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News release

AUSTRALIA

The office market recovery gathers momentum

Sydney and Melbourne record strong net absorption over the 2014/15 financial year, while Brisbane and Canberra show signs of stabilisation


JLL Research has released 2Q15 statistics on national office markets. The figures showed positive net absorption of 88,400 sqm over the quarter – a fourth successive quarter of positive net absorption – and 205,500 sqm over the 2014/15 financial year. As a result, the national CBD office market vacancy rate tightened by 0.5 percentage points to 11.6%.

JLL's Head of Strategic Research, Australia Andrew Ballantyne said, "Domestic lead indicators for the office sector improved over 2Q15. Corporate Australia has responded positively to the Federal Budget and more accommodative monetary policy.

"The office market recovery is gathering momentum in Sydney and Melbourne. However, our quarterly data collection meetings highlighted that leasing enquiry and activity have improved over 2015 even in the weaker leasing markets of Brisbane, Canberra and Perth, where limited organic growth is evident," said Mr Ballantyne.

The Sydney CBD recorded positive net absorption of 59,900 sqm in 2Q15 and 137,600 sqm over the 2014/15 financial year. The 2014/15 net absorption result for the Sydney CBD was the strongest since the 2005/06 financial year. As a result, the Sydney CBD vacancy rate tightened to 7.8% in 2Q15 – well below the 20 year average of 8.3%.

JLL's Head of Office Leasing, Australia, Tim O'Connor said, "Tenant demand for good quality and well-presented A Grade space was firm in the Sydney CBD over the 2014/15 financial year. As a result, strong activity in the A Grade sector has significantly reduced the number of contiguous options within existing buildings."

The Sydney CBD A Grade vacancy rate tightened from 11.9% to 5.6% over the 2014/15 financial year. The A Grade vacancy rate in the Sydney CBD is at the lowest level since 3Q08.

Mr O'Connor said "The demand recovery in Sydney is broadening with CBA expanding its occupational footprint in Q2. However, traditional industry sector definitions are becoming blurred and the FinTech sector – a business based on using software to provide financial services – is a contributor to growth. In Q2, Stone & Chalk and Tyro Payments both increased their occupational footprint in the Sydney CBD.

"The momentum in the Sydney office leasing market will intensify the competition for space over the 2015/16 financial year. Competition in the A Grade sector of the market has already started to exert downward pressure on incentives and we expect incentives will move lower over the second half of 2015," said Mr O'Connor.

The Melbourne CBD recorded 26,000 sqm of positive net absorption in 2Q15 and 122,900 sqm over the 2015/16 financial year. However, vacancy increased marginally (10.1%) in Q2 as backfill space became available from relocation to new developments.

Mr O'Connor said, "The recovery in the Melbourne CBD is supported by the expansion of tenants in the sub 1,000 sqm cohort of the market. Approximately 60% of active leasing enquiry is concentrated in this sector of the market. However, centralisation supports the net absorption numbers with NEC, VECCI and Engineers Australia all relocating operations to the CBD over the quarter."

While Sydney and Melbourne are at the forefront of the office leasing market recovery, four of the six monitored CBD office markets recorded positive net absorption over the 2014/15 financial year.

The Brisbane CBD recorded a second quarter of positive net absorption in 2Q15 (2,600 sqm) and 4,900 sqm over the 2014/15 financial year. As a result, the vacancy rate compressed to 15.1% in 2Q15. Vacancy is concentrated in secondary grade assets (19.3%) with prime grade vacancy tighter at 10.2%.

Mr O'Connor said, "While the Brisbane CBD has stabilised, the Near City office market was negatively impacted by the downsizing of mining and engineering consulting services firms. Negative net absorption of 9,000 sqm was recorded in 2Q15 and vacancy increased to 16.7%."

The Perth CBD recorded negative net absorption of 3,200 sqm in 2Q15 and -50,600 sqm over the 2014/15 financial year. Vacancy increased to 17.4% over 2Q15 – the highest rate since 3Q99.

Mr Ballantyne said, "The rate of tenant contraction has slowed in the Perth CBD – we believe that the bulk of the downsizing has already occurred. However, the main risk to Perth's vacancy rate in the short-term will be on the supply-side of the equation with 135,000 sqm or 8.2% of total stock to deliver in the second half of 2015."

Canberra recorded a second successive quarter of positive net absorption (3,800 sqm) in Q2 with vacancy tightening to 15.3%.

Mr Ballantyne said, "The Federal Budget was positive for the Canberra office market. Furthermore, increased public sector infrastructure capital expenditure on information and communications technology (ICT) will be positive for private sector tenants over the 2015/16 financial year."

In 2Q15, the Adelaide CBD recorded negative net absorption of -700 sqm and vacancy increased marginally to 15.2%. However, prime gross effective rents had a sharp correction of 4.2% over the quarter and by 10.9% over the 2014/15 financial year.

Mr O'Connor said, "Corporate Australia is focused on top line revenue growth to expand profit margins. Real estate is a strategic enabler of growth objectives, while positive net absorption is a sign that businesses are expanding their footprint to accommodate headcount increases. We expect to see an increasing number of expansionary requirements and stronger demand from a broad range of industry sectors as we move through the 2015/16 financial year."

"Improved tenant demand, an expectation of a recovery in effective rents and capitalisation rate compression are the catalysts for the next development cycle. Nevertheless, the lead time for development is typically 36 months and supply additions will be below trend over 2017 and 2018 across most CBD office markets," concluded Mr O'Connor.