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News release

Australia

Tenants are set to hold the balance of power across Australia’s real estate markets in 2013: Jones Lang LaSalle

• The weak macro-economic environment, subdued labour market, and the softening of the mining boom are predicted to contribute to tenants’ favour
• All markets with the exception of Perth are set to be tenant-favourable in 2013


AUSTRALIA, 12 December, 2012 – Tenants are set to hold the balance of power in 2013 across Australia’s real estate markets amidst the continued weak macro-economic environment, subdued labour market and the softening of the mining boom.

Tony Wyllie, Regional Director of Corporate Solutions at Jones Lang LaSalle, said these three factors will boost leverage enjoyed by tenants across the capital city markets – with the exception of Perth – and will also be the biggest influencers on corporate real estate decisions in 2013.

With tenants increasingly focused on driving productivity gains in their real estate portfolios, they look set to be able to achieve a number of efficiency objectives in the next 12 to 18 months in many real estate markets across Australia.
 
Weak macro-economic environment
 
Mr Wyllie said the global economy entered the final quarter of 2012 against a backdrop of continuing uncertainty and growth downgrades. “The global growth outlook forecast is at 3.6% for 2013 – revised down by 0.3% in October 2012. Locally, the effects of this continue to be seen.
 
“Australia’s economic growth forecast is 2.9% for 2013. Queensland and Western Australia are forecast to record the highest economic growth in 2013 at 4.3% and 4.1% respectively, while Sydney and Melbourne office markets have both slowed sharply during the first nine months of 2012 and net absorption flat-lined or declined.”
 
Mr Wyllie said the continued weak macro-economic environment is set to result in sub-lease availability increasing from current levels of 192,000 sqm or 1.2% of stock, the delay of Sydney and Melbourne’s office market recovery and an increased difficulty in the ability to off-load surplus space in 2013, despite continued tenant-favourable opportunities in the market.
 
Subdued labour market
 
Australian employment growth slowed from 2% in 2011 to 0.5% year-to-date in September 2012. Australian employment forecasts remain subdued for 2013 and 2014 at 1.0% and 2.5% respectively.
 
Mr Wyllie said with headcount forecasts highly volatile, real estate decision making is likely to err on the side of caution.
 
“Given the low job security sentiment, with numerous redundancies being announced in the media, real estate decision making may slow as organisations put growth plans on hold. Space that was taken up in 2009-10 in expectation of future growth may now reappear in the market.”
 
Mr Wyllie said tenants uncertain about the macro-economic environment and growth prospects can secure a short-term lease in fully fitted-out premises, with little capital costs required, and postpone a longer-term decision.
 
“Corporates need to consider carefully how to structure lease flexibility, contemplating expansion and contraction needs as well as exit risk,” said Mr Wyllie.
 
Softening of the mining boom
 
The softening of the mining boom is another contributing factor for a tenant-favourable market in 2013 and is set to influence real estate decisions in the next year.
 
In 2012, commodity prices fell by 19.1% while mining sector growth contracted by 0.1% in Q3 2012.
 
Mr Wyllie said the softening of the mining boom will be centred on resource-rich states, including Queensland and Perth, but will have impact on sentiment across the states.
 
Figure 1: The balance of power is tipped towards tenants in 2013, with the exception of Perth
Figure 1_The balance of power is tipped towards tenants in 2013, with the exception of Perth.jpg
Source: Jones Lang LaSalle Research
 
Queensland
 
Michael Greene, Director of Tenant Representation at Jones Lang LaSalle said Brisbane is likely to return to a tenant-favourable market in the short term as the demand boom led by the resources sector slows up. Strong demand is not predicted to re-emerge in Brisbane until 2015-17.
 
“In Brisbane, the resources sector has been the largest driver of white collar employment growth and office market demand over the past few years.
 
“However, it is clear that the resources sector has retreated over recent months and is, at least temporarily, side-lined as a driver of office demand.
 
“One example of this cooling demand is Brazilian miner Vale who went to market with a 15,000 sqm requirement in the Brisbane market earlier in 2012 but is now contracting out of 1,250 sqm in Q3 2012.
 
“While contractions have been fairly limited to date, it does appear that some project space will be given back to the market over the next few years as mining projects terminate.
 
“The market is watching closely to see if mining and related companies will cut back existing operations in the short-term to cut costs.
 
“As a result, Brisbane will revert back to a tenant-favourable market at least in the short term – something that nobody was predicting this time last year,” said Mr Greene.
 
Western Australia
 
Andrew Campbell, Head of Tenant Representation, WA at Jones Lang LaSalle said Perth’s limited supply pipeline is likely to keep the market landlord-favourable – in contrast to the rest of Australia.
 
However, Perth has still seen an increase in vacancy rates. “Although Perth’s vacancy rate remains low at 4%, it has doubled from 2% earlier this year,” said Mr Campbell.
 
In addition to Brisbane, Perth is the other office market that has been particularly boosted by strong resources-led tenant demand over recent years.
 
“Like Brisbane, the market will nervously watch to see if weaker sentiment in the sector continues to lead to the scaling back of office space requirements in coming quarters.
 
“However, with a low starting vacancy and very limited supply pipeline over the next few years, it will take a significant shift in supply constraints and/or further softening in demand before the Perth market will be classified as a tenant-favourable market.”
 
New South Wales
 
Gavin Martin, Head of Tenant Representation, NSW said the recovery of Sydney’s property market will be delayed by the macro-economic environment and remain tenant-favourable going into 2013.
 
“Jones Lang LaSalle’s base office demand projections have been revised down for Sydney over 2013. While there are tenant-favourable opportunities in the market in 2013, the ability to off-load surplus space will become more difficult with the increased supply of sub-lease space.”
 
Mr Martin said the public sector is not immune to the cost pressures being faced by the private sector and this has implications for the office markets around Australia, including NSW.
 
“According to the Australian Bureau of Statistics, Government employment has contracted by 22,700 in NSW in the twelve months to August 2012. This is another factor contributing to sentiment and influencing real estate decisions in NSW.”
 
Mr Martin said a key driver of real estate decisions next year will be workplace efficiencies including Activity Based Working (ABW).
 
“Most organisations with an ‘assigned desk’ workplace face a portfolio or asset underutilisation of between 30-40% at any point in time.
 
“ABW has been proven to deliver cost savings by providing a ratio of seven to eight desks per 10 people or less. Corporate leaders have recognised that the best innovation comes from collaboration and leveraging technology.
 
“We see the adoption of ABW as a slow burn. To date it has been concentrated in the banking and finance and IT&T sectors and as such the Sydney CBD has seen the fastest take-up rate nationally,” said Mr Martin.
 
Victoria
 
Peter Walsh, Head of Tenant Representation, VIC at Jones Lang LaSalle said similarly to Sydney, Melbourne’s market recovery will be slowed by the global and local economy and is predicted to remain in tenants’ favour in 2013.
 
“Melbourne recorded the largest increase in sub-lease availability over the quarter, not helped by the slowing in State Government activity.
 
“Given the low job security sentiment, with numerous redundancies being announced in the media, real estate decision making may slow as organisations put growth plans on hold.
 
“According to the Australian Bureau of Statistics, Government employment has contracted by 18,700 in Victoria in the twelve months to August 2012 – another factor which will impact sentiment and real estate decisions in 2013,” Mr Walsh concluded.