METRO OFFICE First Half 2017

Transcription

1 Research and Forecast Report Accelerating success. METRO OFFICE First Half 2017

2 EXPERTS IN PROPERTY DATA & INSIGHTS Colliers Edge is a subscription service developed by our in-house property research specialists, drawing on the expertise of our national network of operators. DEEPER INSIGHTS Largest data set on market today LIMITLESS SUPPORT Analyst not operators FAIRER PRICING Tailored to your needs Want better insights, faster? Talk to a Colliers Edge expert today Anneke Thompson National Director Research anneke.thompson@colliers.com colliers.com.au/colliersedge Accelerating success.

3 CONTENTS Metro Office snapshot 4 National overview 5 Sydney 6 Melbourne 10 Brisbane 14 Adelaide 16 Perth 18 Newcastle 20 Gold Coast 21 Our experience Metro office 22 Metro Office Research & Forecast Report First Half

4 METRO OFFICE SNAPSHOT A GRADE INDICATORS VACANCY RATE A GRADE NET FACE RENT INCENTIVES NET EFFECTIVE RENT SUPPLY YIELD Current Mar-16 Current Current Mar-16 y-o-y % change Prev 12 months Next 12 months Current 12 month change (bps) NSW North Sydney 7.1% 7.0% $685 23% 28% 8.7% 45, % -66 St Leonards 10.5% 8.5% $565 26% 28% 27.5% , % -38 Chatswood 7.7% 6.6% $510 25% 25% 5.8% % -50 Macquarie Park 7.5% 7.1% $360 26% 26% 12.5% 5,000 21, % -25 Norwest N/A N/A $310 28% 23% -7.3% N/A % -63 Parramatta 4.3% 4.5% $453 15% 18% 10.4% 27, % -75 SOP N/A N/A $375 20% 28% 18.1% N/A N/A 7.00% -87 Rhodes N/A N/A $403 26% 26% 6.1% N/A N/A 7.45% -17 South Sydney N/A N/A $395 23% 18% -2.3% N/A N/A 6.13% -13 CBD Fringe N/A N/A $650 19% 24% 30.7% N/A N/A 5.88% -38 VIC St Kilda Rd 13.2% 8.9% $335 23% 27% 5.4% (18,014) (30,000) 6.63% -75 Southbank 4.1% 8.4% $475 30% 25% 0.8% (8,346) 20, % -100 City Fringe 3.5% 6.7% $400 14% 21% 22.7% (10,973) 10, % -100 Inner East 6.3% 5.3% $380 15% 18% 9.1% 13,650 1, % -100 Outer East 10.7% 11.8% $308 27% 29% 4.0% 19,445 23, % -12 South East 13.1% 11.8% $285 21% 23% 2.5% 19, % -13 North & West 5.9% 4.3% $263 25% 22% 1.3% 17, % 0 QLD Inner South 11.6% 9.7% $458 27% 37% 5.0% 22,100 (1,700) 7.13% -30 Urban Renewal 9.9% 11.2% $453 30% 35% 1.8% (3,430) 31, % -40 Milton 18.6% 20.9% $403 30% 37% 0.6% % -60 Spring Hill 15.0% 13.0% $412 30% 40% 0.5% (3,633) (3,633) 7.75% -50 Toowong 10.2% 10.1% $388 30% 40% 1.3% (950) (950) 7.88% -60 Brisbane Fringe 12.6% 12.8% $423 27% 40% 1.9% 14,087 25, % -55 Gold Coast 12.2% 13.2% $365 15% 20% 0.0% 717 4, % -50 SA Fringe 11.3% 10.9% $325 20% 20% -4.8% 3,215 4, % 0 Inner Metro 6.5% 7.7% $395 20% 20% 0.0% % 25 WA West Perth 17.9% 12.2% $372 40% 35% -15.6% 800 1, % -30

5 NATIONAL OVERVIEW By Anneke Thompson National Director Research For some years now, the CBD office markets of Sydney and Melbourne have been diverging from the rest of country, creating an unprecedented effective rental growth story in both markets. This trend is now in action in metro office markets, both in the rental growth seen in Sydney and Melbourne metro markets when compared to the rest of the country, but also when we look at the performance of inner metro markets compared to their outer metro counterparts. Fringe markets continue to be most popular, and effective rental growth in these markets highlights this. Sydney s CBD fringe was the fastest growing market in the country, with effective rents growing a whopping 30.7 per cent over the year to March Melbourne s City Fringe also grew by a very healthy 22.7 per cent over the same period. Both of these precincts are attracting creative industries and tech firms, who need a central location to attract younger Gen Y staff, but find it difficult to find the specific fitout options they prefer - such as exposed ceilings and polished concrete floors - in CBD locations. Both the Sydney and Melbourne City Fringe markets have seen significant stock withdrawn from the market over the past few years, as residential developments offered a higher and better use. However, the rents now on offer in these city fringe markets - $650 per sqm average net face rents in Sydney, and $400 per sqm in Melbourne means that owners are now more encouraged to retain buildings for office use that had previously been earmarked for residential conversion. Parramatta continues to offer some of the lowest incentives in the country, at an average of 15 per cent for A Grade space. A Grade space in Parramatta remains at full occupancy, so the challenge for landlords is to find the space to get deals done in the current supply climate. Interestingly, some of the strongest rental growth in the country has occurred in markets where vacancy rates have increased. This is an unusual paradox of metro office markets, where the smaller nature of the markets means that current face rents and incentives both factor in future supply constraints to a far greater extent than CBD markets. For this reason, St Leonards in Sydney s lower north shore recorded the second largest effective rental growth rate (27.5 per cent) of any metro market in the country over the year to March 2017, despite the vacancy rate in that market increasing from 8.5 per cent to 10.5 per cent over the same period. The Brisbane Fringe markets saw healthy rental growth levels, with effective rents growing by double figure percentages in Milton, Toowong and Spring Hill. Metro markets in Adelaide and Perth remain challenged, as subdued tenant demand impacts in both markets. Looking forward, the Sydney and Melbourne fringe and inner markets should continue to see a lot of tenant activity, as CBD supply constraints and the search for unusual or creative office space puts these markets into the spotlight. The question is, will landlords and developers take the plunge and respond to this pent up demand? Already in the Melbourne fringe, there is almost 200,000sqm of office space approved or planned, a significant change on previous years when residential development dominated. Infrastructure projects will also impact tenant movements in the medium to longer term, further boosting these sought after markets. Metro Office Research & Forecast Report First Half

