Every year we host an event for approximately 100 clients and colleagues in Australia’s capital city – Canberra. We believe that Canberra plays an important role in a diversified property portfolio as it is lowly correlated with other major Australian office markets.

However, our most recent event was more orientated towards the physical market and titled: Strategies to navigate the divergence between prime and secondary vacancy rates. We used to observe a strong correlation between prime and secondary grade vacancy rates – over the period from 2000 to 2014 – the correlation co-efficient was 0.85.

Chart 1: Canberra vacancy rate by grade
Source: JLL Research

The vacancy rate divergence from 2014 was noticeable. Prime vacancy tightened from 13.0% in 2014 to 5.4% in 1Q18 – the lowest level since early 2008. Low vacancy exerted upward pressure on effective rents which increased by 3.5% over the 12 months to March 2018. In contrast, the secondary grade vacancy rate pushed up towards 25% and secondary net effective rents are 33% lower than where they sat 10 years ago.

To put some context around these numbers a 1,000 sqm sized organisation seeking prime grade contiguous space in Canberra has 14 options. In a normal short-listing process, an organisation will typically discount half the options based on price and location, lowering the number of genuine options to seven. The same sized organisation looking for secondary grade space has 53 options. Even allowing for the normal discounting factor, that still equates to over 25 distinct secondary grade space options for a 1,000 sqm organisation across Canberra.

With so many space options in the secondary grade sector, owners have to find ways to differentiate their product. Not all of these strategies require a full asset repositioning and we believe that owners can implement capital light strategies. The ground floor lobby creates the first impression and is a potential differentiator. Owners should make use of artwork, green walls and informal seating areas to create a usable third space for building occupiers.

Organisations are committed to providing health and wellness initiatives for their employees. End of trip facilities are typically found in modern prime grade assets. However, the number of people cycling to work across the Australian Capital Territory has increased from 2.1% at the 2006 Census to 8.4% in the most recent Census (2016). The limited prevalence of end of trip facilities in secondary grade assets presents an opportunity for owners. We are advocating a circa 400 to 500 sqm facility which includes bike racks, shower facilities, lockers and changing areas.

While this blog has concentrated on the Canberra office market, the asset management strategies proposed are relevant for Perth (28.6%), Brisbane (19.7%) and Adelaide (17.4%) where secondary grade vacancy is elevated and owners are looking for ways (other than price) to differentiate their product in a competitive landscape.

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