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News release

SYDNEY

Office Market Recovery to Gather Momentum in 2010

Q4 statistics confirm that tenant demand is recovering and the competition for prime grade contiguous space is poised to return in 2010


SYDNEY, 20 JANUARY 2010 – December quarter statistics released by Jones Lang LaSalle Research confirm that conditions in Australia’s office markets are stable in the financial centres of Sydney and Melbourne, while the rate of decline slows in the Perth and Brisbane resource-dominated markets.
 
Q4 figures revealed that the aggregate vacancy rate across all CBD office markets monitored by Jones Lang LaSalle nationally increased by only 0.3 percentage points to 8.0% in the December quarter.
 
National Office Analyst, Andrew Ballantyne said, “Once again, 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 61,200 sqm was recorded in the quarter. This is the second successive quarter of positive net absorption.”
 
“In the 1991 recession and post 2000 slowdown, there were two and three successive years of negative net absorption. The 2009 result of +48,400 sqm ensures that this downturn will not record one calendar year of negative net absorption,” said Mr Ballantyne.
 
National Head of Leasing, Kevin George said, “While conceding that a high proportion of net absorption was driven by the pre-commitment activity in 2006 and 2007, the fact that sub-lease availability declined sharply in the second half of 2009 and leasing activity improved highlights the underlying strength in the market.”
 
With the exception of Adelaide (-3,900 sqm) and Canberra (-1,300 sqm), all CBD office markets recorded positive net absorption in the quarter. Once again, Melbourne (27,200 sqm) recorded the highest figure, followed by Brisbane (20,700 sqm), Sydney (9,400 sqm) and Perth (9,000 sqm).
 
“This confirms that the Sydney and Melbourne office markets are at the trough in the current cycle,” said Mr George.
 
“Vacancy in the Sydney CBD declined to 8.2% in Q4 from 8.5% in Q3 and is now in line with the 10 year average. Sydney has surprised on the upside over the past six months. In the post 2000 slowdown, there were 12 successive quarters of negative net absorption compared with four in this downturn (between Q3 08 and Q2 09),” said Mr Ballantyne.
 
Despite the practical completion of Media House at 643 Collins Street and the Goods Shed at 733 Bourke Street in the December quarter, vacancy actually declined in the Melbourne CBD to 6.4% in Q4 from 6.6% in Q3.
 
“From a demand perspective, Melbourne has been a stand out performer recording 64,000 sqm of net absorption in 2009. Companies have continued to make longer-term real estate decisions and looked to upgrade from secondary to prime space, while the market had a tenant bias. The lack of prime contiguous space in Melbourne will become apparent over the next 12 months and the rise in pre-commitment briefs in the market is recognition by tenants that space requirements can no longer be met by vacancy in existing stock,” said Mr George.
 
Outside of the financial centres, vacancy increased in the Brisbane CBD (10.1%), Adelaide CBD (8.2%) and Canberra (8.5%).
 
“Vacancy declined in the Perth CBD to 7.7% as Chevron leased an additional 4,600 sqm at QV1. The expansion of Chevron is a direct result of the Gorgon Gas Development and it will have a positive flow on to the engineering consulting firms and other service providers,” said Mr George.
 
Mr George said positive fundamentals and improved sentiment continued to provide support to rents.
 
Over the quarter, prime gross effective rents were unchanged in Sydney, Melbourne and Adelaide. The rate of rental decline slowed in the Brisbane CBD (-8.3%) and Perth CBD (-2.6%) as these markets continue to adjust from the rental spike in 2006-07. Canberra (-0.8%) recorded a marginal decline in rent.
 
Even with the commencement of eight new and refurbished projects in Q4, the supply outlook continues to contract across the national market. The development pipeline is now 957,000 sqm (60% pre-committed) or 6.2% of existing stock.
 
“We were confident that the benign supply outlook would ensure that the market did not experience a blow out in vacancy similar to the 1975 and 1991 recessions. In fact, the remarkable turnaround in tenant demand is forcing us to revise down our vacancy peak expectations for late 2010,” said Mr Ballantyne.
 
Mr George stated that the lead indicators for office demand continue to firm.
 
“Business confidence surveys are at elevated levels, while job advertisements continue to rise. The micro indicators for the office sector are confirming the improving macro environment with leasing enquires rising across the CBD office markets.
 
“The recent fall in the national unemployment rate to 5.6% is an indication that the war for talent is heating up in the labour market. With the prime vacancy rate at 7.4%, competition for large blocks of the best office space will be intense in 2010, leading to a moderation of incentive levels,” concluded Mr George.