6 Research & Forecast Report SYDNEY Metro Office First Half 2017 By Kristina Mastrullo Associate Director Research MARKET HIGHLIGHTS Investment in new developments, amenity and infrastructure have bolstered rents in North Sydney despite vacancy increasing marginally. The pre-commitment market is due to keep Parramatta vacancy at an all-time low, as it underpins strong net effective rental growth and unprecedented positive net absorption levels. Erosion of office stock due to residential conversion continues among North Shore and Southern markets leading to an uplift in effective rent. This is further exacerbated by acquisitions due to the Sydney Metro project. Investment market In calendar year 2016, metro investment volumes as a proportion of total CBD and metro sales was 57 per cent, with $3.9billion in transactions volumes recorded, compared to the CBD s $2.9billion. On a 10 year average, metro sales make up 37 per cent of combined CBD and metro sales each year, and for 2017 year to date, metro sales volumes have already reached 43 per cent. Scarcity of investment supply and strong demand drove down metro yields during We expect A Grade metro yields to compress further as offshore groups continue to seek metro office assets to deploy capital, as investment-grade stock within the CBD remains limited. Market fundamentals for vendors continue to strengthen, with the Sydney-wide trend of constrained supply placing upward pressure on net effective rents. Suburban peripheral markets are especially impacted by residential encroachment, heightening tenant activity as displaced tenants source alternative accommodation. Furthermore, investment in infrastructure and amenity has contributed to an uplift in rent and competition for space, especially within core metro markets such as Parramatta and North Sydney. Average A Grade yields for Sydney Metro have tightened by 47bps over the past 12 months to average 6.79 per cent in March 2017, and the secondary market has experienced a tightening of 56bps to average a current yield of 7.74 per cent. Taking into consideration market fundamentals and rental outlook, the purchasers of secondary metro assets will most likely be opportunistic, seeking value add opportunities. Furthermore, the spread of 5.01 per cent over the risk free rate for secondary assets suggests further significant compression is likely. While metro markets have enjoyed above-average yield compression over the last six months, metro office assets still present an appealing case to investors, as the yield premium to CBD assets is currently 120bps. The recent offering in North Sydney of 116 Miller Street and 173 Pacfiic Highway (opposite the future Victoria Cross metro station) and Dexus Phillip Street development in Parramatta (pre-committed by the Department of Education for a 12 year term) should see the yield spread between CBD and metro assets narrow. Leasing Market North Sydney Rental growth peaks B Grade net face rents increased an impressive 17.8 per cent in the year to March 2017, the highest in Colliers Edge records (since 2005). A five per cent reduction in incentives, falling to 20 per cent, further drove a significant uplift in net effective rents, increasing 29.6 per cent over the last 12 months. Meanwhile, A Grade net face rents remained stable, with the primary driver of an 11.3 per cent increase in net effective rents being a 5 percentage point reduction in incentives over the last 12 months to 23 per cent. Positive net effective rental growth is projected to continue as office supply remains constrained due to hotel and residential conversions, coupled with the Sydney Metro line office acquisitions. Approx. 10,000sqm has already been withdrawn with a further 3,000sqm 6

7 this year to be replaced with the rail line, and a potential 22,000sqm withdrawn for hotel and residential projects by Furthermore, tenants from Milsons Point, McMahons Point and St Leonards have also been displaced due to a number of residential conversions. This has further benefitted the North Sydney office market, resulting in an uplift in tenant demand and competition for office space. In addition to infrastructure developments, the improvement in amenity is also expected to underpin North Sydney s strong rental growth moving forward, as it offers a good value proposition to displaced tenants from the CBD due to a large number of withdrawals. The upgrade of Brett Whitely Place, a new dining precinct located in Greenwood Plaza at 101 Miller, as well as Woolworths opening in 100 Miller Street are expected to assist in solidifying North Sydney as an extension of the CBD. Vacancy forecast to fall Total market vacancy increased marginally from seven per cent to 7.1 per cent according to the PCA. A and B Grade vacancy increased but were offset by a substantial reduction within premium stock, from 41.2 per cent to 25.2 per cent vacancy. Looking forward, total market vacancy is projected to fall over the next 12 months to 6.5 per cent due to the aforementioned conversion and infrastructure projects along Miller, Walker, Denison, Arthur and Mount Streets, assuming these displaced tenants will relocate within North Sydney. Over the next two years, the Sydney CBD market will tighten further driving positive rental growth in that market, and as a result more tenants will consider North Sydney as a relatively affordable alternative. Tenants migrate into North Sydney North Sydney experienced strong net absorption (27,068sqm) for the six months to January 2017 as tenants relocated from outside market boundaries. According to the PCA 19,000sqm of net tenant demand was attributed to tenants relocating from other markets to the recently completed 177 Pacific Highway. Jacobs relocated from St Leonards, Leighton Holdings consolidated from 11 buildings across Sydney and Vodafone consolidated from their existing North Sydney & Chatswood offices. Goodman Fielder also relocated and expanded their footprint within North Sydney from Macquarie Park to secure 3,700sqm in 40 Mount Street. In addition, Channel 9 has officially announced its move to North Sydney from Willoughby, occupying Winten Group s 1 Denison (60,000sqm) scheduled for completion in early 2020, further proving the returned strength of North Sydney s office market. As a general theme to suburban markets, what will be Channel 9 s old building in Willoughby was sold to Hong Kong-based property investors Euro Property with the intention of developing apartments. Sydney Metro Yields 8% 7% 6% 5% 4% 6.25% 5.88% 6.75% 6.25% 6.09% 6.13% 7.38% 6.63% 7.13% 6.88% 7.38% 7.88% 7.00% 7.00% CBD Fringe North Sydney South Sydney Parramatta Macquarie Park St Leonards Sydney Olympic Park Chatswood Source: Colliers Edge Sep-16 Mar-17 North Sydney Permanent Withdrawals sqm 0-1,000-2,000-3,000-4,000-5,000-6,000-7,000-8,000-9,000 Source: Colliers Edge 187 Miller Street Miller Street 221 Miller Street 88 Walker Street 41 McLaren Street Metro Parramatta Supply Pipeline sqm 70,000 60,000 50,000 40,000 30,000 20,000 10, Phillip Street 2019 Parramatta Square (Stage 4) Source: Colliers Edge Parramatta Square (Stage 3) Marsden Street Chatswood 10 Valentine Avenue Parramatta Square (Stage 6) Conversion 32 Smith Street 75 George Street Precommittment Available Space Refurbishment Space 80 George Street 140 George Street 18 Smith Street 7.75% 7.25% 58 Macquarie Chatswood vacancy is expected to increase throughout 2017 as a number of whole floor opportunities enter the market. Leighton vacated 799 Pacific Highway and Lendlease will be relocating to Barangaroo from The Zenith. Vacancy has already increased from 6.6 per cent to 7.7 per cent in the six months to January 2017 with negative net absorption of -3,310sqm. As a result we expect incentives to remain stable throughout In the six months to March 2017 average A Grade net face rents increased marginally at 1.5 per cent settling at $510 per sqm, Street Metro Office Research & Forecast Report First Half

