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News release


These times they are a not changin’: Australia’s office markets remain largely unchanged from 12 months ago

• Financial hubs, Sydney and Melbourne remain neutral while Perth, bolstered by the mining boom, continues to be landlord-favourable.
• Brisbane is currently neutral although it is expected to shift in favour of landlords in 2013.

AUSTRALIA, 8 AUGUST 2012 – While a market swing in favour of landlords was expected over the past 12 months, Australia’s major office markets have remained relatively unchanged with continuing European debt crisis and difficult trading conditions dampening tenant activity in Australia’s financial hubs.

Sydney and Melbourne, which are dominated by financial and professional services firms, remain neutral with many tenants delaying relocations until global economic conditions have stabilised.   
Meanwhile, Perth continues to be landlord-favourable with a vacancy rate of just 2.9% in the CBD. The strong demand from the mining and resources sector continues to bolster the market with the market expected to remain landlord favourable for at least the next two years.
Although Brisbane is currently neutral, it is expected to shift in favour of landlords in 2013 as mining and resources companies take up large amounts of space putting upward pressure on rents.
Michael Greene, Director of Tenant Representation at Jones Lang LaSalle said, “For the past couple of years building owners have been expecting the market to shift in their favour but this simply has not happened.”
“12 months ago, there was an expectation that the market would rebound strongly in 2012 however tenants have remained cautious in Sydney and Melbourne.” 
The rapid growth of the mining and resources sector has led to a construction boom and has stimulated activity in the CBD. The vacancy rate in the Brisbane CBD is now 8.8% and compares to a peak of 10.6% in mid-2010.  The prime vacancy rate has fallen considerably over the past two years, reaching a very tight 2.6% at the end of Q1/2012.  The completion of One One One Eagle Street and the refurbishment of 150 Charlotte Street resulted in the prime vacancy rate increasing to 8.2% in Q2/2012.  However, some deals in these buildings, currently in advanced negotiation, are likely to reduce vacancy significantly next quarter.
Mr Greene said, "Brisbane is experiencing a resource-led construction boom. The pre-production phase of large scale resource projects is very labour intensive and we have seen significant leasing transaction activity.”
Despite the overall strength of the Brisbane market, the global economic volatility has had an impact, with transaction activity flat-lining over the past several months.
Mr Greene said, “The recent slowdown in sentiment is concerning given the comments by the resources industry about cost blowouts in projects and the volatility of commodities prices. Until these uncertainties are resolved sentiment in the market will remain patchy.”
“However in the long-term, the Queensland Resources Council recently identified $165 billion of investment projects planned to be completed by the end of 2020. Of all jobs created by this investment we estimate 29% would be white collar. The vast majority of these jobs would be based in Brisbane and the effect on the market will be substantial,” Mr Greene said.
Jones Lang LaSalle has modelled the impact of this increased demand with a 100%, 75% and 50% likelihood of these projects proceeding.
Mr Greene said, “Even under the low scenario Brisbane would need a major new office development each year until 2020. The high scenario is the equivalent of a new One One One Eagle Street each year for the next eight years. Grocon has announced Freehills commitment to 480 Queen Street a 65,000 sqm building. If that proceeds, this will provide a major injection of stock into the market. Combined with uncertain market sentiment this will keep a lid on rental growth.”
Like Brisbane, Perth is dominated by the mining and resources sector which has expanded aggressively in the state over the past 24 months. As a result of the boom, there is a shortage of office space in Perth with the CBD having a vacancy rate of 2.9%.
Andrew Campbell, Head of Tenant Representation, WA at Jones Lang LaSalle said, “The resource and resource-related sectors have expanded aggressively over the past 24 months. As a result, there is an acute shortage of space across the Perth office markets. The total NLA of the monitored Perth offiice markets is 1.91 million sqm. At present, only 42,000 sqm of the monitored space is vacant.”
“Tenants with a lease expiry over the next four years in Perth will face a challenging environment. The development pipeline (88,500 sqm) is 88% pre-committed and BHP Billiton will retain a high proportion of their backfill space across their existing locations following their move into Brookfield Place.”
