A strong start to 2018 for Australia's office markets

The leasing market recovery in Brisbane and Perth is starting to gather momentum.

April 18, 2018

AUSTRALIA – JLL Research has released 1Q18 statistics on national office markets. The figures showed positive net absorption of 48,300 sqm over the quarter and 177,100 sqm over the 12 months to March 2018.

The national CBD office market vacancy rate compressed to single digit territory in 1Q18 (9.9%) – a reduction of 1.5 percentage points over the year to March 2018.

JLL Head of Research – Australia, Andrew Ballantyne said, "Business surveys have started 2018 in positive territory and supports our view that corporate Australia is more confident in the medium-term revenue and profitability outlook."

"Employment growth is a lead indicator for office sector demand and the strength in employment numbers is reflected in leasing enquiry figures. While the demand story in Sydney and Melbourne is well articulated, the improvement in the Brisbane and Perth leasing markets has flown under the radar over the past 12 months and is starting to gather momentum," said Mr Ballantyne.

The Perth CBD recorded net absorption of 7,800 sqm in 1Q18 and 34,400 sqm over the 12 months to March 2018. Vacancy has trended lower from the cyclical peak recorded in 1Q16 (24.7%), but remained elevated at 21.4% in 1Q18.

Mr Ballantyne said, "Leasing market activity has improved in Perth, but owners have had to remain competitive with leasing deals and differentiate their office product to appeal to a broad range of tenants."

"However, owners with direct vacancy have much less competition from the sub-lease market, which has contracted from 5.1% of total stock in 2016 to 2.0% of total stock in 1Q18," said Mr Ballantyne.

The Brisbane CBD leasing market recovery is more advanced than Perth and we recorded 15,300 sqm of positive net absorption in 1Q18. Vacancy tightened to 13.9% over the quarter – the lowest level since 1Q13.

JLL Head of Office Leasing – Australia – Tim O'Connor said, "Leasing enquiry has been orientated towards better quality assets and the Brisbane CBD prime grade vacancy has moved back into single digit territory (8.5%) in Q1."

"Population growth is an important indicator for the Queensland economy and Brisbane CBD office market. Net interstate migration into Queensland has started to recover on the back of housing affordability relative to Sydney / Melbourne and an improvement in the labour market, said Mr O'Connor.

The Melbourne CBD recorded the strongest positive quarterly net absorption result in Q1 (36,700 sqm). Net absorption totaled 91,000 sqm over the 12 months to March 2018 and vacancy tightened to 5.4% – the lowest rate since 4Q08.

Mr O'Connor said, "The expansion of co-working operators is an additional ingredient to the Melbourne CBD demand story. Space & Co and Hub Australia both expanded their occupational footprint, while a number of other co-working operators are in advanced stages of lease negotiation."

The sharp reduction in the Melbourne CBD vacancy rate has exerted upward pressure on effective rents. Melbourne CBD prime gross effective rents increased by 3.0% over 1Q18 and by 10.9% over the past 12 months.

The Sydney CBD vacancy rate was largely unchanged at 5.5% in 1Q18. Low vacancy continues to exert upward pressure on Sydney CBD rents. Prime gross effective rents increased by 3.9% over the quarter and by 16.3% over the 12 months to 1Q18.

Mr O'Connor said, "Sydney has moved up global city rankings over the past three years. Part of the explanation for Sydney's ascendency is the expansion of multi-national organisations in the finance, professional services and technology sectors in the city."

The Adelaide CBD office market vacancy rate was largely unchanged at 15.2% in 1Q18. However, the prime grade sector of the market remains healthier with vacancy sitting at 11.6%, while secondary grade vacancy is 17.4%.

Canberra recorded negative net absorption in Q1 (-2,500 sqm). The headline vacancy rate of 13.2% in 1Q18 provides limited insight into the Canberra market. Canberra has the widest prime/ secondary grade vacancy rate spread in the country. Prime grade vacancy is very tight at 5.4%, while the secondary vacancy rate is elevated at 24.9%.

Mr O'Connor said, "Sydney and Melbourne will remain at or close to the top of the global office rent ladder in 2018. The improvement in the Brisbane and Perth leasing markets should be monitored closely and a further reduction in vacancy over the next 24 months should be associated with a moderation in incentive levels."

About JLL
JLL (NYSE: JLL) is a leading professional services firm that specializes in real estate and investment management. A Fortune 500 company, JLL helps real estate owners, occupiers and investors achieve their business ambitions. In 2016, JLL had revenue of $6.8 billion and fee revenue of $5.8 billion and, on behalf of clients, managed 4.4 billion square feet, or 409 million square meters, and completed sales acquisitions and finance transactions of approximately $136 billion. At year-end 2016, JLL had nearly 300 corporate offices, operations in over 80 countries and a global workforce of more than 77,000. JLL has over 50 years of experience in Asia Pacific, with 36,000 employees operating in 94 offices in 16 countries across the region. We were the first global commercial property firm to establish an Australian presence in 1958 and currently employ over 2500 employees throughout our 10 offices across the country.  www.ap.jll.com.