8 while incentives increased from 24 per cent to 25 per cent as a result of increased vacancy. We expect to see owners splitting floors and offering speculative fitouts to drive demand in the sub 500sqm range as heightened competition remains for whole floor space. The Zenith is already seeing success with this strategy. St Leonards St Leonards continues to experience office erosion as stock continues to be earmarked for residential conversion. In the last six months, St Leonard s vacancy has increased from 8.5 per cent to 10.5 per cent in January 2017 as tenants relocate to other metro markets. As previously mentioned, Jacobs relocated from 100 Christie Street to North Sydney, adding a contraction of just over 7,000sqm, Flexirent downsized 4,100sqm and 2UE vacated 170 Pacific Highway handing back 1,094sqm of space. These tenant moves contributed to a total six month net absorption of -22,878sqm. 18,489sqm was withdrawn in the six months to January 2017 with a further 30,000sqm due to come offline in 2017, 18,500sqm of which will be redeveloped into a mixed use precinct (88 Christie Street). The next supply cycle will commence in 2019 with Royal North Shore Hospital fully committing to a 36,000sqm office development as well as Mirvac s 472 Pacific Highway (4,600sqm). Mooted schemes are Gore Hill Technology Park (46,000sqm) and Atchison Street (2,300sqm). Despite the increase in vacancy, the prospect of a stronger residential market encroaching on existing buildings and development space saw net face rents increase 21.5 per cent and incentives fall two percentage points in the last 12 months, with positive net effective rental growth expected to continue over the remainder of Macquarie Park While Macquarie Park has experienced tenant contraction over the last six months, we don t expect this to continue as tenants continue to be priced out of North Sydney and Chatswood leading them to consider Macquarie Park as a viable alternative. After a decade of next to no net effective rental growth over the last six months, net effective rents have increased 9.8 per cent and 13.6 per cent for A and B Grade respectively. Underpinning current and future rental growth is the ongoing residential rezoning taking place in peripheral suburban markets such as Epping and Frenchs Forest, as displaced tenants seek alternative accommodation within Macquarie Park. Despite Chatswood being seen as a direct competitor for office tenants, the floor plates offered are restricted by size and Macquarie Park is able to accommodate tenants looking for larger, more efficient floor plates. The next two years should see 90,000sqm of office space supplied at 45 Waterloo Street (25,000sqm is precommitted to the NSW Government) and we expect this to satisfy demand for larger floor plate users that are unable to secure such space in denser metro markets. Furthermore, Macquarie Park is expected to become a primarily residential and office centre as organisations begin to shift their industrial function to dedicated western and south western industrial markets. According to the PCA, vacancy increased from 7.1 per cent to 7.5 per cent in the six months to January 2017 with net absorption registering -7,475sqm for the period. Parramatta Pre-commitment market keeps Parramatta tight Total market vacancy is forecast to decline over the short term as pre-commitments absorb any new stock. Stage 1 Parramatta Square, which came online at the end of last year, was fully precommitted by Western Sydney University. Taking into consideration the development pipeline, 105 Phillip Street (delivery circa 2018, approx. 25,000sqm) is fully committed to the Department of Education and Stage 4 Parramatta Square (delivery circa 2019, approx. 62,000sqm) is fully committed to Property NSW. These tenants will relocate from Darlinghurst and Sydney CBD which will likely contribute to above average positive net absorption for the period. Looking further ahead, NAB has fully committed to 42,000sqm at Stage 3 Parramatta Square (delivery circa 2020). Notable vacant space is likely to be available in 2020 and 2021 with Parramatta City Council (126 Church Street), the Office of State Revenue (87 Marsden Street), and the Department of Planning and Environment (10 Valentine) intending to vacate 5,800sqm, 4,000sqm and 5,000sqm respectively. Additionally, The Commonwealth Bank of Australia will vacate 101 George Street and 150 George Street in 2022 relocating to the Australian Technology Park (ATP) in Redfern, creating backfill space of approximately 40,000sqm. As a result of the abovementioned movements, by early 2020 vacancy is forecast to fall to 3.3 per cent before increasing to 6.9 per cent by the end of A Grade vacancy is likely to remain at full occupancy in the short term, with the secondary market, particularly B Grade, tightening at a faster rate. Sustained period of strong rental growth For the second consecutive period A Grade space remains at full occupancy, fuelling strong rental growth. Over the last 12 months, net face rents have increased 5.8 per cent, with net effective rents increasing 10.4 per cent as incentives fell three percentage points to 15 per cent. 8

9 B Grade vacancy has fallen to 6.2 per cent, from 6.8 per cent, resulting in even stronger rental growth. Net effective rents increased 16.9 per cent over 12 months largely due to the significant 7 percentage point reduction in incentives, falling to 16 per cent. With a strong pre-commitment market, we anticipate net effective rental growth to exceed historical averages for A and B Grade space of 3.6 per cent year on year and 2.5 per cent year on year respectively. Over the next 12 months, net effective rents for A and B Grade are expected to grow by 10 per cent and 13 per cent respectively with the average annual growth rate over the next three years forecast at 6.7 per cent (A Grade) and 7.4 per cent (B Grade). Sydney Olympic Park Net face rents have firmed up as a result of constrained supply and sustained low vacancy, settling at $410 per sqm at March 2017, representing growth of 9.3 per cent over the last six months. Incentives have remained stable over the period at 20 per cent. A notable transaction and an indicator of healthy demand in the precinct, the Royal Fire Service has pre-committed 9,240sqm to GPT s 4 Murray Rose Drive. However looking forward, vacancy is anticipated to increase with The Commonwealth Bank of Australia vacating approx. 20,000sqm from 2, 4 and 10 Dawn Fraser Avenue, relocating in stages to their new offices in Darling Square mid-2017 and Australian Technology Park, projected for completion around The imminent release of Sydney Olympic Park s Master Plan 2030 will provide certainty for developers and is anticipated to inject interest in the precinct as it provides a comprehensive approach to the long term development of Sydney Olympic Park. The Plan includes new infrastructure such as the WestConnex, the proposed Light Rail and Bennelong Bridge and is predicted to add 34,000sqm job opportunities into the region which may see any large vacancies absorbed before coming to market. City Fringe Creative industries (and increasingly, tech firms) continue to underpin the City Fringe office market, with these tenant types seeking out space in character/heritage buildings in suburbs such as Pyrmont, Ultimo & Surry Hills. Creative industry tenants have been able to collaborate with owners regarding specific fitout options and in some cases minor refurbishments have taken place such as exposing ceilings - in order to add a contemporary and modern feel. We are seeing consistent demand and increasing competition, as supply is extremely constrained. Increased rental levels and a judgement call by owners on the duration of favourable conditions in the residential market are seeing more consideration of retaining properties in office use, rather than the prevalent change of use to residential which has dominated the market in the last few years. The expansion of the digital and creative industries of late has further constrained supply leading to a substantial increase in rents over the last 12 months. A Grade net face and net effective rents have grown 19.3 per cent and 30.7 per cent respectively with B Grade increasing 9.4 per cent and 19.5 per cent respectively. As competition for space has increased, incentives have declined, with A Grade falling three percentage points to 19 per cent and B Grade falling five percentage points to 16 per cent. Few examples of incentives in the 20 per cent plus bracket now exist, and we forecast more downward pressure on incentives, with examples already emerging of sub 10 per cent in some cases. Google has extended their lease to 2021 at Workplace 6 in Pyrmont and confirmed take up of an additional 6,000sqm of ex- Accenture space in the same building. This comes as recent news of Google abandoning plans to move to White Bay Power Station, citing infrastructure shortfalls. Due to low vacancy rates, there is limited whole floor or whole building evidence to report. However, we note that our fringe leasing team is currently finalising over 5,000 sqm of leasing transactions in this precinct contributing to the low vacancy environment. Macquarie University Portfolio Managed on behalf of Macquarie University Metro Office Research & Forecast Report First Half

