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News release

Australia

Corporate Australia is stirring from its slumber

Sydney and Melbourne both record another quarter of positive net absorption, while sub-lease availability declines in the resource-dependent markets of Brisbane and Perth


​​AUSTRALIA, 13 OCTOBER 2014 – JLL Research has released Q3 statistics on the national office markets. JLL recorded positive net absorption 19,800 sqm over the quarter and a stabilisation of the national CBD office market vacancy rate at 12.4%. 

JLL’s National Director of Research, Andrew Ballantyne said “Business conditions have improved throughout 2014, while job advertisement surveys have trended higher. However, the start of the 2014/15 financial year appears to have been the catalyst for increased tenant enquiry and activity.”

Sydney and Melbourne are at the forefront of the recovery. Sydney recorded a third successive quarter of positive net absorption in Q3 (15,100 sqm). Over the first nine months of 2014, net absorption was 42,400 sqm in the Sydney CBD. 

JLL’s Head of Office Leasing, NSW & Australia, Tim O’Connor said “The recovery in the Sydney CBD leasing market is not being led by traditional larger space users – tier 1 legal firms and financial institutions. Technology and technology-related firms are expanding, while the tenant market below 800 sqm is very active.”

Mr O’Connor said “Sydney is following the same trend as east coast US office markets – technology firms are expanding, upgrading and locating themselves in core locations alongside traditional users including investment banks. LinkedIn has committed to relocate to 1 Martin Place and will occupy space in the same building as Macquarie.”

North Sydney also has a high exposure to the technology sector. North Sydney recorded 13,400 sqm of net absorption and a reduction in the vacancy rate to 9.0% in Q3.

However, the improvement in enquiry and activity has yet to move the needle on incentives. Incentives remain stubbornly high at around the 30% mark in the Sydney CBD. 

Mr O’Connor said “Tenants have had the luxury of time in the Sydney CBD over the past three years. We only have to see a few instances of tenants being unable to secure their first choice of accommodation before two things happen – the first is that decision making timeframes begin to reduce and the second is there will be downward pressure on incentives.” 

The Melbourne CBD recorded 27,400 sqm of positive net absorption and a reduction in the vacancy rate to 10.6% in Q3. 

Mr O’Connor said “The Melbourne CBD is experiencing another round of centralisation. Viva Energy and Pragmatic Training both committed to CBD space over the quarter. The acquisition of office stock with residential conversion potential in St Kilda Road will support further centralisation over the next 2-3 years.”

The resource-dependent markets of Brisbane (-2,700 sqm) and Perth (-13,300 sqm) both recorded negative net absorption over Q3. As a result, the vacancy rate increased to 16.7% in the Brisbane CBD and 14.7% in the Perth CBD. 

Mr Ballantyne said “While leasing market conditions remain challenging in both markets, we did have a positive read on sub-lease availability. Sub-lease availability is a sensitive barometer of business confidence and the reduction we recorded over Q3 is a sign that the bulk of the downsizing in the resource and resource-related sectors has already occurred.”

In Brisbane, sub-lease availability fell marginally from 3.71% of total stock in Q2 to 3.63% of total stock in Q3. However, the reduction in sub-lease was more pronounced in Perth declining from 3.93% of total stock in Q2 to 3.45% of total stock in Q3.  

Nevertheless, effective rents remained under downward pressure in Brisbane and Perth. Prime gross effective rents fell by 2.3% in Brisbane and by 4.2% in Perth over Q3. From the most recent cyclical peak (2Q12), Perth CBD prime gross effective rents have declined by 27.4%. 

Canberra recorded a further quarter of negative net absorption (-8,300 sqm) in Q3 and a rise in the vacancy rate to 14.0%. Canberra is now recording the highest vacancy rate since JLL started detailed monitoring of the Canberra market in 1978.

Mr Ballantyne said “Public sector tenants have taken a more strategic approach to real estate portfolio management. As a result, the downsizing of the public sector workforce has flowed through to an increase in sub-lease availability. In Q3, we noted a rise in sub-lease vacancy to 1.78% of total stock.”

In 3Q14, the Adelaide CBD recorded net absorption of 1,500 sqm. However, the vacancy rate was unchanged at 14.8%. 

Mr Ballantyne said “While we have recorded limited tenant expansion in the Adelaide market over 2014, there has been a flight to quality. As a result, vacancy has been displaced to secondary grade assets. The prime grade vacancy rate in Adelaide is now 7.9% - the tightest prime grade vacancy rate for any monitored CBD office market.”

Mr O’Connor said “Corporate Australia has a more positive outlook on revenue growth, headcount expansion and ultimately real estate requirements. While efficiency and productivity continue to be at the forefront of larger occupiers minds at lease renewal time, we are starting to see evidence of tenants leasing additional space and we expect that this trend will become more pronounced in 2015.”

“The residential conversion story will also be positive for Eastern Seaboard office markets over the next five years. In the Sydney CBD, we have identified 250,000 sqm of potential withdrawals in and around Hyde Park. It is however, important to take a disciplined approach to the timing of withdrawals as some owners are willing to extend lease terms on these assets. Nevertheless, it is a positive story over the medium-term and will see the displacement of tenants and generate new enquiry in the leasing markets,” concluded Mr O’Connor. 

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