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News release


The bifurcation of CBD office markets

Sydney and Melbourne recorded positive net absorption in 2Q 2014, while further contractions in demand occurred in Brisbane and Perth

​AUSTRALIA, 21 JULY 2014 – JLL Research has released Q2 statistics on the national office markets. While the statistics showed that the national CBD office market vacancy rate increased to 12.2% in 2Q14, the vacancy rate in the Sydney CBD fell below 10% for the first time since 1Q13.

In 2Q14, JLL recorded positive net absorption of 21,800 square metres in the Sydney CBD and a reduction in the vacancy rate to 9.9%. Centralisation supported net absorption numbers with Tabcorp and AIPE committing to relocate to the Sydney CBD over Q2. 

JLL’s Head of Office Leasing, NSW & Australia, Tim O’Connor said, “There are numerous drivers of centralisation. At the moment, the CBD value proposition provides an opportunity for occupiers looking to centralise their operations and leverage off the amenity of the CBD to be more attractive to prospective job applicants.”

However, centralisation has not had a detrimental impact on decentralised markets. JLL recorded a reduction in the vacancy rate for North Sydney (from 11.0% to 10.6%) and Parramatta (from 6.9% to 6.4%) over 2Q14.

Mr O’Connor said, “In 2014, we have seen stronger enquiry and activity across the Sydney CBD office market. Furthermore, sublease availability is no longer a story in the Sydney CBD. Our closely watched monitor of sublease availability has declined by 23,300 sqm in 2014 to just 1.0% of total stock.” 

The current reading for sublease availability is lower than the 10 year average (1.2% of total stock) and lower than other global finance centres. As an illustration, sublease availability was 1.8% of total stock in New York and 2.2% of total stock in Chicago in 2Q14.

Mr O’Connor said, “Sublease availability is intrinsically linked to business confidence. A reduction in sublease availability is a lead indicator for employment over the medium-term. The outlook for employment growth is also supported by the recent improvement in various job advertisement surveys.” 

Melbourne is also on the positive side of the office market demand divergence. JLL recorded positive net absorption of 11,100 sqm in 2Q14. However, the vacancy rate increased over the quarter to 11.1%. 

Mr O’Connor said, “Large occupiers are reading through the Melbourne CBD vacancy rate. There is limited availability of contiguous space in modern buildings, which has led to further pre-commitment activity. Over the quarter, the requirements released by PwC and Jemena were finalised.” 

In contrast, Brisbane and Perth are on the negative side of the office market demand bifurcation. Over the quarter, Brisbane recorded net absorption of -21,200 sqm and –57,000 sqm over the 2013/14 financial year. As a result, the Brisbane CBD vacancy rate hit 16.5% in 2Q14.

JLL’s National Director of Research, Andrew Ballantyne said, “While no part of the Brisbane office market has been immune from downsizing – tenant contractions have had a disproportionate impact on secondary stock. The secondary grade vacancy rate moved above 20% in 2Q14 – 8.5 percentage points higher than the prime grade vacancy rate (11.9%).

The Perth CBD recorded an eighth successive quarter of negative net absorption in 2Q14 (-13,800 sqm). The contraction in net absorption over the 2013/14 financial year totalled -82,900 sqm. As a result, the vacancy rate in the Perth CBD moved out to 12.7% in 2Q14.

Canberra recorded negative net absorption of -26,600 sqm and a rise in vacancy to 13.2% in 2Q14. JLL expects that 2014 will be the third calendar year of negative net absorption since detailed monitoring of the Canberra office market commenced in 1978.

Mr Ballantyne said, “Canberra has yet to recover from the hiatus in leasing activity leading up to the Federal Budget. While the implementation of recommendations from the National Commission of Audit is negative for the net absorption outlook, it will generate enquiry and activity over the latter part of 2014 and into 2015.” 

In 2Q14, Adelaide recorded net absorption of -4,000 sqm and a rise in vacancy to 14.8%. Adelaide’s vacancy is now at the highest rate since 2000. 

Mr Ballantyne said, “The rent profile followed the same trajectory as tenant demand. Face rents edged slightly higher in Sydney and Melbourne over the 2013/14 financial year. However, a rise in leasing incentives in Brisbane and Perth exerted downward pressure on effective rents in those markets over the past financial year.” 

Prime gross effective rents increased by 2.3% and 0.8% in Sydney and Melbourne over 2013/14. At the same time, prime gross effective rents fell by 9.6% in Brisbane and by 20.8% in Perth.

Mr O’Connor said, “Leasing activity will improve over the 2014/15 financial year. There are already signs of expansion from professional services and technology-related firms. Furthermore, corporate Australia, outside of the mining sector, has underinvested in capital expenditure programs over the past three years.”

“A reactivation of business investment projects, especially those related to IT infrastructure, will under-write the demand for project space over 2014/15.”

“Over the next three years, a significant amount of office stock will be withdrawn across CBD office markets. Almost 4% to 5% of office stock could potentially be withdrawn between 2014 and 2017. Those assets with residential conversion potential will see the displacement of tenants and generate new enquiry in the leasing markets,” concluded Mr O’Connor. 

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