10 Research & Forecast Report MELBOURNE Metro Office First Half 2017 By Anneke Thompson National Director Research MARKET HIGHLIGHTS City Fringe and Inner East have experienced the strongest rental growth on record Development pipeline coming into focus Outer East B Grade market continues to be a challenge for landlords City fringe A one million square metre market The City Fringe office vacancy rate declined from 4.96 per cent in September 2016, to 3.47 per cent in March This is the lowest vacancy rate that Colliers International has ever recorded for the City Fringe market, and is the outcome of strong demand and very low levels of supply. Just over 23,000sqm of office space was absorbed in the year to March 2017, which is some 9,000sqm higher than the long term annual average net absorption rate. While creative type tenants have always been attracted to the City Fringe market, tenant take up was seen across a variety of industry types, including National Home Doctor Service (Health), Grey Innovation (Technology), BSGM (Construction) and The Promotions Factory (marketing/manufacturing). Not surprisingly, these strong demand levels and reduced options for tenants in the City Fringe has given rise to good rental growth both face and effective. Effective rents grew a record 22.7 per cent in the year to March This effective rental growth is made up of a 13 per cent rise in face rents, and a significant reduction in average A Grade incentives from 21 per cent to 14 per cent. The secondary grade market is also benefiting from this strong demand. Rents in the secondary City Fringe market grew by 10 per cent year on year, and incentives now average 18 per cent. Incentives in both the prime and secondary grade markets are low by Melbourne-wide standards (the CBD is averaging 29 per cent), giving some indication of just how popular the City Fringe market is with tenants. Owners of secondary grade stock have been taking advantage of the strong market conditions and, where space does come vacant, refurbishing their stock to attract the growing number of tenants who want non-conventional office space in the most sought after City Fringe locations. The owners of Building 8, 658 Church St and 570 Church St in Richmond have recent leasing success stories following significant vacancy and subsequent refurbishment of their buildings. Both buildings were fully let post upgrade works, with incoming tenants paying significantly more rent than the outgoing tenants in order to secure the space. It is expected that over the remainder of 2017 and into 2018, rents will continue their rise. Following the record rental growth over the year to March 2017, we expect that effective rental growth over the year to March 2018 will be 7.5 per cent. While lower than the rate we have seen in this past year, this is still well above the long term average growth rate of 4.7 per cent per annum. Next development cycle underway Developers, however, have been taking notice of the increase in demand, and the next supply cycle is well and truly underway. There are currently seventeen buildings in planning/mooted stage in the City Fringe, which is a far cry from previous years where residential development dominated the landscape. A total of 111,500sqm is planned for construction to 2020, and a further 89,000sqm in the mooted stage. The next year of supply will be relatively modest, with 10,500sqm due to complete. However, over 2018 and 2019, approximately 95,000sqm of new supply will come on to the market. It is anticipated that at this point in the cycle, incentives will begin to rise. Interestingly, the City Fringe market will also reach an important milestone over the next supply cycle it will become a million square metre market. There is currently 10

11 just over 965,000sqm of office stock in the City Fringe, and by the middle of 2019 we expect supply to tip over the 1,000,000sqm mark. The long term average vacancy rate for the City Fringe is 6.2 per cent. We expect the vacancy rate to stay well under this level until March 2020, when large chunks of supply will tip the vacancy rate up to 7.7 per cent. The Melbourne CBD will also be in the midst of a supply cycle at this time, which will place further pressure on landlords to do competitive deals at this point in the market. City fringe dominates metro investments Strong demand in the City Fringe hasn t been confined to the leasing market. Of the $1.37 billion of deals in the Melbourne Metro market in 2016, 70 per cent - or $967 million worth of sales were transacted on City Fringe assets. Unsurprisingly, this level of activity had an impact on yields, and we saw 100bps of compression over the year to March A Grade yields now average six per cent in the City Fringe. Current yield spreads of 327bps are above the long term average spread of 315bps, so we expect there is still room for yield compression in this cycle, particularly given the strong leasing conditions. Melbourne Metro Office Vacancy Rates St Kilda Road Southbank City Fringe Inner East Outer East South East North & West 0.00% 2.00% 4.00% 6.00% 8.00% 10.00% 12.00% 14.00% Mar-17 Mar-18 (f) Source: Colliers Edge Melbourne Metro A Grade Net Incentives 35% 30% 25% 20% 15% 10% 5% 0% Mar-09 Sep-09 Mar-10 Sep-10 Mar-11 Sep-11 Mar-12 Sep-12 Mar-13 Sep-13 Mar-14 Sep-14 Mar-15 Sep-15 Mar-16 Sep-16 Mar-17 City Fringe Inner East Outer East South East North&West St Kilda Road Southbank Inner East From a demand perspective, the Inner East is just as highly sought after as the City Fringe market, however, the opportunities for tenants to move around are limited. While our vacancy rate has increased in the six months to March 2017, from 4.15 per cent to 6.3 per cent, a number of the larger tenancies that have recently become vacant are currently in Heads of Agreement (HOA) stage, thus we expect the vacancy rate to quickly fall down again to 5.9 per cent by September 2017, and further to 4.7 per cent by this time next year. One of the larger vacancies to be leased in late 2016 was 2 Luton Lane to Swinburne University. This was a 5,660sqm deal which was completed before the space even became vacant, hence is not reflected in our net absorption figures. Orora also renewed 4,000sqm of space at 109 Burwood Road, Hawthorn. Again, this is a large tenant commitment to the Inner East market that is not reflected in net absorption. Effective rental growth to continue Rents continued to increase in the Inner East, despite the increase in the vacancy rate, as the underlying demand not reflected in the figures has pushed landlords to increase face rents and reduce incentives. Face rents grew by 5.6 per cent in the year to March 2017, and coupled with a decline in average incentives from 18 per cent to 15 per cent, the overall increase in effective rents was 9.1 per cent. We are forecasting very similar (nine per cent) effective rental growth over the next 12 months, as continued tenant demand and no supply constrain tenant options. Source: Colliers Edge Melbourne Metro Net Effective Rental Growth Year to March % 22.7% 20.0% 10.3% 10.0% 9.1% 5.4% 2.1% 0.8% 0.0% -0.7% -10.0% St Kilda Road Southbank City Fringe Inner East Outer East South East North&West Source: Colliers Edge Supply outlook still low Despite good tenant demand in the Inner East, there is only one development in the pipeline for this precinct, following the completion of Vicinity s new 13,650sqm building adjacent to the shopping centre. A new development at Camberwell Rd, Camberwell is expected to add 8,000sqm of supply in late Most development sites in the Inner East are still proposed as residential or student accommodation projects. For this reason, we expect that net absorption will remain below long term averages over the next few years, as tenants are forced to look to other markets for accommodation. This is the continuation of a recent trend we have been seeing in the Inner East, which in the five years to 2015 absorbed an average of 15,000sqm of space each year. Since 2015, only 3,000sqm of space has been absorbed on average in this precinct, a stark illustration of supply constraints impacting tenant activity. Metro Office Research & Forecast Report First Half

