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News release


Time is ripe for tenants with the right strategies to capitalise on market conditions

As the two-tier market becomes entrenched and the way we work continues to shift, businesses face complex state and national environments, according to new JLL report

Tenants across Australia's CBD office markets will face a number of possible challenges and opportunities when seeking space, driven by the market's unique and dichotomous environment, according to a new report from JLL. 

Tenants with the right strategy however will be able to create leverage and capitalise on the current market conditions. These opportunities vary from state to state. In Sydney, for example, tenants seeking large space will have more choice by waiting for new developments to come online in 2019. This contrasts with Melbourne where if 5,000 sqm is required, companies are best placed to act now as developments are seeking pre-commitments. Perth tenants, on the other hand, can capitalise on strong value offered in the sublease market by engaging in tripartite discussions with landlords.

A new national report from global commercial real estate firm JLL called 'The Wrap' explores the state of Australia's CBD office landscape and the current and future implications for businesses.

Tony Wyllie, JLL's Head of Integrated Portfolio Services - Australia, said, "For the first time since the early 1990s, the Australian commercial property market is seeing the widest spread in performance across the capital city markets. A two-tier market is well entrenched, dominated by strong demand for Sydney and Melbourne stock whilst Brisbane and Perth have almost unprecedented vacancy rates. This will remain a factor in the decision-making process of tenants and landlords across the country and present a number of challenges and opportunities to be considered."

Mr Wyllie said that when forming a long-term view of the market with these conditions in mind, it was important to have insight into shifting workplace trends, such as agile working, and whether this will affect future demand for commercial property.

"We believe that a shift to agile working will not significantly lower demand levels for commercial property," he said. "As organisations look to implement increased densities, they are at the same time providing more collaboration and incubation space, and so not significantly reducing overall floor space required.
"Demand is also being driven by the rise of the technological age and the emergence of new companies such as Spotify, Meraki, Docusign and Instructure. When you consider that of those companies listed on the S&P 500 in 1957, only 86 original constituents are still there today. Combine this with strong population and economic growth, and demand for work space, especially in Sydney and Melbourne, over the next two years will continue to grow."

SYDNEY - Options tightening as demand grows for premium and A-grade stock

Over the past 12 months, Sydney has seen a shift to a more balanced market that is no longer significantly weighted in the tenant's favour. The Sydney CBD vacancy rate is currently close to equilibrium at 7-8%, the lowest level since the Global Financial Crisis in 2008.

The report revealed that from the period of January – April 2016, there had been 92 tenant briefs in the market, totaling 177,000 sqm of space. That is significantly higher than the 34 tenant briefs totaling 44,000 sqm in the same time period for 2015.

JLL's Head of Tenant Representation for NSW & ACT, Gavin Martin, said availability for large scale space in Sydney's CBD was tightening, especially for A and B-grade stock. "Tenants looking for 10,000 square metres or more are finding they have significantly fewer options, with approximately 45% less stock on the market for these large tracts of space compared to the same period last year. Over the past 12 months, large options have been taken up by companies including Amazon, Apple, Challenger, Workcover, CBA, ARUP and Suncorp.

"However, as the International Towers Sydney development is completed, additional options for larger tracts of contiguous space will become available, taking some pressure off the tightening vacancy rate.  Until then, corporates requiring space prior to this will likely find limited availability, lower incentives and increased rents.

"There has been strong competition for A-grade office space in the <1,000 sqm tenant cohort of the market with supply limited by the closure of buildings, due to the compulsory acquisition for the Sydney Metro and stock being removed for residential conversion. Whilst we are not seeing big increases in organic growth across all sectors, the withdrawal of stock is placing additional pressure on rent and incentive levels."

MELBOURNE – Record leasing activity over past six months; strongest net absorption since 2007

Melbourne has experienced record levels of leasing activity over the past six months, with the overall vacancy rate falling to 8.0% and the strongest level of net absorption since 2007. Incentives have peaked and vary depending on the product, while net effective rentals are expected to increase over the next two years. However, new supply and backfill options will maintain incentives above their long-term market average of 25% and contain net effective rent growth.

JLL's Head of Tenant Representation – Victoria, Peter Walsh, said, "With 593,100 sqm (12.9%) of total office stock in the Melbourne CBD either under construction, with development approval or in the planning pipeline between now and 2020, new developments are making it easier for tenants to implement workplace change and improve utilisation rates.

"Docklands continues to record the tightest vacancy at 4.1% although new stock is likely to come on the market, with pre-commitments confirmed for Mirvac's 664 Collins Street and Lendlease's One Melbourne Quarter. Backfill opportunities are being created in both Docklands and the CBD as companies shift from older developments to newer builds in locations closer to public transport and amenities with larger floor plates that allow greater scope to implement workplace change."

Mr Walsh said that demand for shared spaces and coworking was also on the rise, with We Work actively in the market to lease its first Melbourne site and Hub Australia expanding, opening Hub Southern Cross at 688 Bourke Street, following the success of Hub Melbourne located opposite at 673 Bourke Street.

Mr Walsh continued, "Tenants looking for less than 1,000 sqm in prime space particularly in the east end of the city will need to pay higher net effective rents than 12 months ago, and may find it harder to negotiate with landlords who are reluctant to sub-divide floor plates. However attractive deals and strong incentives are available for tenants prepared to move to the Western Core or willing to consider B-grade buildings, which have higher levels of vacancy.

