Australia's CBD office markets party like it is 2007
JLL research shows quarterly net absorption has hit the highest level in more than a decade.
JLL Research has released 3Q18 statistics on national office markets. The figures showed positive net absorption of 151,200 sqm over the quarter and 258,600 sqm over the 12 months to September 2018.
The national CBD office market vacancy rate compressed in 3Q18 (9.1%) – a reduction of 1.8 percentage points over the year to September 2018.
JLL Head of Research – Australia, Andrew Ballantyne said, "Labour force surveys show that corporate Australia is increasing headcount which has translated into positive leasing enquiry and activity."
"The strength of the office leasing market was reflected in the 3Q18 net absorption figure – the strongest quarterly result since 4Q 2007. While Melbourne continues to be the standout performer, the leasing market upturn is more diverse with above trend net absorption in Canberra, Adelaide, Brisbane and Perth," said Mr Ballantyne.
The Melbourne CBD recorded 79,900 sqm of net absorption in 3Q18 and 187,800 sqm over the 12 months to September 2018. The Melbourne CBD vacancy rate tightened from 4.6% in 2Q18 to 4.0% in 3Q18 – the lowest level since 2Q 2008. Melbourne CBD prime gross effective rents increased by 1.1% over 3Q18 and by 8.7% over the 12 months to September 2018.
JLL Head of Office Leasing – Australia, Tim O'Connor said, "The Melbourne CBD office leasing market juggernaut continues to roll on. Melbourne is one of the world's strongest performing cities and we continue to see a diverse range of industry sectors expanding their occupational footprint in the Melbourne CBD.
"The Melbourne result was even more impressive as it included the relocation of the Victorian WorkCover Authority to a new premise in Geelong. The expansion of professional services firms, centralisation and the education sector all contributed to the strong net absorption result in the Melbourne CBD.
"The Melbourne CBD development pipeline will deliver new product over the next two years with 2020 expected to be the largest year for completions since 1991. However, the strength of the demand-side of the equation has led to a downward revision in the vacancy rate. We project 2020 vacancy will be in the 6% territory – well below equilibrium of 7% to 9% for the Melbourne CBD," Mr O'Connor said.
Sydney CBD recorded 8,800 sqm of net absorption over the 12 months to September 2018 and vacancy was 4.7%. Low vacancy continues to exert upward pressure on Sydney CBD rents. Prime gross effective rents increased by 0.8% over the quarter and by 10.1% over the 12 months to September 2018.
Mr O'Connor said, "Co-working operators are really ramping up their presence in the Sydney CBD. Two more WeWork facilities opened in Q3 and we are speaking with a number of potential new co-working operators. One of the challenges for new entrants is the lack of contiguous space in the Sydney CBD."
The Brisbane CBD recorded 15,400 sqm of net absorption in 3Q18 and vacancy tightened to 13.9%. Over the past 12 months, net absorption in the Brisbane CBD has totaled 39,600 sqm – 29% above the 40-year average of 30,600 sqm.
Mr Ballantyne said, "The Brisbane CBD leasing market recovery is starting to gather momentum with prime grade vacancy (8.2%) tightening to the lowest level since 4Q12. The next phase of the Brisbane recovery will see a reduction in leasing incentives and an improvement in prime effective rents."
The Perth CBD recorded net absorption of 17,600 sqm in 3Q18 and 34,000 sqm over the 12 months to September 2018. Vacancy remains elevated (22.0%), but the spread between prime (18.0%) and secondary (28.1%) grade vacancy remains wide.
The Adelaide CBD recorded positive net absorption of 14,700 sqm in 3Q18 and 23,200 sqm over the 12 months to September 2018. The quarterly net absorption in Adelaide was the strongest since 4Q08. Vacancy tightened to 13.7% with prime grade vacancy moving back into single digit territory (8.3%) in 3Q18.
Mr Ballantyne said, "Defence, resources and professional services are growth sectors of the Adelaide CBD office market. The expansion of the defence sector and competition for skilled labour has led to organisations shifting operations into the CBD. BAE Systems moved into the CBD from Edinburgh Parks in Q3."
Canberra recorded net absorption of 35,700 sqm in Q3 and vacancy tightened to 11.6%. Low vacancy in the prime grade sector (6.2%) has resulted in rental growth with prime gross effective rents increasing by 3.7% over the 12 months to September 2018.
Mr Ballantyne said, "Brisbane, Perth and Adelaide will be the office markets to watch closely in 2019. Leasing enquiry and activity is positive, prime grade vacancy has tightened in Brisbane and Adelaide and we expect owners will start winding back incentives to a level more associated with current vacancy rates."