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A deterioration in economic conditions slows tenant demand, while sub-lease vacancy casts a shadow over financial centres
SYDNEY, 21 January 2009 –December quarter statistics released by Jones Lang LaSalle Research reveal that tenant demand moderated further in light of weakening economic conditions both locally and overseas.
“The Australian commercial market has experienced a turbulent year in 2008, characterised by softening demand, rising vacancy, moderating rental growth and a decompression of investment yields,” according to Jones Lang LaSalle Associate Director of Research, Andrew Ballantyne.
Q4 figures revealed that the aggregate vacancy rate across all CBD office markets that Jones Lang LaSalle monitor nationally increased by 0.9% to 5.5% in the December quarter. Vacancy pressures are clearly increasing, however the headline vacancy rate remains below the long-term equilibrium of between 7% and 8%. Looking at each of the CBD markets individually, all recorded a significant uplift in vacancy with the exception of Adelaide where vacancy increased only marginally to 3.9% from the all-time low of 3.8% in the September quarter.
Jones Lang LaSalle’s National Head of Leasing, Kevin George agrees that turbulent conditions are evident in the market. “The economic slowdown and reduced profitability is forcing organisations to address their cost base. For the majority of companies in CBD markets, labour is the largest cost, followed by rent or IT. Staff layoffs and a re-evaluation of floor space needed in the medium term has resulted in rising sub-lease vacancies,” said Mr George.
Similar to 1991 and 2001, the upturn in sub-lease vacancy is most notable in the financial centres. Sub-lease space being actively marketed in the Sydney CBD increased to 76,000 sqm in Q4 (42,400 sqm in Q3), while in the Melbourne CBD it climbed to 30,250 sqm (11,700 sqm in Q3).
“It is important to put the current sub-lease statistics into an historical context. As a percentage of total stock, both Sydney (1.6%) and Melbourne (0.7%) are around long-term averages. However with unemployment set to rise in 2009, the likelihood of further sub-lease being made available to the market increases,” said Mr Ballantyne.
Across the major CBD office markets, net absorption was approximately 44,200 sqm in Q4. The annualised figure of 148,300 sqm in 2008 was the lowest yearly total since 2003. The Sydney CBD had its second consecutive quarter of negative absorption (-28,450 sqm) with a negative figure also recorded in the Perth CBD (-9,574 sqm), while there was negligible net absorption in Canberra (1,750 sqm) and Brisbane (1,200 sqm). The Melbourne CBD (38,900 sqm) and Adelaide (40,400 sqm), both recorded strong levels of net absorption, however in the case of Melbourne, this was reflective of precommitments and relocations to the CBD as opposed to the strength of underlying demand.
“There will clearly be a softer demand environment in 2009 with the risks most evident in the financial centres of Sydney and Melbourne. Perth and to a lesser extent Brisbane will be impacted by the slowdown in the resource sector with a number of second tier miners fighting for survival and the larger resource houses postponing their growth plans and cutting costs. As the construction pipeline has a high level of pre-commitment, the slowdown will negatively impact demand for backfill space in 2009 and 2010,” said Mr George.
Mr Ballantyne said despite the weaker demand conditions, there was limited risk of an over-supply in CBD markets.
“Across monitored Australian CBD office markets, there was approximately 1.4 million sqm of space under construction at the end of 2008, equating to 9.5% of the total stock. In the past 6 months, the number of projects moving from the planning stage to construction has slowed markedly and this will significantly impact supply additions in the 2011 and 2012 timeframe,” said Mr Ballantyne.
Rising vacancy has increased the tenants bargaining power, resulting in higher incentive levels and downward pressure on effective rents in a number of markets. Over the quarter, prime gross effective rents declined in the Brisbane CBD (-11.2%), Sydney CBD (-10.4%), Melbourne CBD (-6.7%) and Canberra (-0.1%).
“The supply constrained markets may save landlords the pain of further falls beyond 2009. The next six months may prove to be the most favourable for tenants in this cycle,” said Mr George.
Adelaide is the exception to the CBD theme of declining effective rents, with prime gross effective rents increasing by 0.2% over the quarter, and 21.1% in the past 12 months. Adelaide continues to experience relatively strong tenant enquiry, especially from tenants associated with mining and infrastructure projects and the education sector.
In the investment market, Jones Lang LaSalle recorded a further decompression of prime and secondary yields. Weighted average prime yields softened by 40 basis points, while secondary yields experienced greater decompression of 50 basis points in Q4.
Transaction volumes for 2008 were down significantly on previous years. Nationally, Jones Lang LaSalle noted a 60% reduction in 2008 volumes compared with 2007.
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