Offshore capital continues to flow into Australia attracted by high relative yields. Investor demand has historically favoured office assets which have represented just under half of the total inflows over the last five years.

The amount of floor space taken up or absorbed (net absorption) by the market was strong in the last quarter with all of the main markets recording positive rates. The strongest results were recorded in Sydney and Melbourne which accounted for nearly 90% of the total. Both of these markets, with vacancy rates circa 10%, are now considered to be in the recovery phase.

Elsewhere the mining states continue to struggle. Slow growth, coupled with high vacancy levels and increased future supply means there is further downside in both Brisbane and Perth. Brisbane, with a more diverse economy, is expected to recover before Perth.

Finally we believe the Federal Government contraction has now almost played out in Canberra. The positive net absorption of nearly 8,000 sqm in 2015 YTD is a clear improvement after 31,500 of office space was vacated during 2014. We believe this will be the next market to push into recovery phase.

Data from JLL Australia

Spotlight on Melbourne CBD

Melbourne CBD is the second largest office market in Australia with approximately 4.5 million sqm or 27% of the national total.

There are 7 precincts within the Melbourne CBD market. The Western precinct accounts for approximately 40% of the available space. Docklands and Eastern precincts account for a third, and the remaining 4 smaller precincts account for the balance.

Occupier demand has shown further improvement this year to date with 79,000 sqm of positive net absorption and a slight reduction in the vacancy rate to 10%.

Demand is being driven in part by centralisation as businesses look to either relocate or expand their office requirements into the CBD. Supply of new space is limited, and coupled with declining vacancy, rents and values are expected to improve in the medium term.

Cromwell believes Melbourne CBD is in the early recovery phase of the property cycle and has positioned it at 7on our office market view clock.