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News release

Australia

The recovery in office leasing markets gathers momentum

CBD office markets record a second quarter of positive net absorption, the first time since 4Q11


AUSTRALIA, 19 JANUARY 2015 – JLL Research has released 4Q 2014 statistics on national office markets. The figures recorded positive net absorption of 16,200 square metres over the quarter – the first time positive net absorption has been recorded in two consecutive quarters since 4Q 2011. Nevertheless, the national CBD office market vacancy rate was unchanged at 12.5%.

JLL’s National Director of Research, Andrew Ballantyne said, “Job advertisement surveys trended higher over 2014. While business conditions are fragmented across corporate Australia, the improvement in job advertisements is a positive sign that firms are looking to grow headcount.”

However, the recovery in leasing enquiry and activity is concentrated in Sydney and Melbourne. Sydney recorded 27,700 sqm of net absorption over 4Q14 – the highest figure since 2Q10 – taking the full year net absorption figure to an above-trend 70,000 sqm. 

Mr Ballantyne said, “The multi-speed office market has resulted in a significant divergence in vacancy rates. Sydney and Melbourne both recorded a tightening in vacancy, while vacancy moved out sharply across all other CBD office markets.”

The Sydney CBD is the only monitored CBD office market recording a single digit vacancy rate – the Sydney CBD vacancy rate tightened to 9.5% in 4Q14. 

JLL’s Head of Office Leasing, NSW & Australia, Tim O’Connor said, “Net absorption surprised on the upside in Sydney over 2014. The recent resurgence in the Sydney CBD leasing market has been led by strong tenant demand for A Grade space. Tenants in the technology and technology-related sectors are expanding headcount rapidly, while there are tentative signs that the finance sector is no longer in consolidation mode.

“The CBD has also benefitted from a shortage of good quality space outside of the CBD. As a result, a number of companies have centralised operations into the CBD. In 4Q14, Campaign Monitor at 201 Elizabeth Street and Info Track at 135 King Street both leased space in the city.

“The Sydney CBD leasing market is expected to gather further momentum over 2015. As a result, a number of tenants will be unable to secure their first choice of accommodation and there will be downward pressure on leasing incentives over the course of the year,” said Mr O’Connor. 

The Melbourne CBD recorded 16,600 sqm of positive net absorption and a reduction in the vacancy rate to 10.3% in Q4. 

Mr O’Connor said, “The net absorption numbers for the Melbourne CBD were also supported by centralisation. The highest and best use for a number of office assets in St Kilda Road is conversion to residential and we expect that a number of assets will be withdrawn over the next 2-3 years. As a result, the trend of centralisation in the Melbourne CBD has further to run.”

The demand environment is starting to stabilise in the Brisbane CBD. A small contraction was recorded for net absorption (-2,100 sqm), while the rise in vacancy was stymied at 16.8%. 

Mr O’Connor said, “An intrinsic link exists between business confidence and sub-lease availability. Our closely watched indicator of sub-lease availability fell by 7,700 sqm to 3.3% of total stock in the Brisbane CBD in 4Q14. This is a sign that the bulk of the downsizing in the resource sector has already occurred.”

Nevertheless, effective rents remain under downward pressure in Brisbane and Perth. Prime gross effective rents fell by 2.0% in 4Q14 and by 7.0% over 2014 in the Brisbane CBD. Perth recorded a sharper correction at 5.5% over the quarter and 23.4% in 2014. Prime gross effective rents have declined by 31.4% in the Perth CBD since the peak in the rental cycle was recorded in 2Q12. 

Mr Ballantyne said, “The Perth CBD recorded a tenth successive quarter of negative net absorption in Q4 (-22,200 sqm) and vacancy moved out to 15.8% - the highest rate since 1996. The short-term prognosis is for a challenging leasing market in Perth. Tenant demand will remain muted, while 2015 is expected to be the highest year for completions since 1982.”

Canberra recorded negative net absorption (-5,200 sqm) in Q4 and a rise in the vacancy rate to 15.1%. Canberra is now recording the highest vacancy rate since JLL started detailed monitoring of the Canberra office market in 1978. 

In 4Q14, the Adelaide CBD recorded net absorption of 1,400 sqm. However, the vacancy rate increased to 15.0%. Prime gross effective rents fell by 7.1% in Adelaide over 2014. 

Mr O’Connor said, “Efficiency and productivity will be at the forefront of corporate Australia’s mind when making real estate decisions in 2015. Nevertheless, we are starting to see evidence of some tenants leasing additional space upon lease renewal or relocation and we expect this trend will become more pronounced as the year progresses.

“An improvement in demand will coincide with an increase in office completions. Approximately 1.0 million sqm of new and refurbished space will complete across CBD office markets in 2015 and 2016. However, it is important to note that completions do not equal supply. A number of office assets will be withdrawn for conversion to residential or refurbishment. As a result, supply additions will average a more digestible 338,000 sqm per annum in 2015 and 2016,” concluded Mr O’Connor. 

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