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News release

Australia

A positive start for office leasing markets in 1Q

Five of the six monitored CBD office markets recorded positive net absorption in 1Q15. Perth was the outlier with tenant demand contracting for an eleventh successive quarter


​AUSTRALIA, 16 APRIL 2015 – JLL Research has released 1Q15 statistics on national office markets. The figures showed positive net absorption of 85,400 sqm over the quarter – a third successive quarter of positive net absorption. As a result, the national CBD office market vacancy rate tightened by 0.4 percentage points to 12.1%.

JLL’s National Director of Research, Andrew Ballantyne said, “While the headline net absorption result was firm, the lead indicators for office sector demand are mixed. A dichotomy exists between business confidence and hiring intentions. Most business surveys have confidence below historical averages, while job advertisement surveys have trended higher over the past 12 months.

“However, we view the positive trend in job advertisement surveys as a strong lead indicator for leasing enquiry. Our quarterly data collection meetings highlighted that the momentum we recorded in leasing enquiry in Sydney and Melbourne over the latter part of 2014 has continued into 2015,” said Mr Ballantyne.

The Sydney CBD recorded positive net absorption of 34,900 sqm in 1Q15 and 99,500 sqm over the past 12 months. As a result, the Sydney CBD vacancy rate tightened to 9.0% in 1Q15. 

JLL’s Head of Office Leasing, Australia, Tim O’Connor said, “The office leasing market in Sydney is now stronger than at any time since 2007. Tenant demand for A Grade space is robust with the A Grade market accounting for almost three-quarters of net absorption over the past 12 months.”

Mr O’Connor said, “Sydney is following the same trend as other major western finance centres. New York, London, Boston and Frankfurt have all recorded a tightening in vacancy rates between 2012 and 2014. However, the finance sector is not the locomotive of growth – headcount growth is strongest in the professional services sector – technology firms, management consultancy and mid-tier legal firms.

“Increasingly, vacancy is becoming fragmented in the Sydney CBD and the number of options for large space users, outside of development stock, is declining. We are starting to see the first signs of competition for space and incentives are expected to move lower over the second half of 2015,” said Mr O’Connor. 

The Melbourne CBD recorded 52,000 sqm of positive net absorption and a reduction in the vacancy rate to 9.6% in 1Q15. Melbourne has now recorded four successive quarters of positive net absorption totalling 102,600 sqm.

Mr O’Connor said, “Leasing enquiry and activity improved over the first part of 2015. A broad range of industry sectors are actively seeking space, while the growth that we noted in the technology sector in Sydney is starting to move the needle on the demand side of the equation in Melbourne. Furthermore, there are a number of large centralisation requirements which will reduce the number of contiguous options in the CBD.”

While Sydney and Melbourne are at the forefront of the office leasing market recovery, five of the six monitored CBD office markets recorded positive net absorption in 1Q15. 

The Brisbane CBD recorded a first quarter of positive net absorption since 3Q12 in 1Q15 (2,300 sqm). Stock withdrawals also exerted downward pressure on vacancy. As a result, the Brisbane CBD vacancy rate tightened by 1.0 percentage point to 15.6% in 1Q15. Furthermore, we recorded a sharp reduction in sub-lease availability to 2.7% of total stock in 1Q15. 

Mr O’Connor said, “The reduction in sub-lease supports our prognosis that sentiment has improved in Brisbane over the first part of 2015. However, we will not see a Lazarus-like recovery in tenant demand – businesses are taking a considered approach to space requirements and the lease negotiation process will remain protracted over 2015.”

Nevertheless, effective rents remain under downward pressure in Brisbane and Perth. Prime gross effective rents fell by 1.5% in 1Q15 and by 6.6% over the past 12 months in the Brisbane CBD. Perth recorded a sharper correction at 3.1% over the quarter with prime gross effective rents 17.9% lower than 1Q14.

The Perth CBD was the only one of the monitored CBD office market to record negative net absorption in 1Q15 (-11,900 sqm). Vacancy increased to 16.6% over 1Q15 – Perth now has the highest vacancy rate of any monitored CBD office market.

Mr Ballantyne said, “The downward shift in commodity prices will precipitate a wave of M&A activity and consolidation in the resource sector. While this activity will stimulate movement in the market, the Perth leasing market will remain challenging and we expect vacancy will rise further over the latter part of 2015.” 

Canberra recorded positive net absorption (3,900 sqm) in 1Q with vacancy unchanged at 15.5%. Nevertheless, vacancy is at the highest level since JLL started detailed monitoring of the Canberra office market in 1978. 

In 1Q15, the Adelaide CBD recorded net absorption of 4,200 sqm. However, the addition of new supply resulted in vacancy increasing to 15.1% - the highest rate since 2000. Prime gross effective rents fell by 4.1% in Adelaide over 1Q15. 

Mr O’Connor said, “A number of businesses are focused on top line revenue growth and positive net absorption is a sign that corporate Australia is leasing additional space upon lease renewal or relocation. Increasingly, corporate Australia views real estate as an enabler of productivity and supportive of the growth objectives of the firm. The fit-out implemented is a visual element of corporate culture and reflects the personality of the organisation. We expect there will be an increasing number of expansionary requirements released as we move into the 2015/16 financial year.

“A number of office assets with adaptive reuse potential were acquired in Sydney, North Sydney and Melbourne in 1Q. Withdrawal of office stock for conversion to residential, hotels or social infrastructure facilities will visually change the landscape of CBD office markets. JLL projects stock withdrawals will total approximately 800,000 sqm between 2014 and 2019, equating to 4.7% of CBD office stock,” concluded Mr O’Connor. 

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