In commenting on the supply pipeline, Mr Campbell said, “Any new quality grade building to come out of the ground in Perth will almost certainly be 90-100% pre-committed which means minimal space will be released into the market.”
“To secure leasehold space in this environment, pre-commitment is required, and it is critical for organisations with large office requirements to invest time in planning, evaluating scenarios or options available to them, and de-risking what is a significant business decision and financial undertaking.,” Mr Campbell said.
The Sydney office market is characterised by cautious tenants, predominantly in the financial and professional services sectors, looking to maximise cost efficiencies.
Gavin Martin, Head of Tenant Representation, NSW said, “Corporations are still wary of the macroeconomic uncertainty and the sluggish performance of their own state economy has made real estate decision making slow and laboured.”
“The majority of activity is renewals and restructures as tenants adopt a ‘wait and see’ approach before making major new relocation commitments.”
With corporates under increasing pressure to reduce occupancy costs, many are looking to new workplace models to make their existing office space more efficient.
Mr Gavin said, “We have seen an increase in the number of organisations adopting activity based working (ABW) in the market, with others set to follow suit in the Sydney CBD. Considering the demand profile of the Sydney CBD, industries such as banking and finance, professional services and IT in particular are likely adopters.” 
Jones Lang LaSalle estimates this potential pool of ABW adopters in the CBD will account for 2.1 million sqm of the 4.5 million sqm of occupied space – representing just under 50%.
Mr Martin cautioned, “ABW does not suit all organisations. A space area of around 1,500 sqm is considered to be required to build a business case for change plus certain industries such as legal firms are unlikely to be early adopters of the trend if at all. Thus the 2.1 million sqm would need to be tempered significantly when considering the likely candidates for ABW.”
In commenting on the availability of office space in Sydney, Mr Martin said, “The office vacancy rate in the Sydney CBD is 8.6% - above the 30-year average of 8.1%. However, vacancy in the CBD is highly fragmented. Prime vacancy currently stands at 9.3% and secondary at 7.8%. Occupiers of 1,000 sqm to 2,000 sqm have a significant range of options across the market. In contrast, the options for a 3,000 sqm to 5,000 sqm user are relatively scarce.”
While the vacancy rate is currently above the 30 year average, it is expected to tighten over the next three years with a heavily constrained the supply pipeline reducing the amount of available space.
“2012 is set to be the first year of zero completions in the CBD since 1970 so the supply pipeline is quite constrained. As a result, we expect to see rental growth of 5.6% per annum between 2011 and 2014 and a decline in vacancy,” Mr Martin said.
Like Sydney, Melbourne is dominated by financial and professional services companies and is characterised by cautious tenants delaying relocations or renewals.
Peter Walsh, Head of Tenant Representation, VIC at Jones Lang LaSalle said, “Tenants have been behaving cautiously over the past six months and incentives increased in the latter part of 2011.”
“In the last few weeks, we have seen evidence of larger areas of major sublease vacancy ranging from 3,000 sqm to 10,000 sqm which suggests more challenging conditions for large corporate tenants seeking to reduce operational costs. It also offers opportunities for tenants to locate to good quality existing fit outs and save on capital expenditure.”
“A number of tenants have pre-committed to development stock over the past two years. Most recent pre-commitments include Westpac’s 14,000 sqm at Collins Street and Medibank Private’s 30,000 sqm at 720 Bourke Street. There is currently 284,700 sqm of space under construction, equating to 6.7% of total space,” Mr Walsh said.
“While some of the pre-commitments were made by tenants from outside the CBD that will not create backfill space in the city and some of the CBD backfill space has already been leased, vacancy is projected to rise over the next two years. As a result, prime gross effective rents are forecast to grow below trend over the next 24 months, creating a tenant favourable leasing market.”
In comparing the rents in Melbourne to those in Sydney, Mr Walsh said, “Melbourne has been relatively under-priced compared to Sydney and with the forecast recovery a year ago, landlords had been expecting an opportunity to reprice to Sydney standards but this has not materialised. Prime gross effective rents in Melbourne currently stand at $409.93/ sqm compared to Sydney at $623.95/ sqm.”
“This time last year predictions were for the market to be landlord favourable until 2013, however now Jones Lang LaSalle believes that the market will either be in balance or favour the tenant until 2016,” Mr Walsh concluded.
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