"For larger tenants looking for 5,000 sqm or more over next two to three years, now is the time to be going to market with new developments seeking pre-commitments and backfill opportunities, both of which will offer the ability to implement new workplace strategies."

BRISBANE - High vacancy and strong incentives make for a tenant's market

With vacancy rates moving towards a cyclical high, limited net absorption and ongoing investment in new developments, corporates in Brisbane continue to have a range of options open when selecting alternative office space.

Brisbane is currently experiencing one of its highest recorded vacancy rates - 16.6% - and is predicted to increase with the completion of 75,000 sqm at 1 William Street in 2017 which will be fully leased to and occupied by the Queensland Government. This may be partially offset by the Queens Wharf redevelopment which will see the demolition of several office buildings occupied by the State Government, as the space is redeveloped as the Queen's Wharf tourism, leisure and entertainment precinct. There are a limited number of new developments mooted with strong speculation that the 45,000 sqm development at 300 George Street may commence construction without a pre-commitment.

JLL's Head of Tenant Representation - Queensland, Michael Greene, said, "The state of the Brisbane market presents a great opportunity for occupiers to achieve unparalleled flexibility, including short term leases, rights to hand back space and break clauses. Whilst face rents have remained relatively stable, the market continues to see incentives of 40% or more and landlords are having to be increasingly aggressive to attract tenants, offering to cover the tail lease for tenants moving early or delay lease commencement in addition to covering fit-out costs.

"Unless and until there is recovery in the economy leading to a pick-up in demand for office space, the market will remain tenant favourable for the foreseeable future. If you are in the market for a long term lease, now is a good time to secure very positive lease conditions.

"It would be wise however for larger tenants to be aware that whilst the vacancy rate is high, the number of large options are limited. Whilst their covenant will be highly sought after, we would advise to start the process with enough time to consider new developments to ensure they have leverage in the market. Smaller tenants will continue to be spoilt for choice for the foreseeable future, and should use this opportunity to lock in favourable terms to support their business for years to come," Mr Greene said.

PERTH – The 'perfect storm' for tenants continues

Tenants in Perth continue to have an 'open menu' of options when looking for office space, with the CBD office vacancy rate reported to be 25%.

JLL's Director of Tenant Representation – WA, Katherine Moss, said, "What we are witnessing is an increase in owners actively participating in tri-partite discussions in the sub-leasing market, dealing direct with the sub-tenants in order to maintain control and add value to their asset. As a result the new sub-tenants are benefitting from the exceptional value offered in the sublease market, whilst striking a direct relationship with the landlord, ensuring longer term tenure and reducing risk of future real estate costs."

"In the direct lease market, owners who have suffered long term vacancies within their portfolio are being more creative, speculatively fitting out space and differentiating their product through enhancement to base building and redesign. Providing a fit out solution for tenants is a big enabler in today's climate, as it means tenants no longer carry the risk and uncertainty around the cost and timing of capital works both at the beginning and end of the lease."

"Where there is the lure of a strong tenancy, owners are increasingly meeting demands for greater lease flexibility, enabling companies to scale up or down to match their industry cycles. This flexibility is often a key decision driver for occupiers."

CANBERRA – Strong demand for high quality space

A two tier market has emerged in Canberra between the prime grade and secondary buildings, with the federal government's 'Project Tetris'– an initiative which aims to reduce the amount of vacant public service office space paid for by taxpayers – continuing to create tenant churn in the office market. Overall vacancy is at 13.2%, with prime market vacancy at 7.3%.

JLL's Head of Tenant Representation for NSW & ACT, Gavin Martin, said "Stronger leasing activity, driven by a combination of Project Tetris, natural lease expiries and robust incentives particularly at the quality end of the market, resulted in positive 13,700 sqm of total net absorption in the first quarter of 2016. The overall vacancy rate has fallen to 13.2%, however the prime vacancy rate sits at 7.3%. Rents are up slightly and we project that incentives have reached their cyclical peak and are expected to trend lower over the medium term.

"From a supply perspective, over the past 12 months we have seen 32,000 sqm of obsolete stock removed from the market for refurbishment or residential conversions, as well as to carparks. The majority of new projects planned in Canberra over the next four years are dependent on sufficient levels of pre-commitment with eight projects totaling 211,000 sqm planned.

"Demand in Canberra remains strong from tenants seeking better quality offices leading to a reduction in the options available in the core of the CBD. Whilst the market is improving, the choice for tenants seeking larger space continues to be limited due to historic lack of new development in the CBD other than purpose built for specific occupiers. Smaller tenants should be aware that, as demand grows, it is more difficult to secure quality space."

ADELAIDE - Lease negotiations continue to favour tenants

The start of 2016 has seen Adelaide vacancy rates remain stable at 16.2%. However this is still close to the highest ever recorded rates for the CBD market. Demand remains strongest for Premium and A-grade buildings and, with only 14,100 sqm in new development predicted for 2016, the supply pipeline is subdued. Secondary stock is becoming increasingly obsolete through lack of refurbishment activity and is seeing reduced occupier demand as a result. Average incentives for prime properties now exceed 30% of the gross rent and have been at this level since January 2015.

JLL Director of Tenant Representation - SA, Angelo Pavanello, said, "Whilst the local economy continues in its cautious state with low business confidence, and the office vacancy rates remain in double digit figures, all tenants regardless of size will hold the bargaining chip throughout lease negotiations. We don't expect to see any face line rental growth for the next 12-24 months, which will place downward pressure on typically annual rent reviews that landlords have previously benefited from."