Sydney and Melbourne CBD office vacancy approaching 2000 levels: JLL

Sydney and Melbourne CBD office vacancy approaching 2000 levels: JLL

13 July 2018

JLL has released its Q2 2018 office market research which highlights positive trends for Sydney, Melbourne and Perth CBD office markets, in terms of vacancy rates, absorption an rents.

JLL’s research 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.

Sydney CBD vacancy drops to 4.5%

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.”

Melbourne CBD vacancy tightens to 4.6%

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 Q3 2008. 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.

Balancing this viewpoint earlier this month, veteran property executive Michael Cook, from Investa, said he was “nervous” that Melbourne’s recent outstanding rates of absorption of around 75,000-100,000 square metres annually may not continue.

“We forecast vacancy rates in Melbourne could rise to as high as 10 per cent, leading to upwards pressure on incentives and downwards pressure on rents,” Mr Cook said.

Perth CBD vacancy lowest level since 2015

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.”

Brisbane CBD vacancy rate increased to 14.4%

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.”

Meanwhile, the Adelaide CBD vacancy rate is sitting at 15.1%, with the prime grade vacancy rate tightening to 10.6% in 2Q18.

Canberra’s vacancy increased to 13.4%, with the prime grade vacancy rate remaining very tight at 5.7% with upward pressure on rents.