12 A total of $240 million of commercial property was transacted over 2016, with Charter Hall s $140.5 million purchase of a 50 per cent interest in 800 Toorak Rd, Hawthorn East accounting for the bulk of the transaction volume figure. Yields have compressed in line with the City Fringe market, at 100bps to average six per cent for A Grade assets as at March Outer East While the Outer East has always been the third pillar of Melbourne s metro office market, the precinct has now decoupled completely from the City Fringe and Inner East in terms of tenant activity and vacancy. The vacancy rate remains elevated at 10.7 per cent, a minor increase from 10.4 per cent six months earlier. The Outer East has traditionally been a supply driven market, in complete contrast to the City Fringe and Inner East, so the average long term vacancy rate is relatively high, at 9.6 per cent. The supply cycle continues, although at slightly more subdued levels than previous years. Since 2008, the Outer East has added an average of 25,000sqm of new supply each year. We expect that over the year to March 2018, a further 23,000sqm of office space will be added the majority of which (14,000sqm) is at Caribbean Gardens Business Park in Scoresby. Demand in the Outer East continues to remain subdued, particularly in the secondary grade market, where upgrades to older stock are generally needed for a deal to occur. Incentives remain elevated Face rents in the Outer East have remained steady over the year to March 2017, at an average of $308 per sqm for A Grade space. Incentives are elevated compared to the remainder of the Melbourne Metro market, at 27 per cent. We expect these to remain at these levels for the two year forecast period. There were $168 million worth of sales in the Outer East in In Box Hill, there were two sales totalling $50 million, and both of these sales ( Whitehorse Rd and 9 11 Prospect St) were to developers. South East The South East market saw very limited tenant activity through the last half of Net absorption was -6,300sqm, even in a climate where supply increase by 4,000sqm. Vacancy in the South East is at record high levels, reaching per cent in March 2017, against a long term average of 6.75 per cent. Despite the high vacancy, incentives are relatively low, at 21 per cent. This is more due to the nature of owners in the South East, who are predominately local privates. Given the low demand environment in the South East, and the continued preference of Melbourne s metropolitan office tenants to locate in the City Fringe, Inner East and Outer East, a significant yield premium can be found on South East office investments. Average yields for A Grade stock currently sit at eight per cent, well above the Melbourne metro average of 7.09 per cent. 8 Nicholson Street, East Melbourne Valued on behalf of Dexus Funds Management 12

13 2 Luton Lane, Hawthorn Leased on behalf of Programmed Maintenance Services North & West Vacancy declined in the North and West markets, from 8.31 per cent in September 2016 to 5.90 per cent in March This was primarily due to no major supply being completed over this time. In the previous two years, almost 40,000sqm of new supply was added to the North and West market, mostly at the major development of University Hill and Essendon Fields. Effective rental growth was minimal, reducing by almost one per cent over the year to March Rental growth in this market, however, has historically been low, with the long term average effective growth rate being 1.4 per cent per annum. St Kilda Road & Southbank Just over half a billion dollars of asset sales transacted in the St Kilda Road precinct over In total, eight buildings changed hands, half of which were in the boulevard proper. Local and offshore privates and syndicators were the dominant buying group in St Kilda Road. Growthpoint were the only institutional buyer in the precinct in 2016, purchasing 75 Dorcas Street for $166 million in June 2016 at a 6.6 per cent initial yield. Tighter yields were recorded later in the year, with Charter Hall selling 5 Queens Road selling to Singapore s Tong Eng Group for $116.3 million on a 6.35 per cent equivalent reversionary yield. Yields in the precinct now average 6.63 per cent, a drop of 75bps since March Record year of investment activity in Southbank Southbank had a record year of investment transactions, given that three promenade facing assets sold in the latter half of the year. These sales totalled $1.024 billion, and were all sold to offshore buyers. The most recent transaction was ExxonMobil s headquarters at 12 Riverside Quay to a private Chinese investor for circa $160 million. The building transacted at a 5.25 per cent initial yield. Given the strength of the sale prices achieved in Southbank in 2016, average A Grade yields have compressed to 5.88 per cent, down from 6.88 per cent a year ago, when transaction evidence was much thinner. Over the year to March 2017, face rents for both prime and secondary grade office space on St Kilda Road remained steady. However, some good reductions in incentives were recorded, with both grades now averaging 23 per cent, down from 27 per cent a year ago. The reduction in incentives is due to a scarcity of supply of contiguous floors in St Kilda Road (notwithstanding the official vacancy rate) as well as low supply in general in the Melbourne market (CBD and other metro markets). Net effective rents have grown reasonably solidly now for three years running in St Kilda Road. Total effective rental growth over this period has been 17 per cent. Incentives in Southbank have increased over the year to March 2017, as the vacancy at 2 Southbank Boulevard competes with CBD stock (both existing and development) for tenants. Metro Office Research & Forecast Report First Half

14 Research & Forecast Report BRISBANE Metro Office First Half 2017 By Helen Swanson Manager Research MARKET HIGHLIGHTS Vacancy fell from 12.9 per cent to sit at 12.6 per cent as at January 2017, below that of the CBD at 15.3 per cent. Government, business services and finance lead the take up of office space in Brisbane s Metro. Offshore investors dominate, representing 33 per cent of all sales in the second half of Brisbane fringe remains resilient as vacancy declines and sits below the CBD Brisbane s metro office vacancy rate fell from 12.9 per cent in July 2016 to sit at 12.6 per cent as at January The metro office vacancy has been below the Brisbane CBD office vacancy rate since July A grade vacancy was 11.2 per cent down from 11.6 per cent in July 2016 and B grade vacancy remained unchanged over the period to sit at 13.1 per cent. This was the first positive six month net absorption recorded for the metro since January Contributing to the overall decline in vacancy was modest net absorption for the six months to January 2017 of 16,535sqm. This was led by the completion of the Southpoint office development of 23,800sqm. Despite the vacancy rate declining slightly from 21.2 per cent in July 2016, Milton recorded the highest vacancy rate of all precincts for January 2017, at 18.6 per cent. One of the more significant deals to take place in Milton was the 1,400sqm of office space taken by Mates4Mates at 27 Douglas Street. The move saw both Mates4Mates Head office and Brisbane Family Recovery Centre relocate from Albion to Milton. Gross face rents in Milton currently sit at $455 per sqm to $520 per sqm for A grade space, with incentives at an average of 33.5 per cent. Vacancy in the Urban Renewal Area declined from 10.4 per cent in July 2016 to 9.9 per cent in January One of the larger deals to take place in the region over the last six months was Careers Australia taking 4,000 sqm at 515 St Pauls Terrace, Fortitude Valley. The education sector, particularly those catering to international students, are representing a growing proportion of the tenant demand in the metro market. Looking forward we anticipate vacancy in the Fringe to creep up as several tenants vacate their offices in late 2017 and 2018 including Origin at Milton. We anticipate vacancy could head north to sit at 14 per cent to 15 per cent by mid As this occurs we anticipate that incentives could increase slightly further to sit at on average 35 per cent. Robust leasing market Leasing activity remains relatively robust with 184,000 sqm of deals taking place across the fringe in This was down only slightly (2.3 per cent) on the year prior. Government, business services and finance lead the take up of office space in Brisbane s Metro. Additionally, leasing activity from service based sectors such as education, health and information technology has also been prevalent. The majority of leasing enquiry (75 per cent) continues to be for office space sized sub 500sqm. Looking forward, Colliers research suggests that demand over the coming year is likely to stem from the need for expansionary space (34 per cent), lease expiries (25 per cent) and relocation (18 per cent) whilst the remainder may arise from the need to downsize, consolidate and/or acquire project space. Metro and CBD fight out for major corporates The first major office commitment for the Brisbane market occurred in the CBD, with the recent commitment by Origin Energy to take 16,000sqm over a 17 year term in Daisho s 57,900sqm A grade office tower at 180 Ann Street. Origin will relocate from their current premises at 135 Coronation Drive and 339 Coronation Drive, Milton. The 17 year lease commitment now brings the office development to 85% leased. No doubt the 14

