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News release

Sydney

Where to from here? Jones Lang LaSalle reports on strength and length of property recovery

White Paper details the recovery profile for the commercial property market in 2010 – a critical time for investors, owners, managers and tenants


SYDNEY, 22 MARCH 2010 – A new research paper by Jones Lang LaSalle predicts the strength and length of recovery of Australian commercial property markets after the economic downturn will differ significantly between state markets and sectors, in contrast to the market boom (2002-2007) and downturn (2008-2009) periods when commercial property markets were closely aligned.
 
The White Paper entitled, “Market Recovery: Strategies for the Upturn” examines the recovery profile for each of Australia’s commercial property markets based on property market data as well as employment and economic indicators.
 
Most Australian commercial property markets – office, industrial and retail – reached their cyclical trough of the cycle in the December 2009 quarter.  2010 will be a year of consolidation, followed by a return to growth in rents and capital values, starting in 2011.
 
Australasian Head of Research, Dr David Rees, said the Sydney and Melbourne CBD office markets will lead the recovery in property.
 
“It is evident that the recovery profile will vary significantly between sectors and markets.  With commercial property markets in the early recovery phase, 2010 will be a critically important year for investors, owners, managers and tenants to position themselves in order to take full advantage of the next phase of the property cycle,” Dr Rees said.
 
The Australian CEO of Jones Lang LaSalle, Stephen Conry, said the market rebound had come earlier than expected.
 
“We are out of the trough, but not out of the woods.
 
“The market is buoyed by improved business confidence and office vacancy levels being lower than expected.  Business confidence has improved but not dramatically.  The boom, especially 2007, was extraordinary and we will soon return to more ‘ordinary’ times.
 
“Many office markets were in fact ‘saved’ by the downturn.  If the Global Financial Crisis had come any later, the level of new construction in many office markets could have resulted in a prolonged period of high vacancies and a sharper fall in capital values.

“This time last year we expected the current downturn would start to trough around the first quarter of this year.  However, we reached that trough earlier than expected in the fourth quarter of last year, having been spurred on by Australia’s strong economic performance and the business confidence it engendered, Mr Conry said.
 
“Overall, most of the key economic drivers for commercial property markets, including white collar employment, point to an upturn in 2010, followed by a return to trend growth in 2011.
 
“For the office market, we expect the national CBD vacancy rate will peak at 9.6% towards the end of 2010, yields have troughed and prime grade CBD office capital values are expected to remain stable through 2010 before commencing a cyclical rise in 2011. While this is the broad national outlook, the timing of the upturn will differ between individual markets
 
“In the industrial market, we believe prime yields have peaked at 8.60% at the end of 2009, capital values of prime industrial assets have stabilised and, overall, the market has performed better than was expected a year ago. In the retail market, median regional centre yields look to have peaked at 6.60% and capital values have fallen. However, regional shopping centres have emerged from the downturn fairly robust, with steady growth in rents.
 
“The trough for prime grade assets arrived slightly earlier than expected. Secondary grade assets have recorded greater falls in capital values than prime assets. These assets are also now considered to be at, or close to, their cyclical trough,” said Mr Conry.
 
The recovery profile for commercial property markets across Australia:
 
Office:
 
According to the Jones Lang LaSalle White Paper, the national office market has entered the recovery stage of the cycle. Dr Rees said, “Leasing enquiries have increased in all markets since mid-2009 and this is a precursor to a rise in leasing activity. However, this may not translate into an immediate recovery in net absorption as tenants are taking advantage of conditions to upgrade or consolidate; therefore vacancy is being shifted to poorer quality space.
 
“As in previous cycles, the Sydney and Melbourne CBD office markets will be the first office markets to recover. This in part reflects the concentration of financial and insurance sector in both markets and the fast reaction of those sectors to the business cycle.
 
“Sydney, Melbourne and Adelaide have a relatively benign outlook and vacancy is expected to tighten in 2011. Perth, Canberra and Brisbane have large development pipelines as a percentage of total stock, and vacancy rate will take longer to peak in those markets.
 
“The years 2011 and 2012 are expected to witness an acceleration in net absorption across the CBD office markets. However, because CBD office vacancy rates are lower at this cyclical trough than in previous cycles, particularly in Sydney and Melbourne, the impending recovery may be linked to slower than usual growth in net absorption, but faster rental growth than in previous cycles,” said Dr Rees.
 
Figure 3.1: White Collar Employment (as at Q4/2009) shows the historical and forecast jobs growth for major white collar employment sectors, which is a major indicator for CBD office markets.
 
Industrial:
 
According to the White Paper, the national industrial market emerged from this cycle better than expected and many sub-markets have performed better than in the early 1990s downturn.
 
Dr Rees said, “During 2010, demand for industrial space will be rising at a time when new supply is running well below trend. By 2011, these trends will result in rising rents, falling vacancy and a likely resurgence in construction activity.
 
“Since mid-2009, the lead indicators have firmed, with retail turnover figures remaining robust and container movements across the Eastern Seaboard ports having reached record levels in late-2009. This is a precursor to stronger pre-lease, as well as design and construction activity from mid-2010.
 
“Industrial indicators suggest there will be a recovery in demand for warehouse space and logistics facilities during 2010, although the outlook for the manufacturing sector remains subdued,” said Dr Rees.
 
Figure 3.2 shows an indicator that comprises the actual and forecast output of manufacturing and transport and storage sectors plus import volumes – all important indicators of the demand for industrial space.

Retail:
 
According to the Jones Lang LaSalle White Paper, the national retail market will have limited rental growth during 2010 due to an anticipated slowdown in retail spending in 2010.
 
Dr Rees said, “Vacancy rates will decline slowly in sub-regional and neighbourhood centres. Rental growth will gather pace in 2011, with some tightening of yields as consumer spending accelerates.
 
“The national retail supply pipeline peaked in mid-2008 with over 1.4 million sqm of retail space under construction. Since that time, development finance has been expensive and difficult to obtain.
 
“New project commencements have been limited over the past 18 months, and the total space under construction nationally has fallen to around 466,000 sqm at end-2009. The reduction in supply is particularly evident in South-East Queensland, which is also an area of strong population growth over the long term,” he said.
 
Figure 3.3 shows underlying and forecast retail turnover. Retail turnover growth is forecast to slow in 2010, reflecting the withdrawal of the fiscal stimulus as well as rising interest rates. The underlying trend in Figure 3.3 is constructed from employment growth and wages growth, designed to capture the spending capacity of households. During 2010 retail turnover growth may decline, but the underlying spending capacity of households is expected to increase.
 
Landlord or Tenant Market?
 
Dr David Rees added that the recovery profile across commercial property markets was not going to follow the same pattern as the boom and bust cycles.
 
“A comparison of the current and previous cycles, cautions against expectation of a rapid turnaround in 2010.  Strong growth in rents and capital values is likely to emerge in 2011 and 2012,” he said.
 
Table 5.1 in the White Paper shows the behaviour of rents and capital values through the previous cycle and the current downturn. Also shown are estimates for trends in rents and capital values on a national basis over the five year recovery period commencing in 2010.
 
Dr Rees said, “Broadly speaking, rents and capital values are expected to stabilise through 2010 and accelerate from 2011 onwards.
 
“We expect to see a rotation from tenant-favourable to landlord-favourable markets across the major commercial property sectors in Australia over the next two to three years as yields tighten, vacancy falls and rents rise,” he concluded.
 
 
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