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News release


Financial centres start to stabilise

Market downturn shallower than expected: Q309 statistics provide solid evidence that Sydney and Melbourne office markets are close to trough in the current cycle

SYDNEY, 14 OCTOBER 2009 – September quarter statistics released by Jones Lang LaSalle Research reveal that conditions in Australia’s office markets are starting to stabilise in the financial centres of Sydney and Melbourne, while the rate of decline slowed in the Perth and Brisbane resource-dominated markets.
Q3 figures revealed that the aggregate vacancy rate across all CBD office markets that Jones Lang LaSalle monitors nationally increased by only 0.1% to 7.6% in the September quarter.
National Office Analyst, Andrew Ballantyne said, “The marginal rise in vacancy was attributable to the increased availability of backfill space as tenants moved into newly completed buildings. Positive net absorption of 105,000 sqm was recorded in the quarter. This follows two successive quarters of negative net absorption and is the highest net absorption figure since December 2007.
“This is solid evidence that the Sydney and Melbourne office market is close to the trough in the current cycle,” said Mr Ballantyne.
With the exception of Perth (-24,700 sqm), all CBD office markets recorded positive net absorption in the quarter. Melbourne (59,500 sqm) recorded the highest figure, followed by Canberra (35,100 sqm), Brisbane (14,400 sqm), Sydney (12,700 sqm) and Adelaide (7,900 sqm).
National Head of Leasing, Kevin George said, “A stronger than expected domestic economy has under-written an improvement in business confidence. With the headline rate of unemployment declining, corporations have moved from a consolidation mode to planning for future growth, electing to retain hidden vacancy rather than explore options to sub-lease.
“If sub-lease availability is a barometer of the health of the national office market, the sick patient is now clearly in a state of recovery,” added Mr George.
Across the monitored national office markets, the availability of sub-lease accommodation actually contracted in Q3 by approximately 48,000 sqm and now equates to 1.8% of total stock.
“Similar to the RBA monetary policy setting, landlords have been offering emergency levels of incentives to ensure that high occupancy levels were maintained and to secure cash flow over what was expected to be a weak demand environment,” Mr George said.
“The evidence is now accumulating that this downturn will be a lot milder than has been widely feared.
“Therefore the current vacancy levels are too low to support the relatively generous incentive levels offered in Sydney and Melbourne. Incentives will start to decline towards a level more attuned with market fundamentals,” Mr George said.
Mr Ballantyne said the story this quarter was all about Sydney and Melbourne.
“Vacancy in the Sydney CBD declined to 8.5% in Q3 from 8.8% in Q2, while prime gross effective rents were unchanged in the quarter. The peak to trough decline in Sydney rents in this cycle has occurred over 5 quarters, compared with 18 quarters in the 1990s recession and 9 quarters in the post-2000 slowdown.
“Despite the practical completion of the ANZ Headquarters at 833 Collins Street and SX2 at 111 Bourke Street, which delivered 125,500 sqm of new space to the Melbourne CBD in the September quarter, vacancy only increased to 6.6% in Q3 from 5.9%.
“The Melbourne market is less reliant on the volatile Finance & Insurance sector, while the availability of prime contiguous space has allowed occupiers to upgrade or consolidate at very affordable rental levels,” said Mr Ballantyne.
Outside of the Financial centres, vacancy declined in Canberra (7.9%) as the Department of Defence leased two buildings in the Brindabella Business Park. Vacancy increased by 0.8% in the Brisbane CBD (8.3%) and Adelaide CBD (6.1%), while increasing by 1.7% in the Perth CBD (8.3%).
Mr George said positive fundamentals and improved sentiment resulted in the stabilisation of Sydney rental levels.
“Over the quarter, prime gross effective rents increased in the Melbourne CBD (0.7%) and Adelaide (0.4%). There were further rental corrections in the Brisbane CBD (-12.3%) and Perth CBD (-6.1%) as these markets continue to adjust from the rental spike in 2006-07, when market rents rose above the economic rent. Canberra (-2.1%) also recorded a decline.
“The rate of decline in Brisbane and Perth rental levels will start to moderate as the market rents are now approaching the rent required to support new construction within each of those markets,” said Mr George.
The supply outlook continues to contract across the national market. The development pipeline is now 985,000 sqm (61% pre-committed) or 7.3% of existing stock with no new developments commencing across monitored CBD office markets in the September quarter. This compares with an estimate of 1.17 million sqm in Q2.
“A number of requirements that were suspended earlier in the year have started to re-appear. It is becoming apparent to tenants and their advisors that the current downturn will be shorter in duration than previous cycles and the window of opportunity to negotiate a favourable leasing deal is rapidly closing,” said Mr George.
“Owners’ sentiment has clearly improved and at some point over the next 12 months, landlords will start to view vacant space as an opportunity rather than a liability. Clearly the office markets are at an inflexion point in the current cycle,” concluded Mr George.