15 relocation of Origin will have a direct impact on Milton s vacancy rate (forecast to reach circa 30% in H12018) with the company anticipated to relocate in mid It is expected that the excellent incentives on offer in the CBD, and the ability of corporates to use this incentive for fitout and other capital contributions, will mean that fringe and metro landlords will need to be competitive in order to keep/attract larger organisations that might be attracted to the CBD. Limited new office supply keeping metro office market in check No new supply additions are anticipated to come online in the Metro market this year. Thereafter there are only two projects anticipated in Ann Street Fortitude Valley a 21,625sqm office building which is 100 per cent pre-committed to Aurizon, and K5, located at 50 King Street Bowen Hills, a 14,000sqm office building, of which 50 per cent is pre-committed to Aurecon. Limited stock of prime grade office leads to yield compression Sales activity in the metro continues to be affected by a lack of core investment stock which major domestic and offshore investors are seeking. We anticipate, however, that 2017 will buck this trend and there is likely to be an increase in transaction volumes to take place. Owners who have repositioned their buildings and make the decision to crystalise profits via a well executed divestment strategy will continue to be rewarded by the imbalance in the availability of well leased assets and continued demand from the capital markets - both domestically and from offshore. $375 million of metro office transactions have taken place thus far this year. These include 100 McLachlan Street, Fortitude Valley, 200 Creek Street, Spring Hill and 505 St Pauls Terrace (Green Square South Tower), Fortitude Valley. ISPT Super Property sold a 100 per cent interest in the Brisbane City Council headquarters, for $205.5 million, at a market yield of 5.75 per cent and capital value of $11,664 per sqm. The property was acquired by Eureka (AXA IM) Real Assets on behalf of Korean Teachers Pension Fund (KTPF). This sale represents the highest price of any single office asset to have traded in Brisbane on-market in 2016/17 and the first major acquisition in the Brisbane office market, backed by institutional capital from South Korea. The record breaking deal is testament to the keen interest from offshore buyers for quality leased Brisbane based assets. In fact offshore investment in Brisbane metro office assets is currently at a record high representing 33 per cent of all dollar volume of sales in the second half of 2016 and 73 per cent of all sales thus far in Investors are keen to take advantage of the arbitrage of yields on offer for office in Brisbane s Metro compared to its southern counterparts in Sydney and Melbourne. The yield differential as at March 2017 can be up to 200 basis points. In addition, yield spreads over the risk free rate remain above long term averages, and the cost of capital remains historically low, which implies favourable returns for new investors and scope for further yield compression. The average yield for A grade product across Brisbane s metro market as at late 2016 was 8 per cent however more recently we have seen sales transact below this rate including, 164 Grey Street, South Brisbane at a passing initial yield of 7.61 per cent and 100 McLachlan Street, Fortitude Valley at 5.85 per cent. Emergence of counter-cyclical capital for value-add opportunities in secondary market Emerging institutions, syndicators and wealthy privates are likely to seek secondary grade assets which possess some type of income flow which can be refurbished, leased and value added upon purchase. This is likely to become an increasing trend this year as competition intensifies, yield for prime grade stock continues to tighten and investors look to ride up the risk curve for the return on offer from secondary grade assets. 505 St Pauls Terrace, Fortitude Valley Sold on behalf of ISPT Super Property Metro Office Research & Forecast Report First Half

16 Research & Forecast Report ADELAIDE Metro Office First Half 2017 By Kate Gray Associate Director Research MARKET HIGHLIGHTS Investment activity reaches new highs Yields likely to tighten in the coming 12 months for suburban markets Vacancy falls in suburban markets Fringe and metro markets Investment activity reaches new highs There is strong demand for office assets from investors, with a record $ million ($5 million +) worth of office transactions recorded in This was the highest level of investment in metro markets on record. The largest sale was the GP plus Clinic, 16 Playford Blvd, Elizabeth, which sold for $42 million in November This building had a 13.8 year lease term remaining and sold on a yield of 5.8 per cent to Australian AREIT. Prime quality assets with long lease terms are in high demand across all office markets which has resulted in a tightening in yields for the suburban markets. The Adelaide office market is still offering investors higher returns than some other office markets and this is driving demand. It is the lack of stock being offered to the market which is likely to restrict sales volumes going into Demand in the fringe falls New supply in the Fringe market remains limited, with most of the supply which has been added over the last 12 months being stock which has been withdrawn, refurbished and then offered back to the market. The most recent refurbishment completed was 8 Greenhill Road, Wayville which was completed in late This has contributed to an increase in vacancy to 11.3 per cent as at January Also contributing to the increase in vacancy is the move of Grant Thornton into the Adelaide CBD market, which resulted in -1,260 sqm of net absorption in the last six months. This brought total annual net absorption for the fringe market to -8,126 sqm as at January Rents in the fringe eased over the last 12 months, with Grade A effective rents falling by 4.8 percent. This was mainly due to an easing of the top end of rents in the Fringe market. Incentives have however remained stable with a wide range of 15 to 25 per cent. There are two buildings currently under refurbishment and due to be completed in the third quarter of These are Greenhill Road and 100 Greenhill Road, which will add 2,742 sqm to the Fringe market and is likely to result in an increase in vacancy in the second half of The fringe market has seen 8,433 sqm of withdrawals over the last two years, but most of these buildings have been refurbished rather than redeveloped. There has been a change in the parking restrictions along Greenhill Road, with clearways in place until 10am and then from 3pm. This restricts client parking and is likely to restrict demand in the future. Several of the buildings in the fringe market do not have disability access and therefore the first and above levels can be more difficult to lease. Parking is also an issue. When most of these buildings were built in the 1980s, there was one spaceallocated per 25sqm, however, now the ratios demanded are more likely to be one space to 12 to 15sqm. This area has also been rezoned to allow for higher building heights and mixed use including residential. Over the next five years we expect the Fringe market to see more withdrawals which will see new developments with a change of use. With vacancy forecast to increase for 12.7 per cent over the next 12 months it is likely that rental growth in the Fringe market will be limited over the next 12 months. Incentives are expected to remain stable within the current range of 15 to 25 per cent. Vacancy in the suburban market falls The suburban market has seen vacancy tighten to 6.5 per cent. This is down from 7.7 per cent in September All markets saw a fall in vacancy, with the east seeing vacancy fall to 4.8 percent and the south to 1.8 per cent. New supply in the suburban market remains restrained. The only major construction is the Port Centre at Port 16

17 Adelaide. This 3,238sqm building is currently under construction and is due to complete in This building is fully committed to Australian Customs on completion. There are several smaller projects in the pipeline, but most are seeking pre-commitment prior to construction commencing. The suburban market is very much needs based and therefore tends to have lower vacancy as there is limited speculative development in this market. Rental growth in the suburban market has remained stable over the last 12 months with a rental range of $265 to $335 per sqm net. Incentives have also remained stable, within a range of 15 to 25 per cent. With vacancy falling it is more likely that incentives may begin to fall which will lead to growth in net effective rents. Adelaide metropolitan office market Indicators Fringe Suburban Adelaide Metro Office Sales Volumes Thousands 000s Source: Colliers Edge Metro and fringe office vacancy 12% Grade A Gross Rents ($/m²) $425 $395 10% Grade A Gross Rental Growth p.a. -4.4% 0% Prime Incentives 15-25% 15-25% Total Market Vacancy Rate 11.3% 6.5% Vacancy (%) 8% 6% 4% 2% Average Prime Grade Yields % 6.0%-7.5% Prime Grade Capital Values $4,800-$5,000 $4,420-$4,460 New Supply Additions (m²) 1, % H H H H H H H H H Metro office Fringe office Source: Colliers Edge, PCA OMR Source: Colliers Edge 1284 South Road, Tonsley Leased on behalf of Renewal SA Metro Office Research & Forecast Report First Half

