February 2015 – Newcastle CBD Office Market Overview

11 February, 2015 / Vanessa Rader and Lee Follington

Newcastle CBD has been subject to a number or strategies to revitalise the city centre, with GPT pulling out of the Hunter Street redevelopment in 2010 further activity had somewhat stalled until recently. Newcastle Urban Renewal Strategy has been updated in 2014 to include the removal of heavy rail into Wickham and Newcastle, rejuvenation of the CBD and Hunter Street mall. The $94 million law courts complex, University of Newcastle’s NeW Space development at Civic and the redevelopment of the Empire Hotel site together with the new Newcastle LEP which has established a new planning framework will drive the renewal of the city centre.

The Newcastle office market has seen the first increase in supply during 2014 adding 11,090sqm to previous steady stock level, this included the newly redeveloped A grade, 45 Watt Street which added 7,500sqm of which 84% was occupied. As at January 2015 this market has total stock of 255,166sqm, space is well split between A and B grade stock attributing 34.4% and 33.1% stock respectively, while C grade stock accounts for 28.9%, D grade however has been reducing its proportion only recording 3.6%. Vacancy accounts for 8.7% or 22,163sqm as at January 2015, an improvement from 9.2% in 2014 which represented a similar 22,55sqm. Looking at vacancy by quality grade can show the reshuffle by tenants this period with A grade vacancy showing a reduction in vacancy rate to just 2.7%, while B grade resulted in an increase from 7.0% to 13.3%; C grade saw a decline from 16.5% to 9.8% while D grade increased to 14.1%. This reallocation of space can also cause some change in the sub lease vacancy position, this is evident this period with 1.0% sub lease stock a historic high for Newcastle, which will ensure the rental market remains competitive until this is absorbed.

During the 12 months to January 2015, absorption was recorded at 10,238sqm; this increase can be attributed to the strong take up of the new addition to the market which include high profile tenants; PwC as well as legal and property firms. This level of absorption has not been seen in the Newcastle market since the 2008 calendar year and is an encouraging result for the new look Newcastle CBD. Looking ahead in the supply pipeline, there is 3,700sqm currently under construction and due for completion in late 2015 at 168 Parry Street. The proposed Civic West Carpark redevelopment at 291 King Street which is approved for a 9,600sqm office building remains in the development pipeline; however a new project at 18 Honeysuckle Drive has commenced the DA process, the application by Doma Group being for an office building of 7,500sqm. Given the annual ten year average absorption rate across Newcastle CBD is approximately 4,500sqm, these supply projects must be demand led to ensure vacancy does not spike repeating the highs witnessed during the 2008 strong supply additions.

Like many cities around Australia, there has been limited movement in face rentals over the last five years, with caution in markets surrounding business sentiment and consumer confidence putting on hold any business expansion or relocation plans. Data from the Hunter Valley Research Foundation outline the deteriorating business and consumer outlook due to the weak economic conditions. Unemployment in the Hunter region continues to increase recording 7.87% in September 2014, this increase most notably due to the reduced demand in the mining and infrastructure sectors. Current prime net face rents average $318/sqm however within a broad range up to $400/sqm for newer assets and small suites, these can also achieve incentives in the 8% to 10% range. The current tight 2.7% vacancy rate for A grade assets suggest some positive momentum may enter this market particularly given some anticipated growth in the services and innovation industries in the CBD. Secondary assets vary considerably depending on the quality, location, accessibility of space, while averaging $238/sqm this can be as low as $150/sqm while incentives in this quality grade are typically not as high as the prime market.

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Vanessa Rader (Head of Research)
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