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News release


A difficult year for office markets in 2012

Below trend net absorption in 2012 pushes the national CBD office market vacancy rate towards the upper end of equilibrium

AUSTRALIA, 21 January 2013 – Statistics released by Jones Lang LaSalle Research show that net absorption was well below trend in 2012.  

The CBD office markets recorded 16,500 sqm of net absorption in Q4 and 55,900 over the whole of 2012. The calendar year figure was approximately one-fifth of the ten-year average (294,000 sqm).
Jones Lang LaSalle’s Head of Capital Markets Research, Andrew Ballantyne said, “The below-trend net absorption result reflects a lack of confidence across corporate Australia. Net absorption in 2012 was comparable to 2009 (41,600 sqm) and business confidence in the latter part of 2012 fell to the lowest level since April-2009.”
Sub-lease availability is the most sensitive property market indicator to business conditions. Over the course of 2012, sub-lease availability increased by 61,900 sqm to 1.14% of total stock.
“While sub-lease availability has increased in Australia, it remains well below the 2009 peak (2.0% of total stock) and below the level recorded in other mature markets. In the US, for example, sub-lease availability across the 44 office markets tracked by Jones Lang LaSalle sits at 1.6% of total stock,” said Mr Ballantyne.
In 2012, three of the six monitored CBD office markets recorded negative net absorption. Melbourne (-40,400 sqm), Sydney (-15,400 sqm) and Adelaide (-1,750 sqm) all recorded negative results in 2012.
On the positive side of the ledger, Canberra (68,900 sqm), Perth (29,800 sqm) and Brisbane (14,800 sqm) recorded the strongest net absorption in 2012.
As a result of below-trend net absorption, the national CBD office market vacancy rate increased by 0.5 percentage points to 8.8% over Q4.
“Vacancy is now at the upper end of equilibrium, which is assumed to be between 7% and 9% for office markets. Only two of the monitored markets, however, are recording vacancy within the equilibrium range – Sydney (8.4%) and Melbourne (8.1%),” said Mr Ballantyne.
Adelaide (11.14%), Canberra (11.1%) and Brisbane (9.9%) are all recording vacancy above the equilibrium rate. At the other end of the spectrum, Perth (5.6%) remains the tightest CBD office market in Australia.
The rise in vacancy has had a disproportionate impact on the secondary-grade sector of the office market.
Mr Ballantyne said, “A higher proportion of the excess capacity in CBD office markets sits in secondary-grade stock. The prime-grade vacancy rate is 7.2% – 3.5 percentage points tighter than secondary-grade (10.7%).”
Prime-grade stock in CBD office markets surpassed 8.0 million sqm in 2012. The prime-grade market accounts for 53% of the 16.5 million sqm of stock across Australia’s CBD office markets.
Mr Ballantyne said, “There were a few significant landmarks reached in the prime-grade market in Q4. Melbourne surpassed 2.5 million sqm of prime-grade stock for the first time, while Brisbane moved past the 1.0 million sqm mark in Q4."
Jones Lang LaSalle’s NSW Head of Leasing, Tim O’Connor  said, “The leasing environment will be challenging over the next 12 months. Lead indicators such as business confidence and job advertisement surveys point towards limited organic growth across corporate Australia in 2013.”
“Tenant expansion, however, is only one driver of leasing activity. We continue to engage with corporates who are looking to consolidate multiple tenancies to make efficiency gains or improve occupational densities,” said Mr O’Connor.
“Activity Based Working is promoted by corporate real estate professionals as a way of implementing cultural change within an organisation. A fully integrated ABW fit-out, however, is not appropriate for all organisations.
“As a result, we believe the ‘ABW-lite’ model will become more prevalent, whereby occupiers take elements that work for their business without embracing all aspects of the concept,” said Mr O’Connor.
There were relatively few project commencements across Australian office markets between 2009 and 2011. With a construction lead-time of between 24 and 36 months for office developments, supply will be below trend in 2013 and 2014.
There is 472,000 sqm of new and refurbished space to complete in 2013 and 2014 equating to 2.9% of total stock. Approximately two-thirds of the space is pre-committed.
Mr O’Connor said, “There is a misconception that completions equal supply. Approximately 41% of the stock in Australian CBD office markets is in excess of 30 years old. These assets reflect the design and characteristics of previous generations. In order to meet the requirements of modern corporate occupiers, a high proportion of backfill space will be withdrawn in 2013 and 2014.
“Jones Lang LaSalle has identified up to 200,000 sqm of space which could be withdrawn in 2013 and 2014. As a result, supply additions over the next 24 months will be significantly below the 35-year average of 250,000 sqm,” said Mr O’Connor.
Image: CBD Office Markets Vacancy Rates, 4Q12

 Source: Jones Lang LaSalle