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News release

Sydney

Taking the temperature of Corporate Australia

A rise in sub-lease availability resulted in the first quarterly negative net absorption figure for the CBD office markets since Q2 2009


AUSTRALIA, 10 October 2012 – Statistics released by Jones Lang LaSalle Research show that sub-lease availability increased across a number of CBD office markets in the September quarter. 

Stephen Conry, CEO of Jones Lang LaSalle Australia said, “Corporate Australia is nervous. Various factors are contributing to a deterioration in business confidence including downward revisions to the short-term global economic growth outlook, negative reflection on the resource sector’s prospects for continued growth and the national political environment.
 
“Across all six CBD office markets, negative net absorption of -36,800 sqm was recorded in Q3. This was the first quarterly contraction in occupied space since Q2 2009. Approximately 70% of the negative net absorption figure can be explained by a rise in sub-lease availability. As a result, the national CBD vacancy rate increased to 8.3% in Q3 from 7.8% in Q2.
 
“Sub-lease availability is a key office market thermometer of business confidence. When we took the temperature of Corporate Australia in Q3, sub-lease availability had increased by 78,100 sqm over the past 12 months to 1.2% of total stock.
 

“While sub-lease availability has increased, it remains well below the level recorded in mid-2009 (2.0% of total stock),” said Mr Conry.

“Importantly, the medium to long term supply of office space everywhere is measured, with no oversupply looming. Current sublease space increases shouldn’t cause much angst, more a cause for the market to take stock,” said Mr Conry.
 
The Brisbane CBD shrugged off the downsizing in the resource sector to record positive net absorption of 10,800 sqm in Q3. The partial completion of King George Central left the vacancy rate unchanged at 8.8% in Q3.
 
Mr Conry said, “Although recording positive net absorption in Q3, Brisbane was not immune to the rise in sub-lease availability, recording an increase of 5,800 sqm in Q3 to 1.3% of total stock.”
 
Melbourne recorded the largest increase in sub-lease availability over the quarter. Sub-lease availability increased by 12,900 sqm in Q3 and now stands at 1.6% of total stock. The overall vacancy rate in the Melbourne CBD increased to 8.3% in the quarter.
 
“There has been a great deal of speculation regarding the volume of sub-lease space coming onto the Melbourne market. The Q3 Jones Lang LaSalle data release has now clarified the sub-lease story. The quality of the sub-lease space being offered will likely see a flight to quality from B-Grade assets and an overall reduction in sub-lease vacancy over the next 6-12 months,” said Mr Conry.
 
Net absorption (400 sqm) was essentially zero in the Sydney CBD and the vacancy rate remained unchanged at 8.6% in Q3.
 
Mr Conry said “The Sydney CBD can be characterised as a low-low market – low tenant demand and low supply. Over the past 12 months, net absorption has totalled 9,700 sqm. Any downsizing that has occurred in the financial services sector has been offset by tenant centralisation. For example, in Q3, Adobe Systems relocated into the CBD from Chatswood.
 
“Nevertheless, leasing volumes remain very low in the Sydney CBD. As a result, owners are recording high tenant retention rates. It is important for owners with direct vacancy, especially in the 1,000 sqm to 2,000 sqm size cohort, to qualify enquiry. A number of tenants are testing the market as leverage for their lease renewal negotiation.
 
“Some businesses, however, are looking to consolidate multiple tenancies to make efficiency gains, while others are looking to drive a cultural change throughout their organisation. Furthermore, we have identified major lease expiries approaching 1.4 million sqm in 2013 to 2015.
 

“The weight of lease expiry, even when applying conservative conversion rates, will generate additional activity in the Sydney CBD,” said Mr Conry.

There was a moderate increase in sub-lease availability in Perth (2,700 sqm) over the quarter and a rise in the vacancy rate from 2.9% in Q2 to 4.0% in Q3.
 
Mr Conry said, “The labour requirements are lower for large scale resource projects as they move from construction into production. With the peak in resource investment anticipated to occur over the next 6-18 months, there have been a number of contractions out of project space in the Perth CBD.”
 
Jones Lang LaSalle’s Head of Capital Markets Research, Andrew Ballantyne said, “There was a risk in Perth that the tight vacancy rate would exert pressure on rents to unsustainable rates. A slowdown in demand from iron ore miners and their consultants will moderate the rate of rental growth over the next 12-18 months.
 

“This is a long-term positive for the Perth market. It will limit the potential for excessive development activity over the medium-term and create a more sustainable balance between demand and supply,” said Mr Ballantyne.

Prime gross effective rents were unchanged in the Perth CBD in Q3. They have, however, increased by 9.5% over the past 12 months.
 

Adelaide recorded -10,000 sqm of net absorption and a rise in the vacancy rate to 8.5%. The vacancy rate in Canberra moved back into double-digit territory Q3 (10.5%) after the completion of a development at 4 National Circuit, Barton.


Mr Ballantyne said, “Whilst we have recorded an increase in the national vacancy rate in Q3 to 8.3% - the occupancy rates for office buildings in Australia are among the highest in the world. Vacancy rates in the Americas (16.2%), Europe (9.6%) and the Asia-Pacific all exceed Australia and in some markets there is a significant supply pipeline overhang.”
 
The domestic economy is expected to record around trend growth in 2013 and 2014. Jones Lang LaSalle, however, expects net absorption to be below the long-term average for the CBD office markets.
 

“Historically, vacancy rate movement are more sensitive to supply than demand. The supply-side of the equation is well managed over the medium-term. There is 726,700 sqm of space under construction equating to 4.4% of total stock to complete by the end of 2015. The pre-commitment rate for the projects under construction is a healthy 71%,” said Mr Ballantyne.