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News release


A strong demand-led office market recovery in Sydney and Melbourne

Melbourne has joined Sydney in recording above trend rental growth, while effective rents are moving higher in Canberra

​​​​ JLL Research has released 3Q16 statistics on national office markets. The figures showed positive net absorption of 102,300 sqm over the quarter across CBD office markets and 306,400 sqm over the 12 months to September 2016.

The national CBD office market vacancy rate was reported at 12.0% in 3Q16 – a 0.6 percentage point reduction over 2016 (from 12.6%). However, the CBD office market vacancy spread remains wide with Sydney’s vacancy at a below average 7.2%, while Perth remains elevated at 24.7%.

JLL’s Head of Strategic Research, Australia , Andrew Ballantyne said, “The Australian economy has proven to be very resilient recording a 25th successive year of positive economic growth in Q2, while non-mining sectors are benefitting from accommodative monetary policy and a lower AUD. Furthermore, business surveys have shown that corporate Australia is more confident about the medium-term outlook and is seeking to increase headcount.”

The strength of the service-sector economy is reflected in white collar employment growth and positive net absorption in Sydney and Melbourne. 

The Melbourne CBD recorded 67,500 sqm of positive net absorption in 3Q16 and 159,100 sqm over the 12 months to September 2016. However, vacancy moved marginally higher to 8.9% in 3Q16 as backfill space from relocation to new development was made available. 

Mr Ballantyne said “The demand recovery in Melbourne is broadening with positive enquiry and activity from professional services firms and the education sector, while centralisation to the CBD remains a relevant theme. However, we have started to record more activity from the public sector and a significant proportion of net absorption in Q3 was related to the expansion of public sector tenants.” 

A sharp reduction in sub-lease availability has facilitated an environment where effective rents can recover in the Melbourne CBD. Sub-lease availability contracted from 1.9% of total stock at the end of 2015 to 0.9% of total stock in Q3. Prime gross effective rents increased by 4.2% over the quarter and by 6.4% over the 12 months to 3Q16. 

JLL’s Head of Office Leasing, Australia, Tim O’Connor said, “The Melbourne CBD has joined Sydney in the early upturn phase of the rental cycle. The options for tenants are starting to contract and the next wave of completions will not occur until late 2018, creating an environment for above trend effective rental growth in the Melbourne CBD.”

The Sydney CBD recorded positive net absorption of 27,000 sqm in 3Q16 and 120,400 sqm over the 12 months to September 2016. While the Sydney CBD vacancy rate was largely unchanged at 7.2%, strong leasing activity at the MLC Centre, 680 George Street and 320 Pitt Street has pushed the A Grade vacancy rate below the 6.0% mark – significantly tighter than the 10 year average of 8.1%. 

Mr O’Connor said “Sydney’s role as a global city has attracted multi-national companies to the city. While the expansion of the technology sector has slowed (from a very high base) in 2016, Uber and Atlassian are examples of multi-national technology firms seeking to increase their operations in Sydney and Australia.”

“A more significant contribution to growth will come from Asian-based financial intuitions. Chinese and Japanese banks have increased their loan book in Australia significantly over the past three years and are seeking diversification in their client base. In Q3 we saw Bank of China acquire 140 Sussex Street, while China Merchants Bank increased its occupational footprint sevenfold,” said Mr O’Connor. 

Positive leasing enquiry and activity in the Sydney CBD has translated into strong rental growth. Prime gross effective rents increased by 4.9% over the quarter and by 15.4% over the 12 months to 3Q16. However, rental growth was much stronger for secondary grade assets with secondary gross effective rents increasing by 26.1% over the past 12 months. 

Mr O’Connor said “The availability of secondary grade space is contracting sharply, generating competition for space across B Grade assets. Competition will become more intense over the next 18 months as tenants have to vacate assets earmarked for the Sydney Metro project or residential conversion.”

The Canberra office market has steadily improved recording 6,000 sqm of positive net absorption in 3Q16 and a reduction in vacancy to 13.0%. 

Mr Ballantyne said, “A high proportion of Canberra’s vacancy resides within secondary grade assets. The number of contiguous options in the central precincts of Canberra is low and rents are starting to rise. While Canberra does not experience the same rental volatility as other office markets, prime gross effective rents increased by 2.9% over the 12 months to September 2016.”

JLL recorded a seventh successive quarter of positive net absorption in the Brisbane CBD. Net absorption was 6,100 sqm in the quarter and vacancy tightened marginally to 16.3% in 3Q16. 

The Perth CBD recorded negative net absorption (-2,100 sqm) and a slight uplift in vacancy to 24.7%. Rents remain under downward pressure with prime gross effective rents contracting by 1.1% in 3Q16. 

Leasing market activity was fairly limited in the Adelaide CBD over 3Q16. However, vacancy recorded a modest reduction to 16.1%.

Mr O’Connor said, “Asset management strategies adopted by owners differ depending on market dynamics. Sydney and Melbourne are in the midst of a strong cyclical rental upswing and owners will be able to capture higher rents and potentially achieve fixed escalations in leases above historical norms.”

“While Perth and Brisbane will be challenging leasing markets over the medium-term, leasing activity is improving and owners will need to be innovative to differentiate their product to maintain occupancy rates above the broader market. The provision of shared space related to conference facilities and health and well-being are examples of strategies to differentiate office product,” concluded Mr O’Connor.