Skip Ribbon Commands
Skip to main content

News release

CBD Office Market Statistics Surprise on the Upside in Q3

Australian CBD office markets shrug off macro concerns to post a rebound in net absorption

AUSTRALIA, 12 OCTOBER 2011 – Statistics released by Jones Lang LaSalle Research show that the demand for office space remains relatively firm despite the volatility in financial markets and heightened risks associated with European sovereign debt issues.
Across the CBD office markets, positive net absorption of 80,000 sqm was recorded in Q3. Over the past 12 months, net absorption has totalled 256,100 sqm, marginally above the 10-year average of 242,200 sqm. As a result, the national vacancy rate tightened from 7.6% in Q2 to 7.4% in Q3.
Jones Lang LaSalle’s National Head of Office Leasing, Kevin George said “The CBD office markets are a microcosm of the multi-speed domestic economy. The miners and those associated with the miners remain aggressive in their expansion plans, the retail banks continue to make long-term real estate decisions, whilst activity from the professional services sector is patchy.”
Interestingly, the positive net absorption recorded in Q3 was all within the prime-grade sector of the market. For secondary grade assets, net absorption was close to zero.
Mr George said “A high proportion of tenants are concerned about their short to medium-term revenue outlook and are reviewing their cost base to protect margins. A tenant can relocate to higher priced good quality prime-grade space, but make savings on the overall occupancy cost by taking less space and using it more efficiently. We continue to see strong demand for buildings with typical floor plates above 1,500 sqm.”
Over the quarter, the strongest markets - from a rent growth perspective - were Sydney and Perth.
In Q3, the Sydney CBD recorded net absorption of 19,800 sqm. However, the vacancy rate increased by 0.4 percentage points to 8.4% over the quarter. The slight rise in vacancy was partly a result of 1 Bligh Street reaching practical completion with uncommitted space.
Mr George said “The slight rise in vacancy was already factored into market expectations. Nevertheless, the premium-grade sector of the market is tight and rental evidence from Aurora and Gateway over the quarter supported our movement in market rents. As a result, Sydney prime gross effective rents increased by 4.5% in Q3 and are now up 9.7% from 12 months earlier.”
“We are obviously monitoring global volatility in the financial markets as there is a relationship between equity markets and the demand for office space in the Sydney CBD. At present, conservatism by some tenants is counter-balanced by others who look towards the Asia Pacific region as their growth opportunity amid concerns over the economic outlook for Europe and the US,” said Mr George.

Jones Lang LaSalle’s Director of National Office Market Research, Andrew Ballantyne said, “The recent capital expenditure survey undertaken by the Australian Bureau of Statistics for 2011/12 continues to highlight the strong growth in investment spending in the mining sector with a number of large projects already underway.”
Perth recorded another strong quarter of net absorption (16,400 sqm) with BHP Billiton committing to multiple new leases. As a result, the vacancy rate tightened to 3.2% - the lowest figure since Q4 2008.
“A lack of prime contiguous space is exerting upward pressure on rents. Prime gross effective rents in the Perth CBD increased by 8.3% in Q3 and 20.4% over the last 12 months,” said Mr Ballantyne.
The strongest net absorption figure recorded in Q3 was in the Brisbane CBD (29,500 sqm). The vacancy rate in Brisbane increased to 7.0% in Q3, up from 6.8% in Q2.
Mr George said, “The resource and resource-related sectors continue to move ahead with expansion plans in the Brisbane CBD. Encouragingly, a number of leases were executed at One One One Eagle Street taking the development to 50% pre-commitment. The needle has yet to move on leasing incentives, but owners are starting to become more confident about the outlook and we expect to see positive effective rental growth in 2012.”
All CBD office markets recorded positive net absorption in Q3. The figures for Canberra (10,700 sqm), Melbourne (2,700 sqm) and Adelaide (1,100 sqm) were below the other CBD office markets. Vacancy tightened in Canberra (12.0%) and Melbourne (5.9%), whilst Adelaide (7.2%) recorded a moderate increase of 0.2 percentage points.
Prime gross effective rents were unchanged in Melbourne and Adelaide over the quarter, while Canberra recorded a decline of 1.5%.
While the headline numbers are very positive for the office markets, the recent deterioration in business confidence and weaker employment data has resulted in increased questions about sub-lease vacancy rates.
Mr Ballantyne said “Sub-lease availability is the barometer for the health of the office market. When we took the temperature in Q3, we found that sub-lease availability across the monitored CBD office markets had only increased by a very moderate 7,000 sqm to stand at 0.7% of total stock in Q3.”
“There is, however, a greater risk to the short-term demand outlook than there was earlier in the year. Historically, significant vacancy spikes in Australian office markets have been supply-led not demand-led. However, the supply outlook in the markets most vulnerable to a demand-side slowdown – Sydney and Melbourne – is moderate,” said Mr Ballantyne.
From the last quarter of 2011 to 2013, there is only 873,400 sqm of space under construction across CBD office markets, equating to 5.4% of total stock. Around 70% of the space is pre-committed. Only 13% or 115,000 sqm of the space is located in the Sydney CBD.
“The Reserve Bank of Australia and a number of private sector economists remain positive about the Australian economic outlook for 2012. I expect that the boom in the mining sector will start to flow to the finance and professional services sectors in Sydney and Melbourne through increased M&A activity, initial public offerings and capital raisings,” concluded Mr George.