18 Research & Forecast Report PERTH Metro Office First Half 2017 By Quyen Quach Senior Research Analyst Research MARKET HIGHLIGHTS Net effective rents becoming very attractive Landlords following CBD lead and implementing upgrades Limited new supply in the medium term Tenant migration continues Net tenant demand in the Perth CBD and West Perth remains weak. Perth CBD vacancy, according to the PCA, increased to 22.5 per cent and West Perth increased 3.1 percentage points, to 17.9 per cent, over the six months to January Continued sluggish economic activity, combined with the centralisation shift, has forced vacancies higher and market rental rates lower across suburban areas. For this edition of the Metro Office RFR, Colliers International examined vacancy for office buildings over 1,000sqm in the Perth CBD Fringe. This area is classified as the suburbs of Northbridge, Highgate, and Perth (north of Roe Street and excluding the PCA CBD precinct). Estimated vacancy for the Perth CBD Fringe was 17.8 per cent. The majority of vacant space was Secondary Grade, which at 16,135sqm, makes up 56.1 per cent of the CBD Fringe precinct vacancy. Vacant A Grade space totalled 12,610sqm, comprised mostly of space within the area bounded by Stirling Street, Newcastle Street and Nash Street. Rising vacancy and extended time-on-market has driven landlords, who have the capacity, to improve their space offering via refurbishments and amenity additions. This has included new lobbies, new wet areas and end of trip facilities. Notwithstanding the tough conditions, agents have reported an increase in enquiries over the six months to the end of March However, this has yet to translate to an uplift in occupancy levels. As most enquiries have been from smaller occupiers, there has been no notable positive impact on net absorption. Rents significantly more attractive Stubbornly high vacancy and strong competition has driven rental rates lower, and delivered very attractive upgrade options for existing businesses. In fact, it has been a good 20 years since this volume of available space has been seen in the Perth office market. CBD fringe office rents moderated 6.5 per cent year-on-year in March 2017 and 33.3 per cent since mid-2012 to average $325 per sqm. Incentives have risen to an average of 47.5 per cent; returning an effective market rental average of $171 per sqm. Despite soft economic conditions, some tenants are being proactive. They are taking the opportunity to map-out their growth strategy, and are seeking to secure appropriate accommodation with attractive covenants for the longer term. The legal sector has been particularly active, as have consultants and other business services. Though these tenants have secured locations on the Terrace. Some suburban tenants, looking to maintain a local presence, are also seeking upgrades via renewal negotiations that include significant accommodation and building capital works or new leases in an improved location. Supply moderating During 2016, a total of 6,530sqm of new office space was delivered to the Perth Metropolitan office market. This is in stark contrast to the previous three years where 69,030sqm, 59,890sqm and 34,525sqm was delivered in 2013, 2014 and 2015 respectively. However, a further 31,600sqm of space is scheduled for delivery in 2017, largely as a result of projects initiated several years prior. It s abundantly clear Perth has a significant supply/demand imbalance. There is simply too much space for the current level of 18

19 economic activity. Landlords know this, and are feeling it in their hip pocket. The banks, in response to this, have been tightening West Perth Vacancy Rate lending on commercial projects. This should limit new supply over the next two years, with the only major addition being 9,600sqm by Primewest at 8 Davidson Terrace in Joondalup. Fortunately this is a fully committed project, which the state government committed to in mid % 18% 16% 14% 12% 10% 8% 17.9% Outlook 6% 4% 2% China is apparently throwing the kitchen sink at its economy in an effort to maintain employment and growth. This boosted commodity prices over 2016, and in addition to increasing volumes, has helped lift WA s export revenue. Subsequently, the international trade surplus has grown 75.6 per cent year-on-year 0% Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 Jul-15 Direct - Vacancy Factor Sub-lease Vacancy Factor Source: Colliers Edge, PCA OMR West Perth Average Net Face Rents Jan-16 Jul-16 Jan-17 to $7.42 billion for the month of February $700 However, if the states performance over the past year, and economic forecast for the next 12 months, are anything to go by, it s looking like another tough year for the Perth metropolitan office market. We forecast vacancy in the Perth CBD to edge up to 23.5 per cent by mid-2017, as further space is likely to emerge from existing major LNG construction projects proceeding to completion. Woodside s new headquarters at 98 Mounts Bay Road is slated for completion later in 2017, with possession likely to occur sometime in the first half of This is going to generate an additional 40,000sqm of Prime Grade vacancy at 240 St Georges Terrace. So, expect a flight to quality to continue as Dexus proceeds to backfill this deserted space. As such, suburban landlords are set to experience continued competition with the CBD for tenants over the next year. Average Net Face Rents ($/sqm) $600 $500 $400 $300 $200 $100 $0 Mar-10 Sep-10 Mar-11 Sep-11 Mar-12 Sep-12 Mar-13 Sep-13 Mar-14 Sep-14 Mar-15 Sep-15 Mar-16 Sep-16 Mar-17 A Grade B Grade Source: Colliers Edge The silver lining is that the anticipated market bottom is nearer than it was a year ago; and similar to last year, this one should fly by, bringing us even closer to the turning point. 1 Watts Place, Bentley Managed on behalf of Private Clients Metro Office Research & Forecast Report First Half

20 Research & Forecast Report NEWCASTLE Metro Office First Half 2017 By Peter Macadam Director Commercial Vacancy rates across all grades 25% 25% MARKET HIGHLIGHTS 20% 15% 15% Stock withdrawls and migration to the CBD has reduced vacancy rates across all grades. 10% 5% 11% 8.6% 9.3% 12% 11.4% 7.1% Investment in infrastructure, urban renewal and general affordability has spurred residential development. Opportunities still exist despite yield compression evidenced across the market. The strength of the local economy, coupled with rental growth and yield compression, has seen continued interest in the market from commercial investors and mixed use developers. The ongoing demand and price growth is a function of the low interest rate environment and market conditions in major metropolitan markets which, has resulted in valuable arbitrage opportunities to the ten year bond rate for investors in the Newcastle commercial market. Similarly, limited supply in the commercial A Grade market has resulted in sustained gross face rental growth. Vacancy rate falls across all grades The Property Council of Australia Office Market Report indicated an A Grade vacancy in January 2017 of 8.6 per cent, down from 10.7 per cent in January The tightening in the A Grade vacancy is despite net additions of 12,183sqm. The demand is a result of companies relocating from suburban markets to enhance their corporate profile, and typically enhance access to staff amenity with a focus on attracting and retaining a skilled workforce. Without any net additions in 2017 we are anticipating further tightening in the A Grade market, with our first half 2018 forecast vacancy rate estimated at 3.6 per cent. The overall vacancy rate has reduced from 13 per cent to 9.3 per cent, which has been aided by the withdrawal of lower grade stock for residential conversion. 0% A Grade B Grade C Grade D Grade Jan-16 Jan-17 Source: Colliers Edge, PCA OMR Yields tightening further Non-listed institutional investors have been active in the Newcastle capital market, whilst there has been continued demand from high net worth individuals. The weight of capital looking for commercial investments remains high, with yield compression in core and core plus markets continuing as competition increases over the tighter available stock. We have evidenced high transactional activity throughout the CBD, with $303.6 million in total transactions over the last 24 months. From a major capital markets perspective, there have been three transactions totalling $132.9 million & 61 Bolton Street, Newcastle Analysis of a deal Sale Price $20,600,000 Sale Date Jan 17 Net Lettable Area 6,142.70m² WALE 3.78 years (by income) Net initial Yield 6.28% Equivalent Initial Yield 8.51% Internal Rate of Return 8.87% (incl capex) Capital Value ($/m²) $3,354 The purchase of the above B Grade asset by Eagle Funds Management is reflective of the Newcastle market leasing fundamentals, recently evidenced when Colliers International leased 3,314sqm within 6 months of the purchase by Investec from Charter Hall. 20

