By Hayden Peck and Richard Steedman, Knight Frank Hobart
The recent release of the Property Council of Australia’s (PCA) Office Market Report 2019 provides further evidence of Hobart’s thriving property market.
Recording a vacancy rate of only 5.9%, it ranks as the third strongest capital city office market in the country, behind only Melbourne (3.2%) and Sydney (4.1%) with all other markets significantly weaker with Canberra 11.0%, Brisbane 13.0%, Adelaide 14.2%, Darwin 17.2% and Perth 18.5%.
Hobart’s CBD office market vacancy rate of 5.9% indicates that the market has tightened considerably in recent years, down 3% from 8.9% in 2015 and is significantly stronger than the national average of 8.5%.
The ‘A’ grade sector is the tightest, with a vacancy rate of only 4.9%, ‘B’ grade 9.1%, with ‘C’ and ‘D’ grade 6.0% and 6.1% respectively.
Hobart’s low office vacancy rate is a function of three key factors, being minimal speculative development; competing property uses and increased demand.
Historically, new supply within Hobart’s market has been demand driven, with new office accommodation primarily resulting from pre-commitment by major tenants with very little speculative development.
This is in part due to an economic rental generally being required to ensure an appropriate return to the developer.
Improved economic conditions has resulted in greater competition within our market from competing property uses, in particular from the tourism/hotel sector.
This has resulted in an increase in the underlying land value of key sites within our city, rendering some older office buildings and/or their sites to have a higher and better use than offices, such as visitor, residential or student accommodation.
As a result, a number of older office buildings have been demolished or converted to alternative uses.
This in effect represents a replenishing of Hobart’s office market stock.
Strong economic growth in Tasmania in recent times has resulted in new demand for office accommodation with net absorption, i.e. increase in area occupied, recorded at 1,178 sqm for the year and a total of 6,465 sqm over the past two years.
We have seen a strong increase in demand from small businesses new to our market, with many seeing great opportunity within our confident and growing market.
We have also seen new demand from the education sector, particularly Registered Training Organisations (RTO) for international students with a number of organisations setting up business in Hobart over the past two years.
This new education demand has resulted in associated services also opening within the CBD such as immigration and travel agencies and other professional services targeting international students such as lawyers and accountants.
With very little new office market stock, i.e. new buildings, forecast to come online in the short to medium term, and growing demand for Hobart office accommodation, this should see a further reduction in the vacancy rate which will likely translate into rental growth.