Office markets around Australia have strengthened amid resurgent occupier confidence, albeit CBD markets retain the lead over their suburban counterparts, new research shows.

According to the Property Council’s latest Office Market Report, total vacancy in the country’s office markets decreased from 9.6 percent to 9.0 percent in the six months to July 2011, the lowest level in two years.

The decline in vacancy was the result of stronger demand and lower-than-average supply. Net absorption, the best indicator of demand for office space, was 219,059sqm over the period, 17.9 percent above the 20-year historic average (185,743sqm). Total supply for the period was 198,999sqm, 34.5 percent less than the historic average (303,803sqm).

The research also shows CBD markets are absorbing new stock, while non-CBD markets are back-filling existing vacant space in the absence of new supply.

CBD markets retain the lead over suburban counterparts

By vacancy, Australian CBD office markets are still ahead of suburban office markets. Vacancy in CBD markets declined from 8.7 percent to 8.4 percent in the six months to July 2011.

Non-CBD market vacancy dropped by 0.9 percentage points over the same period, but is still at 10.5 percent.

“The CBD office markets are the property success story of the past year, with four of the six markets tracked by the Office Market Report showing vacancy of less than 8.0 percent,” said Property Council CEO, Peter Verwer.

“However Australia's largest CBD market, Sydney, is not enjoying the same success. This market has been weak since the GFC, and is now trying to digest above-average supply.”

A total of 111,552sqm was added to the Sydney CBD market over the period, which is 44.4 percent more than the 20-year historic average. Over the same period, net absorption was just 5,509sqm.Sydney was the only CBD market to record an increase in vacancy over the six months to July 2011, shifting from 8.3 percent to 9.3 percent, the highest vacancy rate for five years.

“However, the news is not all bad for Sydney's CBD, as supply to this market will halve over the remainder of 2011, and halve again over 2012, before rebounding in 2013.”

Mr Verwer said while CBD markets are the dominant force in the Australian office landscape, the immediate future for suburban office markets looks good.

“While suburban office market vacancy lags the CBD market, there is still a positive story here.

“Total vacancy in non-CBD markets reduced over the six months to July 2011, and while the aggregate is still at 10.5 percent, two-thirds of non-CBD markets tracked by the Office Market Report show vacancy below 10 percent.”

Mr Verwer said supply over the next 18 months will be moderate. A total of 236,440sqm of stock is due to be added to all office markets in the second half of 2011, with a further 639,740sqm to come on-line over 2012.

The bulk of the stock to be added will land in CBD markets. A total of 714,196sqm will come on-line in Australia’s CBDs over the next 18 months, which is on par with historical averages. A total of 161,984sqm will land in non-CBD markets, which is below average.