The office sector shrugs off financial market volatility
Strong leasing activity and a shortage of contiguous space are starting to generate the first signs of rental tension in the Sydney CBD office market
JLL Research has released 3Q15 statistics on national office markets. The figures showed positive net absorption of 87,700 sqm over the quarter and 283,400 sqm over the past 12 months. The demand recovery in CBD office markets has gathered momentum with the rolling 12 month net absorption result 47% higher than the 20 year average for CBD office markets (193,300 sqm).
However, the availability of backfill space from the relocation to new development stock resulted in the national CBD office market vacancy rate remaining unchanged at 12.0%.
JLL's Head of Strategic Research, Australia Andrew Ballantyne said, "While financial market volatility negatively impacted business confidence over the quarter, businesses were willing to read through the short-term volatility and make long-term strategic real estate decisions."
"Sydney and Melbourne remain at the forefront of the leasing market recovery with leasing activity expiry-related in other CBD office markets. Nevertheless, there are tentative signs of organic growth in Brisbane, Canberra and Adelaide with positive net absorption recorded in each of those markets over Q3," said Mr Ballantyne.
The Sydney CBD recorded positive net absorption of 25,600 sqm in 3Q15 and 148,000 sqm over the past 12 months. As a result, the Sydney CBD vacancy rate tightened to 7.7% in 3Q15 – well below the 20 year average of 8.3%.
JLL's Head of Office Leasing, Australia, Tim O'Connor said, "The early phase of the demand recovery in the Sydney CBD was concentrated in the technology sector. However, the demand recovery is broadening with increased activity from financial services, infrastructure and education sector tenants."
Mr O'Connor said "A lower AUD is positive for the externally focused services sector. The education sector is a FX sensitive sector of the Australian economy and we have recorded increased activity from education related users across the Eastern Seaboard."
Mr O'Connor said "Strong leasing activity has resulted in competition for space and vacancy becoming fragmented across the Sydney CBD. The industry sectors in expansion mode are typically occupiers of A Grade space and the A Grade market has tightened significantly. However, leasing activity across the Premium Grade sector has certainly firmed over the past three months and vacancy has started to move lower."
"The first signs of rental tension are becoming evident in Sydney CBD. Face rents are rising and some moderate downward pressure was recorded on incentives. As a result, prime gross effective rents increased by 2.7% over Q3 and by 6.2% over the past 12 months," said Mr O'Connor.
The Melbourne CBD recorded 45,900 sqm of positive net absorption in 3Q15 and 141,500 sqm over the past 12 months. However, vacancy was unchanged in Q3 (10.1%) as backfill space became available from relocation to new developments.
Mr O'Connor said, "Technology can be a disrupter for traditional industry sectors. However, it is having a positive impact on the Melbourne office market with online betting platforms – Sportsbet and CrownBet – expanding their occupational footprint in the CBD."
Five of the six monitored CBD office markets recorded positive net absorption over Q3. Perth was the only market to record negative net absorption in Q3 – a 13th successive quarter of negative net absorption in the Perth CBD.
The Perth CBD recorded negative net absorption of 4,700 sqm in 3Q15 and -42,000 sqm over the past 12 months. Vacancy increased to 19.6% over 3Q15 – the highest rate since 1995. Prime gross effective rents fell by 2.7% in Q3 and have contracted by 37.8% from the cyclical peak in mid-2012.
Mr Ballantyne said, "Further downsizing in the resource and resource-related sectors contributed to a rise in Perth's vacancy rate. Sub-lease availability hit 5.0% of total stock in Q3 and is at the highest reading since JLL started to monitor sub-lease vacancy in 1990."
The Brisbane CBD recorded a third quarter of positive net absorption in 3Q15 (5,600 sqm) and 13,300 sqm over the past 12 months. As a result, the vacancy rate compressed to 14.5% in 3Q15 – the lowest rate since 2Q13.
Mr Ballantyne said, "Lease expiry is the catalyst for activity in the Brisbane CBD office market. However, the availability of prime grade space has precipitated a flight to quality and a reduction in the prime grade vacancy below 10% in Q3."
Canberra recorded a third successive quarter of positive net absorption (9,300 sqm) in Q3 with vacancy tightening to 15.1%.
In 3Q15, the Adelaide CBD recorded positive net absorption of 5,900 sqm. However, vacancy increased to 15.9% over the quarter.
Mr O'Connor said, "Corporate Australia is focused on attraction and retention strategies for knowledge workers. Real estate is more than an enabler of undertaking business – it shapes the culture and the personality of the organisation. Positive readings from job advertisements highlight that companies are seeking to increase headcount and the level of enquiry we are receiving points towards activity in the latter part of 2015 and into 2016."
"Sydney is at the forefront of the office market rent recovery and competition for space will push effective rents higher in 2016. We expect that effective rents will start to improve in Melbourne over 2016, while Brisbane and Perth will remain under downward pressure until vacancy reaches a cyclical peak in late 2016," concluded Mr O'Connor.