Investa Office (“Investa”) this week released its “Leading Indicators and Office Demand” report, forecasting a recovery in office market demand across Australian CBDs in late 2014.

Investa’s Composite Leading Indicator, an aggregation of selected labour, business, financial and global market indicators, suggests that CBD absorption will stabilise over the next 6 months, followed by a stronger uplift from mid-2014.

Peter Carstairs, General Manager Research, Investa Office said: "2013 has been a year of weak office demand across all CBD markets in Australia, however we are now through the worst of it. Our research points to 2014 being a year of recovery, with some CBD markets already starting to gain momentum, while others will take longer to pick up."

Investa expects Sydney and Melbourne to lead the demand recovery, with absorption in these markets improving and expected to be back at trend levels by mid-year. The strength of global financial markets will underpin this rebound, due to the tenant base in both locations being heavily weighted to the finance sector. Lower interest rates are also now beginning to stimulate the non-mining sector, which will further boost tenant demand.

Mr Carstairs said: “Brisbane and Perth will experience a slower recovery due largely to moderating commodity prices and higher mining production costs. We believe demand will be weak in these two markets until mid-2014, with a neutral to mild pick up by the end of the year.”

The report indicates that business confidence in Australia is the highest it has been in two years, largely driven by the finance, business and property services sectors. Business conditions for small and medium enterprises have improved more quickly than conditions for larger companies and this is evidenced by the number of leasing deals finalised under 1,000 square metres across Investa’s portfolio during 2013.

Investa also predicts the ‘flight to quality’ trend will continue to impact absorption in secondary grade markets, with tenants continuing to upgrade to better quality buildings while they can afford to do so.

"We expect weakness in the leasing markets will remain concentrated in lower quality assets and the spread between prime and secondary vacancy rates to expand over the next two years. This trend will drive an increase in the withdrawal rate, as secondary office buildings will increasingly be converted to other uses, resulting in the secondary grade market losing scale across the country," said Mr Carstairs.