Above trend net absorption across the Sydney and Melbourne CBDs leads to a sharp reduction in vacancy
AUSTRALIA, 11 July 2018 – JLL Research has released 2Q18 statistics on national office markets. The figures showed positive net absorption of 90,000 sqm over the quarter and 197,400 sqm over the 2017/18 financial year.
The national CBD office market vacancy rate compressed in 2Q18 (9.4%) – a reduction of 1.5 percentage points over the 2017/18 financial year.
JLL Head of Research – Australia, Andrew Ballantyne said, “The S&P/ASX 200 has followed an upward trajectory since early 2016 and measures of business confidence show that corporate Australia is relatively positive about the medium-term revenue and profitability outlook.
“Sydney and Melbourne are more sensitive to financial markets and posted very strong net absorption results in 2Q18. However, the leasing market we are watching very closely is Perth with net absorption double the historical average over the 2017/18 financial year,” said Mr Ballantyne.
The Sydney CBD recorded 51,100 sqm of net absorption and a reduction in vacancy to 4.5% in 2Q18 (from 5.5% in Q1). Low vacancy continues to exert upward pressure on Sydney CBD rents. Prime gross effective rents increased by 1.6% over the quarter and by 12.5% over the 2017/18 financial year.
JLL Managing Director – NSW, Daniel Kernaghan said, “We have said through the course of this vacancy tightening cycle that the Sydney CBD vacancy rate will reach levels not seen since the 2000 Olympics. At 4.5%, we are closing in on the 4.0% recorded in 2000.”
Mr Kernaghan said, “The flight to quality is an over-used phrase in the real estate sector. However, the physical characteristics of Premium Grade assets and the ability to generate efficiency dividends over large and flexible floorplates is a key driver for organisations.”
The Sydney CBD Premium Grade vacancy has tightened from 14.7% after the completion of International Towers Sydney (T1) in late 2016 to 4.8% in 2Q18 – the lowest level since 1Q11.
The Melbourne CBD recorded 41,900 sqm of net absorption and 113,600 sqm over the 2017/18 financial year. The Melbourne CBD vacancy rate tightened from 5.4% in 1Q18 to 4.6% in 2Q18 – the lowest level since 3Q08. Melbourne CBD prime gross effective rents increased by 2.7% over 2Q18 and by 10.7% over the 2017/18 financial year.
Mr Ballantyne said, “The strength of the Victorian economy is reflected in leasing enquiry and activity. Professional services firms are in expansion mode, flexible space providers are growing their footprint and we continue to see a number of organisations centralise operations into the Melbourne CBD.
“While we are seeing some organisations relocate operations to the Melbourne CBD, the metro markets are performing strongly with vacancy tightening and effective rental growth comparable to the CBD,” said Mr Ballantyne.
Over the 2017/18 financial year, Melbourne Fringe prime gross effective rents increased by 12.8%, while Melbourne suburban rents were up 8.2%.
The Perth CBD recorded net absorption of 8,700 sqm in 2Q18 and 32,500 sqm over the 2017/18 financial year. Vacancy trended lower in 2Q18 (20.9%) and is now at the lowest level since 3Q15. However, a widening divergence is becoming apparent between prime (16.2%) and secondary (27.6%) grade vacancy.
Mr Ballantyne said, “BHP’s announcement that they will proceed with a new iron ore mine in the Pilbara is positive for sentiment across the Perth CBD. Our closely monitored sub-lease availability indicator has declined to less than 2.0% of total stock in 2Q18 – the lowest reading since 2011.”
The Brisbane CBD recorded negative net absorption in 2Q18 (-10,500 sqm) and vacancy increased to 14.4%. The negative result was a direct result Aurizon moving into a new development in Fortitude Valley
Mr Ballantyne said, “The negative result does not alter our view that the Brisbane CBD leasing market is showing tangible signs of improvement. Excluding the Aurizon relocation, the Brisbane CBD would have recorded positive net absorption. Furthermore, flex space operators are at the start of their Brisbane expansion plans and will be a major contributor to net take-up over the next 18 months.”
The Adelaide CBD recorded positive net absorption of 1,900 sqm in 2Q18 and 12,600 sqm over the 2017/18 financial year. While the headline vacancy rate is sitting at 15.1%, the prime grade vacancy rate tightened to 10.6% in 2Q18.
Canberra recorded negative net absorption in Q2 (-3,100 sqm) and vacancy increased to 13.4%. However, the prime grade vacancy rate remains very tight at 5.7% and we are seeing upward pressure on rents. Prime gross effective rents increased by 1.0% over the quarter and by 4.1% over the 2017/18 financial year.
Mr Ballantyne said, “Sydney and Melbourne will feature in any discussion of the world’s strongest office markets over the 2018/19 financial year. However, a shortage of prime grade space will curtail net absorption and we expect to see a notable increase in tenant retention rates.”