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News release

Sydney

No CBD office market is an island

Broad based nature of the economic downturn results in the majority of monitored CBD office markets recording negative absorption in the March quarter


SYDNEY, 15 APRIL 2009 – March quarter statistics released by Jones Lang LaSalle Research reveal that vacancy pressures are rising across the monitored CBD office markets.
 
Q1 figures revealed that the aggregate vacancy rate across all CBD office markets that Jones Lang LaSalle monitor nationally increased by 0.9% to 6.4% in the March quarter.
 
“Vacancy for the office markets is similar to that of unemployment for the economy in that they are both lagging indicators. Even after the soft demand figures of the last 15 months, vacancy at 6.4% remains below market equilibrium of 7% to 8%. However, the rising vacancy trend is apparent in all markets and it will be at least another 24 months before the headline figure reaches a cyclical peak,” said Jones Lang LaSalle’s Associate Director of Research, Andrew Ballantyne.
 
All markets recorded an increase in vacancy. The Perth CBD (3.5%) and Brisbane CBD (5.5%) recorded the highest uplifts of 2.2% and 1.6% respectively. The vacancy rate in both the Sydney CBD (8.1%) and Melbourne CBD (5.9%) increased by 0.6%.
 
Jones Lang LaSalle’s National Head of Leasing, Kevin George stated that all CBD office markets are being impacted by the current economic climate and this is reflected in rising sub-lease availability.
 
“Businesses are concerned about the duration of the economic downturn and are taking the opportunity to reduce real estate costs through the disposal of excess space.
 
“In the second half of 2008, sub-lease vacancy was confined to the financial centres of Sydney and Melbourne. Typically, companies were only sub-letting if they had at least a full floor of additional space after restructuring. The sub-lease story has spread to Brisbane, Perth and Adelaide in 2009 and is impacting a wider range of industry sectors. In the next 6-12 months, it is likely that smaller occupiers will consider sub-leasing and we will start to see an increase in part floors coming onto the market,” Mr George said.
 
The volume of sub-lease availability reached 94,600 sqm in the Sydney CBD and 66,100 sqm in the Melbourne CBD at the end of the March quarter. As a percentage of total stock, the Sydney CBD (2.0%) is at the highest level since 1993, while the Melbourne CBD (1.6%) is at a figure not witnessed since 1994.

With larger occupiers in prime grade buildings in the finance & insurance sector and certain business services companies responsible for the bulk of sub-lease on the market, rising sub-lease availability has had a disproportionate impact on prime vacancy. In the past 12 months, the national prime vacancy rate has increased by 4.1% to 6.1%, while the secondary vacancy rate has moved out by only 1.1% to 6.6%.
 
“It is clear that no CBD office market is an island – all are being impacted by a global economy moving towards recession with a negative absorption figure recorded in each of the CBD office markets, except Brisbane in the March quarter,” said Andrew Ballantyne.
 
Across the major CBD office markets, net absorption was approximately –92,500 sqm in Q1. The Sydney CBD recorded a third consecutive quarter of negative absorption (-78,200 sqm), while the Perth CBD (-3,200 sqm) recorded a second quarter for the first time since the second half of 2002. The Melbourne CBD (-25,600 sqm), Adelaide (-8,800 sqm) and Canberra (-8,600 sqm) all recorded a first quarter of negative absorption in the current cycle. The only market to record positive absorption was the Brisbane CBD (31,700 sqm), a result of moves into completed projects rather than an indication of underlying demand in the market.
 
The silver lining in the black cloud overhanging the CBD office markets is the supply outlook. Projects under construction across the national office markets equates to 8% of existing stock. The Perth CBD and Brisbane CBD are the highest at 20% and 14% respectively, while the pipeline in the Sydney CBD (2.8%) and Melbourne CBD (5.9%) are relatively benign.
 
“In terms of the supply outlook, the current downturn resembles the 1982 recession as opposed to the 1991 version. In 1981, 8.8% of existing stock was under construction compared with 22% in 1990. Vacancy in the early 1980s slowdown increased by 3.3% from trough to peak, compared to 15.4% in the early 1990s. The movement in the vacancy rate will be higher in this cycle than the early 1980s, but critically for the health of the market, it will not be a re-run of the early 1990s,” Mr Ballantyne said.
 
A soft demand environment, rising vacancy and competition from sub-lease vacancy has put pressure on effective rents in all of the markets. Over the quarter, prime gross effective rents declined in the Sydney CBD (-8.9%), Perth CBD (-7.4%), Brisbane CBD (-5.0%), Canberra (-4.7%), Melbourne CBD (-4.4%), and Adelaide (-3.3%).
 
Kevin George cautioned that there will be a challenging demand environment in 2009 and 2010, although activity is expected to increase. “The softer market conditions have generated significant interest from major tenants with imminent lease expiries. There is expected to be an increase in leasing volumes in the second half of 2009 as companies relocate to improve their bottom line.”
 
“With a moderate supply outlook, the main risk to the market is an increase in the rate of business failures, which would create additional direct vacancy. Landlords should be monitoring their tenants situation and consider strategies to minimise the potential risk to their income stream,” Mr George said.
 
 
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