Australian office markets have historically been highly correlated. Vacancy in all CBD office markets rose simultaneously in the 1989-1993 period. Vacancy levels also fell simultaneously across all the CBD markets in the years leading up to 2007. The past five years however, have seen a discontinuity of this characteristic, with divergent movements from the major markets. Sydney and Melbourne CBD’s vacancy rate edged lower, while, in contrast, Perth and Brisbane’s vacancy rates have risen sharply. The implication for investors is that in the current office environment, the timing and strategic decisions can yield significant portfolio diversification benefits. Analysing the effects of supply and demand can provide insights for investment decisions.
Supply and demand factors both contributed to the increased volatility of market vacancy during the 1989-1993 recession for the CBD markets in Sydney, Melbourne and Perth. Rising supply and falling demand for office space reinforced each other to increase vacancy. Supply contributed to 62.1% and 67.8% of the volatility in vacancy for Sydney and Melbourne respectively. In Sydney, net completions outweighed net absorption, which was relatively stable, despite the recession. This theme was repeated in Melbourne. The impact of supply was even more evident in Perth where it was responsible for 83.5% of the volatility in vacancy. Office space demand contributed a mere 16.5%.
Whilst vacancy rates in the Canberra and Brisbane markets also rose in this period, the manner in which this occurred was different. Both demand and supply moved in the same direction. In Canberra, there was sustained positive net absorption, which was simultaneously matched by a higher magnitude of positive net completions over this period. The Brisbane market experienced a decline in net absorption and a simultaneous decrease (albeit of a slightly smaller magnitude) in net completions, as the withdrawal rate increased. In other words, supply was helping to reduce overall volatility in vacancy caused by demand, despite the rising vacancy rate.
The last five years, however is characterised differently. The most striking feature is the relatively low supply and demand correlations for both the Canberra and Brisbane markets. Both supply (46.7%) and demand (53.3%) contributed to the increase in market volatility. Vacancy has been trending down in Canberra. Demand in Brisbane also remains the dominant variable affecting volatility and accounts for 93.6% of the overall volatility while the remaining 6.4% is caused by net completions. However, vacancy in Brisbane has been trending upwards.
Over the same period, average net absorption in Sydney has been strong. As an offset, net completions figures have been strong enough to counteract this in order to decrease vacancy. A similar theme is present in Perth albeit to a much lower extent. However, Perth’s vacancy rate has been rising. This comparison of the markets for investment decisions illustrates the importance of inspecting the interaction of supply and demand. For both Sydney and Perth, demand and supply moved in the same direction but the resulting effects are different. The vacancy rate in Sydney is decreasing, while that of Perth is rising.
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