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News release

AUSTRALIA

Prime and secondary office market vacancy rates diverge

Organisations are seeking better quality office space leading to strong leasing activity in the prime grade sector of the market


​JLL Research has released 3Q17 statistics on national office markets. The figures showed positive net absorption of 45,600 sqm over the quarter across CBD office markets and 234,800 sqm over the 12 months to September 2017.

The national CBD office market vacancy rate has trended lower and hit 10.8% in 3Q17 – 2.0 percentage points lower than the most recent cyclical peak (4Q14).

JLL Head of Research – Australia, Andrew Ballantyne said, "Lead indicators were positive for the office sector over 3Q17 – business conditions are now at the highest level since early 2008. Corporate Australia is becoming more confident about the medium-term outlook with the ABS reporting strong employment growth over 2017."

Leasing enquiry and activity has remained strong in Sydney and Melbourne with multiple industry sectors in expansionary mode. The Perth CBD leasing market recovery has gathered momentum with a fourth successive quarter of positive net absorption recorded in 3Q17.

Sydney CBD net absorption was very strong in Q3 (41,400 sqm) and vacancy tightened to 6.0% – the lowest level since 1Q08.

JLL Head of Office Leasing – Australia – Tim O'Connor said, "Leasing activity was largely concentrated in the Premium Grade sector of the market. The quality of the space, activation of the retail amenity and opening of the Wynyard Walk have increased the pool of tenants for the Barangaroo South precinct. A diverse range of small to mid-sized tenants committed to space in Q3 pushing the Premium Grade vacancy rate down to 7.3%."

Strong activity in the Premium Grade sector of the market has resulted in a convergence between prime and secondary vacancy rates – both were reported at 6.0% in Q3.

Sydney CBD prime gross effective rents increased by 2.9% in Q3 and by 22.9% over the 12 months to September 2017. Strong rental growth is a theme across most Sydney office markets with the Sydney Fringe (+15.6%), North Sydney (+11.2%), Parramatta (+10.2%) and Macquarie Park (+6.8%) all recording above trend prime gross effective rental growth over the past 12 months.

Melbourne recorded positive net absorption in Q3 (5,700 sqm) and over the 12 months to September 2017 (100,900 sqm). Vacancy tightened to 6.9% in Q3 – the first time vacancy has been below 7.0% since early 2012.

Mr O'Connor said, "Leasing activity is broad based in the Melbourne CBD with positive contributions from the public sector, technology firms and health care sector. A tightening in vacancy and a reduction in the number of contiguous options in existing buildings are exerting upward pressure on effective rents."

Prime gross effective rents increased by 2.9% over 3Q17 and by 14.8% over the 12 months to September 2017.

The Perth CBD recorded a fourth successive quarter of positive net absorption in Q3 (16,100 sqm) taking the 12 monthly net absorption figure to 51,400 sqm. As a result, vacancy fell by 0.9 percentage points to 21.8%.

Mr Ballantyne said, "A number of tenants were priced out of the Perth CBD from 2006 to 2012. As those leases have started to expire, the affordability of the CBD has precipitated a wave of centralisation activity. Organisations relocating operations back to the city is having a positive impact on net absorption figures and reducing the excess capacity in the Perth CBD office market.

"Centralisation is not the only driver of leasing enquiry and activity. Some of the leasing market drivers evident across the Eastern Seaboard – expansion of technology firms, the growth of co-working operators and an increase in the education sector – are evident in the Perth office market," said Mr Ballantyne.

A hiatus in the Brisbane leasing market recovery occurred over the quarter. We recorded negative net absorption in 3Q17 (-18,400 sqm) and a marginal increase in the vacancy rate to 15.8%.

Mr Ballantyne said, "The negative result was largely explained by the consolidation of the State Government into existing space. However, the flight to quality remained a relevant theme and prime grade vacancy tightened to the lowest level since 3Q15."

Adelaide recorded a second successive quarter of positive net absorption in 3Q17 (4,100 sqm). Activity was strongest from small to mid-sized organisations and vacancy tightened to 15.7% in 3Q17.

Canberra recorded negative net absorption of -3,300 sqm in Q3, while vacancy increased to 13.4%. However, prime gross effective rents continue to drift higher, increasing by 0.7% over the quarter and by 2.9% over the 12 months to September 2017.

Mr O'Connor said, "Headcount growth is typically a precursor for leasing enquiry and activity. The challenge for tenants in Sydney and Melbourne is a shortage of prime grade contiguous space in existing buildings. Competition for space will lead to a further reduction in leasing incentives over the next 12 months and positive effective rental growth in the Sydney and Melbourne CBDs."