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News release


New options available for tenants in today’s Australian office markets

Incentives are high, and landlords are willing to negotiate options that were unavailable six to 12 months ago

AUSTRALIA, 25 September, 2013 – With the current capital city office markets across Australia now sitting in the tenant’s favour, new options have become available for them in today’s market.

The findings are discussed in Jones Lang LaSalle’s latest Research report The Wrap, which investigates the latest real estate market trends across Australia.

According to Jones Lang LaSalle’s Head of Tenant Representation for Australia, Steve Urwin, Australia’s capital city office markets have moved further in favour of tenants in the last 12 months – both good and bad news for tenants.

“While there are great deals to be had, they are primarily as a result of subdued tenant demand due to cost cutting, headcount reductions and nervousness in the outlook over the next two-year period.
“However, the current market conditions offer opportunities as well. Clever solutions are being sought by tenants to deal with their current real estate strategy and give them appropriate flexibility in future.
“The opportunity for tenants is that landlords are prepared to write deals on space much further ahead of lease expiry than is typical, along with underwriting a tenant’s existing lease tail. In many cases, this is creating a compelling case for a premises rethink, restructure or relocation.
“An increasing number of institutional landlords are also prepared to consider pure effective deals with low rentals and no incentives – unheard of for a very long time – in an attempt to differentiate their offering in the market,” said Mr Urwin.

This year has seen a continuation of the cost-cutting and downsizing that we saw organisations take in 2012. With the higher representation of international firms, as well as banking and financial services organisations, the impact on the Sydney CBD has been amplified compared to other capital city markets.

According to The Wrap, vacancy levels have moved above 10%, recorded at 10.2% for Q2-13 in the CBD and 10.7% in the CBD Fringe. Dissecting the CBD numbers reveals A-grade space has the highest vacancy for the quarter at 12%, followed by B-grade at 10.6% and premium space at 9.4%.
According to the report, the current market conditions are being driven by weak business sentiment, delayed decision making and record-low interest rates. If sentiment changes and these factors resolve, with the record-low supply pipeline, the market may in fact recover more quickly than anticipated.

Melbourne has seen a rather rapid rise in its vacancy rate over the past 12 months. According to The Wrap, this is due to a negative net absorption environment as a result of below-trend demand, as well as the introduction of new supply such as 171 Collins Street, 555 Lonsdale Street and 180 Lonsdale Street.

The vacancy rate across all grades is now in excess of 10% in Melbourne’s CBD but is more pronounced in secondary space. Premium vacancy stands at 9.8% and A-grade at 8.5% as at Q2 2013.
Landlords are now willing to negotiate and offer more flexibility. Previously, landlords in older A and B Grade space with existing fit-outs would only be prepared to lease space on a five-year plus term. Now, they will consider three, two or in some instances 12-month leases.
The Brisbane CBD market has seen a marked shift over the past 12 months, with the heat coming out of the resource industry faster than anyone expected and sentiment taking a downward spiral very quickly.
According to The Wrap, having enjoyed an average vacancy rate of around 5.5% over the past decade, the city’s average vacancy currently sits at 14.2% - its highest in 20 years.
The Wrap asserts that no sector of the market is immune, with prime vacancy levels at 9.9% compared to 2.6% just 18 months ago. The emergence of a two-tiered market is however being seen, with vacancy in B-grade stock increasing to 17.8% as at June 2013.
With a drive for cost efficiency amongst corporates, a shift to better utilisation of space and shrinkage of footprint is being seen, with concepts such as activity based working gaining traction in Brisbane.
In the past three quarters, around 90,000 sqm of sub-lease space has flowed into the Perth CBD market. Total vacancy for the CBD stands at 7.9% as at Q3-13 compared with the sub 5% experienced for most of the last two years. Negative net absorption was recorded for Q2-13, the fourth quarter in a row.
According to The Wrap, there has been a paradigm shift in the Perth real estate market due to the economic conditions. Landlords are readjusting the terms offered to tenants. Whilst not having to meet the discounting of rents in the sub-lease market, they are improving the terms of their deals to adjust to the significant shift in market dynamics.