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News release

Vacancy remains at 7.2% across CBD office markets

The vacancy rate in the Perth CBD fell to 2.0%, while Brisbane dropped towards 6.0%

AUSTRALIA, 11 APRIL 2012 – Statistics released by Jones Lang LaSalle Research showed that the leasing market had its traditional slow start to the year in Q1. Nevertheless, a small positive was recorded for net absorption across all CBD office markets and the national vacancy rate remained unchanged.
Across the CBD office markets, positive net absorption of 2,300 sqm was recorded in Q1. However, net absorption has totalled 255,900 sqm over the past 12 months. As a result, the national vacancy rate remained at 7.2% in Q1.
Jones Lang LaSalle’s National Head of Office Leasing, Kevin George said “The demand environment was bifurcated in Q1. Strong enquiry and activity was recorded in Perth and Brisbane, while there was a more cautious start to the year in Sydney and Melbourne.”
“Perth and Brisbane are experiencing a resource-related construction boom. The pre-production phase of large scale resource and energy projects is very labour intensive and is flowing through to the demand for office space,” said Mr George.
Net absorption was 7,400 sqm in Perth and 1,750 sqm in Brisbane. As a result, vacancy tightened to 2.0% in the Perth CBD and 6.1% in the Brisbane CBD. There are limited options for tenants in the near city markets. West Perth (2.8%) is very tight, while the vacancy rate in the Brisbane Fringe (7.7%) is in line with the long-term average.
Mr George said “There is an acute shortage of space in the Perth CBD. Prime gross effective rents increased by 3.3% in the quarter and have now risen by 27.7% from the cyclical low (3Q10). With rents rising quickly, owners are concerned that they will under-value space by releasing an asking rent to the market prior to availability.”
“Brisbane is about 12 months behind Perth in the current cycle. Further leasing activity at One One One Eagle Street is positive for sentiment in the Brisbane office market. Prime gross effective rents increased by 2.8% in the quarter and are now up by 4.3% over the past six months,” said Mr George.
The key ingredients for a development cycle are: below equilibrium vacancy, above trend rental growth and capitalisation rates compression.
Mr George said “The price signals from the space market are not flowing through to development activity in Brisbane and Perth. The lending criteria for development finance remain tough and financiers are applying lower loan-to-cost ratios to projects.”
Jones Lang LaSalle’s Head of Capital Markets Research, Andrew Ballantyne said “The first three months of 2012 have actually seen better news on the global economy.

Nevertheless, parts of corporate Australia are concerned about the short-term revenue outlook and are reviewing costs to protect margins.”
“For the majority of companies, labour is the largest cost followed by IT and real estate. The transmission mechanism between headcount reductions and the space market will be sub-lease availability,” said Mr Ballantyne.
Jones Lang LaSalle’s quarterly monitoring of sub-lease vacancy shows it was unchanged in the Sydney CBD at 1.0% of total stock. In Melbourne, sub-lease availability increased by 7,700 sqm, but remains low at 0.6% of total stock.
The Sydney CBD recorded net absorption of -8,900 sqm and vacancy increased to 8.7%. The net absorption figure would have been zero for the quarter, but for the identification of further backfill space from the CBA relocation to Darling Quarter.
Mr Ballantyne said “While the Sydney CBD vacancy increased over the quarter, further leasing activity at 1 Bligh Street was a boost to sentiment in the Sydney CBD office market. As a result, vacancy in the Premium grade sector of the market tightened to 6.9% in Q1.”
The Sydney CBD is also benefitting from tightening vacancy rates across the North Shore and Fringe office markets. Prime gross effective rents increased by 1.0% in the Sydney CBD over the quarter.
“In Q1, British American Tobacco, Teachers Health Fund and Brown Forman all moved into the city. We expect North Sydney rental growth will be higher than the CBD over the next three years, improving the relative affordability of the city,” said Mr Ballantyne.
The Melbourne CBD recorded zero net absorption in Q1 and vacancy remained at 5.8%. Prime gross effective rents increased by a marginal 0.7% over the quarter.
Adelaide recorded negative net absorption of –4,400 sqm with vacancy rising to 8.1%. Canberra recorded 6,800 sqm of net absorption in Q1. Vacancy tightened to 10.8% over the quarter.
The economic outlook in 2012 is stronger for Australia than most advanced economies. However, the rate of employment growth is expected to slow below the long-term average over the next 12 months.
Mr George “There will be a number of drivers for leasing activity over the 18 months. Tenants can relocate to buildings with large efficient floor plates, or buildings that can provide vertical connectivity, at a higher rent, but make savings on the overall occupancy cost by taking less space and using it more efficiently.
“Furthermore, a number of companies are having a renewed push towards improving productivity growth. The consolidation of multiple tenancies can assist with improving communication between departments and help drive productivity gains.
“Whilst cost containment remains an imperative for large corporates in the current economic environment, companies are acutely aware of the need to have relevant and sufficient office space to meet their needs as business conditions improve,” concluded Mr George.