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News release

Sydney

First signs of rental tension in Australian office markets

Q1 statistics confirm that rents have started to rise in Melbourne and Adelaide with Sydney to follow in late 2010


SYDNEY, 14 APRIL 2010 – March quarter statistics released by Jones Lang LaSalle Research confirm that tenant enquiry is rising in all markets, leasing activity is improving and landlords are starting to become more confident in lease negotiations.
 
Q1 figures revealed that the aggregate vacancy rate across all CBD office markets monitored by Jones Lang LaSalle nationally actually declined by 0.1 percentage points to 7.9% in the March quarter.
 
National Office Analyst, Andrew Ballantyne said, “Under normal market conditions, landlords confidence should be inversely related to the outlook for vacancy. The main reason for the increased optimism is that every passing quarter confirms that the vacancy peak in this cycle will be very benign compared with previous downturns.”
 
Positive net absorption of 169,100 sqm was recorded in the quarter. This is the third successive quarter of positive net absorption for the Australian CBD office markets and the highest quarterly figure since 4Q07.
 
National Head of Leasing, Kevin George said, “In the second half of 2009, positive net absorption was primarily a result of pre-commitment activity. Whilst pre-commitment moves contributed to the Q1 figure, a higher proportion was related to new leasing activity after the rise in enquiries we recorded in the latter part of 2009.
 
“One of the key indicators driving the improvement in sentiment is sub-lease availability in the Sydney CBD which fell from 2.23% in Q4 to 1.88% of total stock in Q1.”
 
All CBD office markets recorded positive net absorption in
the quarter. Melbourne (48,800 sqm) recorded the highest figure, followed by Canberra (45,600 sqm), Sydney (44,000 sqm), Brisbane (22,400 sqm), Adelaide (8,000 sqm) and Perth (300 sqm).
 
Vacancy in the Sydney CBD fell back to 8.0% in Q1 despite the completion of speculative refurbishments at 175 Pitt Street (22,950 sqm) and 149 Castlereagh Street (11,947 sqm).
 
Mr George said, “The recovery in Sydney is starting to gather momentum and recent pre-lease and leasing deals have shown the return of FIRE (Finance & Insurance and Real Estate) sector tenants back into the market.
 
“Interestingly, a number of tenants have taken the opportunity to upgrade their space and most moves recorded in Q1 showed an increase in footprint compared with their previous tenancy.”
 
Despite the practical completion of the Myer Headquarters at 800 Collins Street and CSC Australia at 364 Docklands Drive in the March quarter, vacancy actually declined in the Melbourne CBD to 6.3% in Q1.
 
Mr Ballantyne said, “Melbourne continues to surprise on the upside recording 48,800 sqm of net absorption over the quarter and 137,400 sqm over the past 12 months. Prime vacancy has tightened to 5.2% and increased competition for prime contiguous space is evident.
 
“As tenant options have dwindled, upward pressure on rents has become evident. Prime gross effective rents increased by 5.1% over the quarter as face rents grew slightly and leasing incentives tightened.”
 
For a third successive quarter, prime gross effective rents were unchanged in the Sydney CBD.
 
Mr George said, “Competition for space drives rents and reduces leasing incentives. There remains sufficient full floor availability in Sydney to keep rents at current levels for the next 12 months, but as new deals are announced and vacancy is cascaded down the grades, there will be an increase in prime rents similar to that of Melbourne.”
 
Outside of the financial centres, vacancy was relatively steady in the Perth CBD (7.7%) and Adelaide CBD (8.1%), while Canberra increased to 8.7%.
 
“Vacancy increased marginally in the Brisbane CBD to 10.4%, however tenant demand is recovering and it has been the mining and mining-related firms that are leading the recovery to date as new mining projects begin to commence.
 
“This demand will filter down to supporting business services firms and limit the upward pressure on vacancy over the next 12-24 months. The completion of 111 Eagle Street is set to capture the next upswing in the Brisbane market,” said Mr George.
 
The rate of rental decline continues to slow in the Brisbane CBD (-4.7%) and Perth CBD (-3.1%). Both these markets are now expected to reach a trough in 2010. Prime gross effective rents also declined in Canberra (-0.2%), while Adelaide recorded an increase of 1.5% in Q1.
 
Mr George said, “Sydney, Melbourne and Adelaide start the current expansion with considerably lower vacancy than previously expected, and with a lower vacancy factor than the peak of previous downturns.
 
“Businesses are growing headcount as reflected by the ABS labour force survey and the solid earnings reporting season in February is a precursor for companies making longer-term capital investment decisions. As a result, a number of major pre-commitments were concluded in Q1 and the number of briefs in the market continues to increase.
 
“This will increase new development activity in CBD office markets after only 5 new projects above 10,000 sqm commenced in 2009. Nevertheless, the amount of new supply scheduled to complete in 2011 and 2012 is low and we expect to see a period of above trend rental growth in Melbourne and Sydney from mid 2011,” concluded Mr George.