Has Adelaide become the most interesting CBD office market?

AUSTRALIA, 16 OCTOBER 2019 – JLL Research has released 3Q19 statistics on national office markets. The figures showed positive net absorption of 37,900 sqm over 3Q19 and 119,800 sqm over the 12 months to September 2019.

The national CBD office market vacancy rate was 8.1% in 3Q19 – a reduction of 1.0 percentage point over the year to 3Q19.

JLL Head of Research – Australia, Andrew Ballantyne said, “The Reserve Bank of Australia has moved decisively to further ease monetary policy and support employment growth across Australia. However, business confidence remains patchy and some organisations will be reluctant to make long-term decisions until the economic outlook improves.

“Adelaide is one of the office markets where sentiment has improved significantly over the past 12 months. Defence, aerospace, technology and health are all growth sectors of the Adelaide market and are having a positive impact on leasing enquiry and activity,” said Mr Ballantyne.

Boeing and BAE Systems have recently expanded their footprint in the Adelaide CBD and net absorption totaled 7,100 sqm over 3Q19. Vacancy trended lower to 13.5% with the prime grade sector moving back into single digit territory (9.9%). Prime gross effective rents have started to move higher and increased by 5.5% over the 12 months to September 2019.

The Sydney CBD recorded positive net absorption of 8,600 sqm in 3Q19. However, vacancy increased marginally to 4.6% as backfill space became available from relocation activity into a new development.

JLL Head of Leasing – Australia, Tim O’Connor said, “The Sydney CBD office market is a microcosm of the broader economy with expansion activity in the technology and flexible space sectors offset by some additional sublease space.

“However, we are seeing strong interest for the high quality sublease space being marketed and a number of the options are expected to be absorbed relatively quickly,” said Mr O’Connor.

Overall, Sydney CBD sublease availability is sitting at 0.9% of total stock – in line with the long-term average of 1.0% of total stock.

The Melbourne CBD recorded 6,000 sqm of net absorption over the quarter and vacancy tightened to 3.7% in 3Q19. The Melbourne CBD prime grade vacancy rate tightened to 2.1% in 3Q19 – the lowest level since early 2008.

Mr O’Connor said, “The very low prime grade vacancy rate is a positive sign for the Melbourne CBD office market as the next wave of new developments complete in 2020 and 2021. Some of the concerns around backfill space availability are over-stated and we are already seeing healthy levels of enquiry on these assets.”

Melbourne CBD rents continue to move higher with prime gross effective rents increasing by 4.8% over the 12 months to September 2019.

The Brisbane CBD recorded 4,700 sqm of net absorption in 3Q19 and 23,400 sqm over the 12 months to September 2019. The headline vacancy rate compressed to 10.9% in 3Q19 – the lowest level since 4Q12.

Mr Ballantyne said, “It is important to read behind the vacancy headlines in the Brisbane CBD. We are seeing positive enquiry and activity for good quality assets and prime grade vacancy has now compressed to 6.8%.”

The improvement in the Brisbane CBD has not been at the expense of the Brisbane Near City market. The Brisbane Near City recorded 31,600 sqm of net absorption over the past six months and a reduction in vacancy to 13.6% in 3Q19. Similar to the CBD, the Brisbane Near City prime grade vacancy rate (9.1%) is significantly tighter than secondary grade (17.1%).

The Perth CBD recorded net absorption of 7,700 sqm in 3Q19 and 39,800 sqm over the 12 months to September 2019. Vacancy remains elevated (19.4%), but the spread between prime (14.4%) and secondary (27.2%) remains wide reflecting stronger occupier demand for prime grade assets.

The Commonwealth of Australia has moved out of caretaker mode with stronger leasing enquiry and activity in the Canberra office market. Net absorption was 3,800 sqm over the quarter and vacancy tightened to 10.6% in 3Q19. The A Grade sector of the market is significantly tighter with A Grade vacancy compressing to 6.0% over the quarter.

Mr O’Connor said, “2020 is shaping to be an interesting year for the office sector. An uncertain economic outlook will influence decision-making, but a number of industry sectors are in expansionary mode. Infrastructure spending is a tailwind for the domestic economy and the potential to fast-track infrastructure spending would be positive for economic and white collar employment growth.”