Vacancy levels rise slightly but outlook still positive for offices

A turnaround in sentiment for business has led to an improved outlook for the Sydney leasing office sector, despite vacancies rising marginally during the past three months, according to new data.

But lower interest rates and a fall in supply after 2015 has led to forecasts that the vacancy rate may drop below double digits in the next few years. Incentives remain high at about 30 per cent in rental contracts. However, that too is expected to stabilise in coming years.

The more positive outlook for leasing has also prompted a new round of corporate activity, with GPT making a surprise $4 billion counter-bid for the Commonwealth Property Office Fund.

Carmel Hourigan, the head of GPT investment business, said in its offer presentation that market fundamentals are now indicating recovery in 2014 and that the September quarter was the strongest three months of net absorption (leasing) since mid 2009.

Ms Hourigan said prime grade net absorption for the eastern seaboard capital cities was starting to recover from a three-year decline.

Nick Crothers, director of strategic research and consulting at Jones Lang LaSalle, said in his report for the quarter that gross rents were expected to increase as incentive levels stabilise and face rents continue to trend upwards.

"Some further yield compression is also likely, given the solid demand for Sydney office assets from both foreign and domestic investors," he said. "Given the lack of prime-grade investment opportunities, this may see some further downward pressure on secondary grade yields. Once Barangaroo is fully leased and the backfill of offices left empty by the move to Barangaroo, Sydney's vacancy level is tipped to decline."

Mr Crothers said new supply over the next 12 months is expected to be below the five-year average. This, coupled with a significant amount of stock withdrawals in the short-term, was expected to put downward pressure on the vacancy rate in the near term.

The high demand for owning assets would also keep a base under the market. "There is still a high volume of undeployed capital ... looking to invest in Sydney office property," Mr Crothers said.