Multiple industry sectors in expansion mode
Employment growth has translated into positive enquiry and activity across Australian office markets.
JLL Research has released 4Q17 statistics on national office markets. The figures showed positive net absorption of 13,600 sqm over the quarter and 187,100 sqm over 2017 across CBD office markets.
The national CBD office market vacancy rate has compressed to 10.4% in 4Q17 – a reduction of 1.5 percentage points over the course of 2017.
JLL Head of Research – Australia, Andrew Ballantyne said, "Employment is the key economic variable for the office sector. Corporate Australia has become more confident about the medium-term revenue outlook and this confidence has translated into strong employment growth over 2017."
"Employment growth is a precursor for leasing enquiry and activity. In Sydney and Melbourne, multiple industry sectors are in expansionary mode. However, leasing enquiry has improved across Adelaide, Brisbane and Perth with all three markets recording positive net absorption in 2017," said Mr Ballantyne.
The Melbourne CBD recorded the strongest positive quarterly net absorption result in Q4 (29,400 sqm). Net absorption totaled 91,100 sqm over 2017 and vacancy tightened to 6.4% – the lowest rate since 1Q12.
JLL Head of Office Leasing – Australia – Tim O'Connor said, "Education is a growth sector of the Melbourne CBD. Quality institutions, affordability, lifestyle, employment prospects and student community make Melbourne an attractive destination for overseas students."
"Education is only one part of the Melbourne growth story. The public sector is in expansion mode, technology related firms are increasing headcount, while centralisation activity continues to support net absorption figures," said Mr O'Connor.
A tightening in vacancy and a reduction in the number of contiguous options in existing buildings are exerting upward pressure on effective rents. Melbourne CBD prime gross effective rents increased by 1.7% over 4Q17 and by 12.2% over 2017.
Mr O'Connor said, "Organisations in Melbourne's non-CBD office markets consider a range of location decision-making criteria including: proximity to customers, the ability to attract workers, transportation, amenity and car parking provision. The positive leasing activity we have recorded in the CBD is reflected in the Melbourne Fringe and Suburban office markets."
Over 2017, Melbourne Fringe net absorption (41,500 sqm) was the highest since 2010, while Melbourne South East suburban market net absorption (48,900 sqm) was the highest since 2005.
Sydney CBD net absorption was positive in 2017 (22,300 sqm) and vacancy tightened to 5.4%. Leasing activity was concentrated in good quality assets with the prime grade vacancy rate compressing to 5.1% – the lowest since 3Q08.
Mr O'Connor said, "The trend towards centralisation remained relevant over the latter part of 2017. However, a number of large organisations are moving towards a multi-location model with Allianz moving part of their operation to North Sydney and Herbert Smith Freehills relocating workers to Macquarie Park."
Low vacancy continues to exert upward pressure on Sydney CBD rents. Prime gross effective rents increased by 3.9% in Q4 and by 20.5% over 2017.
The leasing market recovery gathered momentum in the Adelaide CBD with positive net absorption of 8,700 sqm in Q4 and 20,900 sqm in 2017 – the strongest annual net absorption result since 2008.
Mr Ballantyne said, "South Australia is the defence capital of Australia. Babcock International shifted their Australian operations to Adelaide in 2016 and further increased their footprint in the CBD in Q4."
The Brisbane CBD recorded positive net absorption of 33,200 sqm in 2017 and a reduction in vacancy to 15.0%. The divergence between prime (10.4%) and secondary (19.8%) remains wide with prime grade vacancy at the lowest level since 3Q15.
The Perth CBD recorded net absorption of 41,800 sqm in 2017 – well above the 25-year average of 17,700 sqm. Vacancy remains elevated at 21.8%, but the spread between prime (18.6%) and secondary (26.8%) vacancy is expected to widen in 2018.
It is important to read behind the headlines in Canberra. Headline vacancy was elevated at 13.3% in 4Q17. However, prime grade vacancy remains tight at 5.6% and we recorded prime gross effective rental growth of 4.3% in 2017.
Mr O'Connor said, "A shortage of prime grade contiguous space in Sydney and Melbourne will see owners record high tenant retention rates and positive rent reversion in 2018. While leasing market conditions in Brisbane and Perth have improved, owners will have to ensure their product is differentiated and appeals to a broad range of organisations to improve retention rates or minimise downtime in cash flow."