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News release

AUSTRALIA

CBD office markets record above trend net absorption over the 2015/16 financial year

However, the divergence in vacancy rates across Australian CBD office markets is the widest on record


​​​JLL Research has released 2Q16 statistics on national office markets. The figures showed positive net absorption of 110,200 sqm over the quarter across CBD office markets and 291,800 sqm over the 2015/16 financial year. 

As a result, the national CBD office market vacancy rate compressed from 12.4% in 1Q16 to 11.9% in 2Q16. However, the weighted-average national CBD office market vacancy rate provides limited insight into office market conditions with all markets (excluding Canberra) either significantly tighter than the national average or significantly higher.

JLL’s Head of Strategic Research Australia Andrew Ballantyne said, “The headline numbers we printed for the office sector were very positive over the 2015/16 financial year. However, the divergence between the stronger performing markets of Sydney and Melbourne and those markets with challenging leasing market conditions widened further over the past 12 months.”

The sharp divergence in office market conditions makes it more challenging for organisations to navigate a pathway through lease negotiation in different markets. 

“Historically, we have observed a fairly high degree of correlation between CBD office markets. However, the current vacancy spread between Sydney (7.1%) at the tighter end of the vacancy spectrum and Perth (24.6%) at the weaker end is 17.5 percentage points. The current spread is unprecedented and accurately reflects the divergence across CBD office markets,” said Mr Ballantyne.

The Sydney CBD recorded positive net absorption of 33,300 sqm in 2Q16 and 119,100 sqm over the 2015/16 financial year. However, the Sydney CBD vacancy rate increased marginally to 7.1% as backfill space became available from moves to new development. Nevertheless, Sydney’s vacancy rate is significantly tighter than the 10 year average of 8.4%.

JLL’s Head of Office Leasing,​ Australia, Tim O’Connor said “Multiple industry sectors are in an expansionary mode in the Sydney CBD with strong activity from the financial services, professional services and technology sectors. Centralisation is also having a positive impact on take-up in the Sydney CBD.”

Mr O’Connor said “Over the past few months we have started to see the impact of tenant displacement from the compulsory acquisition of assets for the Sydney Metro project and the conversion of office assets on the Sydney CBD leasing market. However, only a small fraction of these tenants have committed to new premises and displacement will generate new leasing enquiry over the 2016/17 financial year.”

Prime gross effective rents in the Sydney CBD increased by 2.1% in 2Q16 and by 12.2% over the 2015/16 financial year. The trajectory of effective rents in the Sydney CBD is replicated across metropolitan Sydney office markets with the Sydney Fringe (+15.6%), North Sydney (+8.5%) and Chatswood (+7.9%) all recording above trend effective rental growth over 2015/16.

The Melbourne CBD recorded 56,600 sqm of positive net absorption in 2Q16 and 137,500 sqm over the 2015/16 financial year. As a result, the vacancy rate compressed from 9.2% in 1Q16 to 8.0% in 2Q16. Positive leasing activity has yet to translate into effective rental growth with prime gross effective rents only increasing by 2.6% over the 2015/16 financial year. 

Mr O’Connor said, “The Melbourne CBD has lagged the effective rent recovery in Sydney. However, the upcoming hiatus in project completions in the Melbourne CBD and a reduction in the number of options for contiguous space creates an environment for above trend rental growth over the second half of 2016 and into 2017.”

Five of the six monitored CBD office markets recorded positive net absorption over the 2015/16 financial year. The Perth CBD was the one exception and recorded negative net absorption of –3,000 sqm over 2Q16 and a vacancy rate of 24.6%. 

JLL recorded a sixth successive quarter of positive net absorption in the Brisbane CBD. Net absorption was 27,400 sqm in the quarter and 46,900 sqm over the 2015/16 financial year. As a result, vacancy tightened back to 16.6% in 2Q16.

Mr Ballantyne said, “Positive net absorption crystallises our view that there are tangible signs of recovery in the Brisbane CBD leasing market. The Queensland economy has past the trough, while the affordability of Brisbane house prices relative to Sydney has traditionally precipitated positive net interstate migration into Queensland.”

Canberra recorded 11,500 sqm of net absorption over the 2015/16 financial year. As a result, Canberra’s vacancy rate tightened to 13.2% in 2Q16, while prime gross effective rents increased by 2.5% over the 2015/16 financial year. 

Mr Ballantyne said “The most recent Federal Budget revealed that the Commonwealth of Australia is seeking to increase headcount over the 2016/17 financial year. Public sector headcount growth and increased enquiry form the private sector will have a positive impact on the Canberra office market over the next 12 months.”

The Adelaide CBD recorded net absorption of 5,400 ​sqm in 2Q16 and vacancy tightened to 16.2%.

Mr O’Connor said, “Real estate requirements continue to evolve and owners with upcoming vacancy need to ensure their asset is positioned to meet current tenant demand patterns. Organisations are increasingly seeking the provision of shared facilities in the asset, while a focus on health and well-being is the latest differentiator to attract and retain knowledge workers.”

“Development activity reaches a cyclical peak across most CBD office markets in 2016. Completions will be below trend over 2017 and 2018, while stock withdrawals across a number of markets will exert downward pressure on vacancy. Sydney is leading the rental market recovery, but we expect to see an improvement in effective rents in Melbourne, Canberra and Adelaide as the cycle progresses,” concluded Mr O’Connor. 


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