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News release

A Strong Year for Office Markets

Australian CBD office markets record net absorption 20% above the long-term average in 2011

Statistics released by Jones Lang LaSalle Research show that the demand for office space was solid in 2011 despite the volatility in financial markets and the Eurozone sovereign debt crisis.
Across the CBD office markets, positive net absorption of 125,100 sqm was recorded in Q4. Over 2011, net absorption has totalled 337,000 sqm – 20% above the 10-year average. As a result, the national vacancy rate tightened from 7.4% in Q3 to 7.2% in Q4. Excluding Canberra – where vacancy remains in double-digit territory – the vacancy rate for the five major CBD office markets is only 6.6%.
Jones Lang LaSalle’s National Head of Office Leasing, Kevin George said, “The leasing environment was more challenging in 2011 than the net absorption result would suggest. Nevertheless, we continued to see tenants willing to make long-term decisions if productivity gains could be achieved by consolidating multiple tenancies or the space could be used more efficiently to improve occupational densities.”
The flight to quality was evident in 2011. Of the 341,600 sqm of net absorption recorded, approximately 91% was in the prime-grade sector of the market.
Nowhere was the flight to quality more evident than the Sydney CBD. In Q4, the Sydney CBD recorded net absorption 17,700 sqm and 87,900 sqm over 2011. However, net absorption for prime-grade stock was 123,100 sqm in 2011, compared with -35,000sqm for secondary stock.
Mr George said “Prime gross effective rents increased by 4.0% in Q4 and 10.6% over 2011 in the Sydney CBD. However, 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.”
Despite the strong net absorption result, 85 Castlereagh Street reached practical completion over the quarter and the vacancy rate increased marginally to 8.5% in the Sydney CBD.
Mr George said “We continue to monitor volatility in financial markets and announcements of headcount reductions in the finance sector are clearly negative for office market sentiment in Sydney and Melbourne. The transmission mechanism for the office markets will be through sub-lease vacancy. At the moment, the availability of sub-lease space remains at very low levels.”
Across the CBD office markets, sub-lease availability increased by a minor 11,700 sqm or 0.07% of total stock in Q4. In the Sydney CBD, sub-lease vacancy is at 0.98% of total stock – below the 10-year average of 1.18% of total stock.
Jones Lang LaSalle’s Director of National Office Market Research, Andrew Ballantyne said, “The demand for space in the resource-dependent markets of Perth and Brisbane remains strong.”
In 2010, the Perth CBD recorded 100,000 sqm of net absorption – the first time in Jones Lang LaSalle’s 40-year time series.
Mr Ballantyne said “2010 was meant to be Perth’s annus mirabilis. However, the demand for space – driven by the resource and resource-related sector – gathered momentum in 2011 and we recorded net absorption of 39,200 sqm in Q4 – taking the figure for 2011 to 109,400 sqm.”
“There is an acute shortage of space in Perth CBD. Vacancy fell to 2.5% in Q4 and prime gross effective rents increased by 20.5% over 2011,” said Mr Ballantyne.
The Brisbane CBD recorded 12,700 sqm of net absorption in Q4 and 63,500 sqm over the past 12 months. 2011 was the third successive year that net absorption was above 60,000 sqm in the Brisbane CBD.
“Brisbane entered the early upturn phase of the rental cycle in Q4. Strong tenant take-up has absorbed the excess capacity in the market and pushed the vacancy rate down to 6.3% in Q4. As a result, the needle has started to move on leasing incentives and prime gross effective rents increased by 1.5% over the quarter,” said Mr Ballantyne.
All CBD office markets – with the exception of Adelaide – recorded positive net absorption in Q4. The Melbourne CBD recorded 33,600 sqm of net absorption in Q4 and 49,300 sqm in 2011. As a result, vacancy tightened by 0.1 percentage point to 5.8%.
Adelaide recorded negative net absorption of –4,300 sqm with vacancy rising to 7.6%. Canberra recorded 26,700 sqm of net absorption in Q4 and 28,300 sqm over 2011. Whilst vacancy has tightened by 1.9 percentage points over the six months to Q4, vacancy remains in double digit territory at 11.1%.
The economic outlook in 2012 is stronger for Australian than most advanced economies. However, the rate of employment growth is expected to slow below the long-term average over the next 12 months.
A moderate development outlook in Australia is expected to keep vacancy at the lower end of equilibrium throughout 2012. Across CBD office markets, 815,900 sqm of space is under construction, equating to 5.1% of total stock. Two-thirds of the space under construction is pre-committed.
Mr George said “There are still a number of pre-commitment requirements to be satisfied. In a normal short-listing process, a tenant would consider the suitability of the scheme, location and price-point.”
“However, the lending criteria for development finance criteria are becoming tougher and loan-to-cost ratios lower. Increasingly, tenants will have to assess the strength of a developer’s balance sheet and ability to attract capital partners to the project or secure a fund-through from an investor, concluded Mr George.