21 Research & Forecast Report GOLD COAST Metro Office First Half 2017 By Helen Swanson Manager Research Vacancy heads south as business sentiment improves According to the Property Council of Australia, the Gold Coast office vacancy rate as at January 2017 was at 12.2 per cent, down from 14.3 per cent recorded in July This result was significantly below that of Brisbane CBD at 15.3 per cent and Brisbane s Fringe at 12.6 per cent. Vacancy on the Gold Coast has been declining since January 2015, and the imminent pick up in business confidence has seen vacant offices now leased quickly for rental rates achieved to that prior to the global credit crisis. Contributing to the overall decline was a strong flight to quality with the vacancy for A Grade product declining from 18.7 per cent to 12.9 per cent over the six months to January Additionally, B Grade product also declined from 12.4 per cent to 11.1 per cent. As shown in the below graph the sub lease vacancy also has come back significantly from 1.3 per cent to 0.4 per cent over the six month period to January The tightest market as at January 2017 is the Robina - Varsity Lakes market recording a vacancy rate of 6.9 per cent down from 10.0 per cent. Contributing to the fall, the National Disability Insurance agency chose the Rocket office building, Robina for its new regional headquarters of 2,786sqm. It is believed the agency will pay a net face rate of $408 per sqm over 10 years with two by two year options. A flurry of other office deals was also completed last year at the Rocket including an accounting, medical and recruitment firm all taking office space. Southport also recorded a decline in vacancy falling from 15.5 per cent in July 2016 to sit at 13.2 per cent in January Some of the bigger deals to take place last year included the New York Film Academy (2,000sqm) at Southport Central, Department of Housing and Public Works (837sqm) at Bartercard House, Endeavour College of Natural Medicine (1,276sqm) at Nexus and Eagle Gold Coast Vacancy (%) 24% 22% 20% 18% 16% 14% 12% 10% 8% 6% 4% 2% 0% Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Total Vacancy (LHS) Source: Colliers Edge, PCA OMR Jan-07 Academy (696sqm) at 56 Nerang Street. More recently this year, Go to Court Lawyers also signed a lease for 400sqm at a gross face rental of $350 per sqm over a five year term. The overall positive net absorption and decline in vacancy rates over the past two years appears to have strengthened the rental market. Net absorption for the six months to January 2017 was a healthy 10,088sqm and was a vast improvement on the negative 4,511sqm recorded in the six months prior. A and B Grade product both recorded positive net absorption with 5,849sqm and 4,266sqm respectively. Owner occupiers see value in strata office Jan-08 Demand has been particularly strong for strata office in key regions across the Coast. Strata office accounts for 25 per cent of the total Gold Coast office market, 4 per cent in Brisbane and 9 per cent in Sydney. Owner occupiers have come back to the strata market which has seen vacancy rates decline from 12.4 per cent in July 2016 to 9.3 per cent as at January This is significantly below the high of 26 per cent recorded in July Capital values for strata office sub 500sqm currently range from $3,000 per sqm to $5,500 per sqm which offers an affordable option compared to leasing prime grade office. With office rents anticipated to rise further this year it would appear an opportune time for owner occupiers to enter the market and purchase strata office premises. Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Sub Lease Vacancy (RHS) Jan-14 Jan-15 Jan-16 Jan % 3.5% 3.0% 2.5% 2.0% 1.5% 1.0% 0.5% 0% Metro Office Research & Forecast Report First Half

22 OUR EXPERIENCE METRO OFFICE LEASED 2-6 Bowes Street Phillip, ACT 10,931m² On behalf of Quintessential Equity 225 Balcatta Road Balcatta, WA 2,500m² new office building Pre-commitment on behalf of Jarodi Pty Ltd to Fugro Properties Australia Pty Ltd 321 Ferntree Gully Road Mt Waverley, VIC 4,664m² On behalf of DEXUS MANAGED Macquarie University Portfolio, NSW 86,000m² On behalf of Macquarie University The National Archives Preservation Facility, ACT 18,000m² On behalf of Doma Group 19 Lang Parade Milton, QLD 13,797m² On behalf of Mdev Property Group SOLD Satellite Corporate Centre Mulgrave, VIC $87.6 million On behalf of Frasers Property 18 Smith Street Parramatta, NSW $85.1 million On Behalf of Altis Aviation House Phillip, ACT $68.1 million On behalf of Mirvac VALUED 15 Broadway Ultimo, NSW 126,474m² On behalf of University of Technology Sydney 100 Harris Street Pyrmont, NSW 24,474m² On behalf of Citi 100 Pty Ltd 8 Nicholson Street East Melbourne, VIC 22,809m² On behalf Dexus Funds Management PROJECT MANAGED Blacktown, NSW 5,600m² On behalf of 3M Forrest, ACT 2,800m² On behalf of Quintessential Equity Artarmon, NSW 1,600m² On behalf of De Lage Landen Accelerating success. How else can we help you? Speak to one of our property experts today. au.office@colliers.com

23 AUSTRALIA IN THE LAST 12 MONTHS 362 deals for 248,738 square metres of metro office space 515 St Pauls Terrace Fortitude Valley, QLD 3,962m² On behalf of ISPT 1284 South Road Tonsley, SA 3,950m² On behalf of Renewal SA Levels and part level 17, 101 Miller Street North Sydney, NSW 3,500m² On behalf of Mirvac Real Estate & TH Real Estate 460 metro office assets achieving a 96% occupancy rate & 61 Bolton Street Newcastle, NSW 6,142m² On behalf of Private Client 675 Victoria Street Richmond, VIC 2,008m² On behalf of Private Client 1 Watts Place Bentley, WA 933m² On behalf of Private Client 86 deals for $1.395 billion of metro office assets Thebarton Campus Adelaide, SA $25 million On behalf of private client & 61 Bolton Street, Newcastle, NSW $20.75 million On behalf of private client Chermside Galleria, QLD $18.25 million On behalf of GPD Chermside Pty Ltd 1.5 million square metres totalling over $6.9 billion worth in value 133 Hasler Road Osborne Park, WA 16,116m² On behalf of Universal Investment Gesellschaft Robinson Street Dandenong, VIC 13,865m² On behalf of Cromwell Funds Management Limited 200 Creek Street Spring Hill, QLD 7,603m² On behalf of Sentinel Property Group Projects delivered by our award winning team Bayswater, VIC 1,600m² On behalf of Merck Millipore Parramatta, NSW 1,500m² On behalf of AMA Projects Chadstone, VIC 550m² On behalf of Colliers International For more information about Colliers International and working with us visit: