THE BIG TWO STREETS AHEAD IN OFFICE GAME

THE Australian office market has turned into a tale of two cities with Melbourne, and particularly Sydney, proving unstoppable over the past year.

Vacancy rates in Sydney remained steady at 6.3 per cent, offsetting new supply in the A-grade market, on the back of the highest demand in a decade, according to the Property Council of Australia.

Sydney's office market experienced net absorption of 96,745sqm in the six months to January 2016, more than three times the historic average.

According to commercial agency CBRE, the Sydney story is even more remarkable because despite a marginally lower inquiry rate over the past year, transactions surged more than 40 per cent.

Sydney's total net absorption in 2015 surged to 157,150sqm, driven by big demand from the financial services and IT sectors relocating from fringe markets.

Melbourne's office vacancy rate dipped to 7.7 per cent from 8.1 six months ago, and compares with 9.1 per cent this time last year. This is despite 130,000sqm of new office supply completed in 2015.

Both Sydney and Melbourne contrast sharply with the Brisbane and Perth office markets where commercial agency CBRE predicts a little more downside to come.

"There is a significant divergence between the below long run average vacancy rates in Sydney and Melbourne and the higher levels of vacancy in Perth and Brisbane and this divergence is set to continue through 2016," says CBRE's Australian head of research Stephen McNabb.

"In general we are seeing the stronger economic performance in NSW and Victoria supporting demand in these markets, with Sydney showing a stronger demand recovery after near zero growth between 2008 and 2013."

Brisbane's vacancy rate held steady at 14.9 per cent despite a negative net absorption of 1300sqm in the six months to January. While this marks the third year of negative net absorption, CBRE predicts the Brisbane market will move into positive territory in 2016 despite the addition of three new office towers to the market.

"The impact of the new stock will also be partly offset by the demolition of several existing buildings to make way for the new Queens Wharf project," says CBRE's Queensland director of office services John Walklate.

The Property Council says three new office projects will add 190,000sqm of office space to the Brisbane market this year, and another 22,000sqm in the CBD fringe.

However, Queensland executive director of the Property Council Chris Mountford says conversions of office space into student and visitor accommodation has been easing the pressure.

"The drive for the adaptive reuse of older buildings is already under way," Mountford says.

Perth has experienced its first positive net absorption, totalling 42,387sqm, breaking a three-year losing streak. However, a flood of new stock has pushed vacancy rates from 16.6 per cent to 19.2 per cent.

Adelaide has also been impacted by increased stock levels and continued negative demand. The CBD office vacancy rate has risen to 14.1 per cent from 13.5 per cent.

"Incentives in the Adelaide CBD hit an all-time high in 2015, being above 35 per cent in some instances," says CBRE's director of office services Andrew Bahr.

"The early signs in 2016 are that hat this pressure on landlords is not going to stop.  Lack of demand and a number of good quality offerings in the market has put tenants in the driving seat, shopping around for some of the best incentive deals seen on record."