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News release


Mixed conditions across Australian CBD office markets

The chasm between the resource-dependent office markets of Perth and Brisbane and the service-orientated markets of Sydney and Melbourne is widening

AUSTRALIA, 11 July 2012 – Statistics released by Jones Lang LaSalle Research showed that the leasing market remained challenging in Q2. Nevertheless, positive net absorption was recorded and the rise in the national vacancy rate was a direct result of increased backfill space availability in Brisbane, Melbourne and Perth.

Jones Lang LaSalle’s National Head of Office Leasing, Kevin George said “Across global financial markets, risk-off was the key theme of Q2. The increased risk of a European sovereign default and signs that the US and Chinese economies were slowing, impacted business decision-making and further extended the lease negotiation process.”
“Nevertheless, the pre-commitments made by Westpac, KPMG and Lend Lease to C4 and C5 at Barangaroo shows that major leasing transactions can still be concluded,” said Mr George.
Across the CBD office markets, positive net absorption of 73,900 sqm was recorded in Q2. However, the backfill space created by the completion of major developments in Brisbane, Melbourne and Perth resulted in the national CBD vacancy rate increasing by 0.6 percentage points to 7.8% in Q2.
Mr George said “The completion of City Square North (Perth) and 111 Eagle Street (Brisbane) finally dispels the myth that these markets have significant development pipelines. Both of the projects were substantially leased before practical completion, vacancy is low and the development outlook is moderate.”
The Perth CBD recorded net absorption of 64,000 sqm in Q2 and the vacancy rate increased to 2.9%. Following the completion of City Square North, there is currently 8,633 sqm of space under construction in Perth, equating to 0.5% of total stock.
Prime gross effective rents in Perth increased by 3.2% over the quarter and are now up 31.8% from the cyclical low in 3Q10.


“The price signals from the space market in Perth have yet to translate into development activity. We expect that a number of pre-commitments will conclude over the next 6-12 months. Nevertheless, the first completions in the next development cycle are unlikely to occur until 2015 at the earliest, keeping Perth vacancy at a very low rate over the next three years,” said Mr George.
In the Brisbane CBD, net absorption was 11,700 sqm in Q2 and vacancy increased to 8.8%.

Mr George said “Projections of mid-teen vacancy rates in the Brisbane CBD following the completion of 111 Eagle Street have proven to be inaccurate. The pre-production phase of large scale resource and energy projects is very labour intensive and continues to underpin the demand for office space. Similar to Perth, I expect a number of pre-commitments to be announced over the next 12 months.”

Net absorption was essentially flat (+1,000 sqm) in the Sydney CBD, but the vacancy rate tightened by 0.1 percentage point to 8.6% in Q2. Prime gross effective rents were unchanged over the quarter.
Mr George said “A large proportion of Corporate Australia is concerned about the short-term revenue outlook and businesses are reviewing costs to protect margins. As a result, there is limited organic growth in the market and owners are reporting higher tenant retention rates, as tenants opt for the more cost effective option of staying put.”
Tenant expansion, however, is only one driver of leasing activity. A number of businesses are looking to consolidate multiple tenancies to make efficiency gains, while others are looking to drive a cultural change throughout their organisation.
“A number of companies are exploring Activity Based Working as way of implementing a cultural change. A fully integrated ABW fit-out, however, is not appropriate for all organisations. As a result, we have coined the phrase ‘ABW Light’ – whereby occupiers take the elements that work for their business without embracing all aspects of the concept,” said Mr George.


The Melbourne CBD recorded negative net absorption of -16,400 sqm and the vacancy rate increased to 7.4% in Q2.
Jones Lang LaSalle’s Head of Capital Markets Research, Andrew Ballantyne said “The 2011/12 financial year will be remembered as Melbourne’s annus horribilis. The finance sector contracted, while the Victorian Government confirmed 3,500 public sector job cuts in the May budget. As a result, sub-lease availability increased to 1.3% of total stock.”
Mr George said “There is a further 236,700 sqm of space under construction in the Melbourne CBD to deliver by the first half of 2014. If demand remains weak in the 2012/13 financial year, vacancy could be moving out towards 10% in Melbourne.”
“However, the availability of good quality contiguous space in the CBD and tight conditions in the Fringe and suburban markets will provide the catalyst for centralisation of non-CBD tenants and absorb some of the excess capacity in the CBD,” said Mr George.
The Adelaide CBD office market recorded net absorption of 5,800 sqm in Q2 and the vacancy rate tightened to 7.7%.
Mr Ballantyne said “Adelaide has been the quiet achiever of the Australian office markets over the past three years. In Q2, prime gross effective rents increased by 0.7% and are now up 18.8% from the cyclical trough that was recorded in 2Q09. The increase in Adelaide rents over this period is second only to the Perth CBD.”
Canberra recorded a fourth successive quarter of positive net absorption in Q2 (7,800 sqm) and 47,600 sqm for the 2011/12 financial year. As a result, the vacancy rate tightened to 9.9% - the first time vacancy has been below 10% since 4Q09.
Jones Lang LaSalle expects tenants will remain cautious in committing to new space and net absorption is likely to be below trend in the 2012/13 financial year.
Mr Ballantyne said “Nevertheless, the supply-side of the equation is well managed over the medium-term. Across CBD office markets, there is only 616,800 sqm of space under construction, equating to 3.8% of total stock to complete by the end of 2014.
"As a result, the national vacancy rate is projected to remain around the mid-point of equilibrium assumed to be between 7% and 9% for office markets,” concluded Mr Ballantyne.