supply is currently precommitted. As such, the future addition of vacant space, coupled with the resultant backfill from major tenant moves, would place upward pressure on the overall vacancy rate.

Building owners are currently holding on to their assets, rather than selling into a soft market.  However, if the decision is made to sell, secondary grade buildings can be expected to sell at soft yields, with the purchaser more likely to be a private investor or ‘small cap’ fund.

Conversely, there is anecdotal evidence that a number of international buyers are showing interest in new buildings with long leases to the Commonwealth at prices which will show very strong yields if the sales complete

Simon Hemphill is divisional director of research at Savills ACT.