According to ACT Leasing Director Robert Murray, this continues a good run over recent quarters which has significantly improved the outlook for the market.

“As little as 12 months ago, the outlook for the Canberra market was all doom and gloom due to the large supply pipeline looming over the market. However, as it has panned out tenant demand over the last year has been much stronger than expected and more of the backfill space created as tenants have taken up new completed buildings has been taken up” he said.

This surprising strength has allowed the Canberra vacancy rate to stay very low at just 2.2% at the end of Q1 and has resulted in rental growth of 8.9% growth for the 12 months to March in the ACT.

“This rental growth largely reflects the impact of new stock raising the average quality of prime office stock in the city. However, had demand not stayed strong, this rental growth would not have been achievable,” said Mr Murray.

While the market has dealt well with the new supply that has reached the market to date, much of the challenge for Canberra still lays ahead. In 2007 almost half of the national supply expected to complete, will occur in Canberra. A record 255 000m2 new space will be added in Canberra, largely due to several large projects precommitted to Federal Government tenants. These include the Australian Tax Office (64 000m2 in two stages), Centrelink (41 000m2) and the Department of Agriculture, Fishery and Forestry (33 400m2).  New Federal Government supply is well underway this year with the completion of the Prime Minister’s Department new office in Barton and Department of Defence occupying new stock at the airport.

Mr Murray says strong supply and the looming election expected towards the end of the year will mean that the ACT leasing market is likely to be fairly quiet at the end of 2007, and the bulk of 2007 leasing activity is likely to happen in the coming June quarter.

“Towards the end of 2006 and in early 2007, Commonwealth departments, particularly Centrelink, DITR and the Department of Defence, have seen much stronger growth than originally anticipated,” he says. ”As a result of stronger demand, further rental growth is expected throughout 2007.”

“However, the next twelve months are expected to be very dynamic, as the market adjusts to significant levels of new supply and the effects of the upcoming election.  This changing dynamic will also have important implications for secondary owners, where the pressure will be on to reposition assets in order to retain existing tenants and to attract new ones,”  he says.

“The issue of secondary backfill space is not expected to really impact the market until the second quarter of next year, however some impact will be felt before then.  In the meantime, rents are expected to continue growing at similar levels to last year and the vacancy rate is expected to rise steadily.
“A resurgent federal government sector is expected to absorb more of the vacated space than previously thought, improving the short-medium term outlook for vacancy compared to earlier expectations. The result of the upcoming Federal election, to be held in Q4, will have implications for the market given the dominance of the Federal Government, however the extent of this impact is unclear,” he says.