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News release


Pace of decline in national office markets slows in Q209

The main driver of rising vacancy in Q2 is attributable to new supply and backfill space, not weaker demand as was the main driver in Q1

SYDNEY, 22 JULY 2009 – June quarter statistics released by Jones Lang LaSalle Research reveal that vacancy pressures continue to increase across the monitored CBD office markets.
Q2 figures revealed that the aggregate vacancy rate across all CBD office markets that Jones Lang LaSalle monitor nationally on a quarterly basis increased by 1.1% to 7.5% in the June quarter.
Jones Lang LaSalle’s National Office Analyst, Andrew Ballantyne said, “Unlike Q1, the increase in the national vacancy rate was more attributable to the completion of new stock and backfill space availability than negative net absorption. Furthermore 18 months into the current downturn and vacancy has only just reached equilibrium of between 7% and 8% for the national market.
“While demand for office space can be expected to decline in all CBD markets over the next few quarters, analysis of quarterly data suggests that from a national perspective the pace of decline has slowed,” said Mr Ballantyne.
With the exception of Melbourne, all markets recorded an increase in vacancy. The Perth CBD (6.6%), Canberra (9.6%) and Brisbane CBD (7.5%) recorded the highest uplifts of 3.2%, 1.8% and 1.7% respectively. The vacancy rate in the Sydney CBD (8.8%) and Adelaide CBD (5.3%) increased by under 1.0%.
“Similar to the domestic economy, the Melbourne CBD continues to surprise on the upside. Despite sub-lease availability increasing from 1.6% to 2.0% of total stock in Q2, the headline vacancy rate remained unchanged at 5.9% during the June quarter,” said Mr Ballantyne.
“The Melbourne CBD benefits from affordable rental levels, while the availability of contiguous space has enabled tenants to relocate from the Fringe to the CBD. The continued high occupancy rates in the Melbourne CBD have been to the detriment of other markets including St Kilda Road where vacancy has increased to 10.7% in Q2 from 5.8% a year earlier,” said Mr Ballantyne.
Jones Lang LaSalle’s National Head of Leasing, Kevin George stated that rising sub-lease availability continued to cast a shadow over all CBD office markets.
“Corporate profitability is being challenged in most industry sectors. Real estate is typically a top 3 expense and organisations looking to consolidate their cost base are releasing excess space to the market and competing with direct vacancy,” said Mr George.
The volume of sub-lease availability has increased sharply outside of the financial centres and reached 46,800 sqm in the Perth CBD and 36,100 sqm in Brisbane. As a percentage of total stock, the Perth (3.3%) and Brisbane CBDs (1.9%) are at the highest levels since 1990.
Across the major CBD office markets, net absorption was approximately –33,150 sqm in Q2. The Sydney CBD continues to be the softest market, recording a fourth consecutive quarter of negative net absorption (-25,700 sqm). However this is sharply lower than the negative 80,000 sqm recorded in the first quarter of this year. In the past 12 months, negative net absorption in Sydney has totalled 4.2% of total stock.
Negative net absorption was also recorded in Canberra (-8,300 sqm), Adelaide (-6,800 sqm) and Brisbane (-5,900 sqm). Perth (11,700 sqm) and Melbourne (1,800 sqm) both recorded positive net absorption in Q2.
“The positive absorption in Perth is not a reflection of the strength of underlying demand – it is essentially demand from pre-commitment deals to new development that is now coming on stream,” said Mr Ballantyne.
Rising vacancy and competition from sub-lease vacancy has put pressure on effective rents in the majority of markets. Over the quarter, prime gross effective rents declined in the Perth CBD (-18.2%), Brisbane CBD (-9.6%), Sydney CBD (-9.2%), Canberra (-0.9%), Melbourne CBD (-0.6%) and Adelaide CBD (-0.6%).
“The extent of rental declines is not a reflection of the headline vacancy rate. Landlords are nervous about the demand outlook as unemployment is expected to rise over the next 18 months,” said Mr George.
“There are however tenants with imminent lease expiries taking advantage of the softer market conditions to upgrade or consolidate real estate requirements, while improving their bottom line. As a result, leasing volumes will start to increase in the second half of 2009,” said Mr George.
The supply outlook continues to be a positive for the national market. The development pipeline is now 1.17 million sqm or 8.3% of existing stock. The past quarter has seen a further reduction across CBD office markets of more than 100,000 sqm for 2009, further limiting vacancy rate increases.
“Given the current uncertainty around rents, construction costs and cap rates, only nine projects have commenced construction in 2009 across the CBD office markets. With a typical construction lead time of 24-30 months, supply additions will be very light in the 2011 to 2012 timeframe,” said Mr George.
“The window of opportunity for tenants to negotiate favourable lease terms is relatively short. We expect vacancy to reach a cyclical peak between 10% and 12% in early 2011, which coupled with limited supply additions will lead to an acceleration of effective rents, especially in Sydney and Melbourne,” concluded Mr George.