CBD Offices Shaping Up as a 2-Speed Market

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ACCORDING TO the latest quarterly report from JLL (AFR: 14 July p35), the Australian CBD office scene was in much better shape, as at the end of June this year.

However, it was only Sydney and Melbourne that displayed any marked improvement.

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Absorption Levels

The JLL report confirmed a net absorption of 110,200 square metres for the June quarter -- with the Australia-wide vacancy rate tightening to 11.9% from 12.4%. And for the full 12-month period, it was an above-trend figure of 291,800 sqm.

Overall, Sydney and Melbourne accounted for 81% of total CBD net absorption over the quarter; and 88% over the entire financial year.

Vacancy Rates

Furthermore, these two capital cities also had the lowest vacancy rates (at 7.1% cent and 8% respectively); and were the only capital cities where incentive levels have started to decline.

By comparison, Perth's CBD office market continued to weaken with negative net absorption recorded over the quarter. And as a result the vacancy rate rose to 24.6% -- while rents actually fell almost 14% over the 12 month period.

Even though Brisbane and Adelaide recorded a positive net absorption and declining vacancy rates, both their vacancy rates were still above 16% at the end of the June quarter.

In Canberra, the vacancy rate firmed to 13.2% with a slight increase in gross effective rents over the year.

According to Andrew Ballantyne (JLL's head of research): "The headline numbers we printed for the office sector were very positive over the 2015/16 financial year. However, the divergence between the stronger performing markets of Sydney and Melbourne and those markets with challenging leasing market conditions widened further over the past 12 months."

Rental Growth

It would seem Sydney was the standout market for rental growth -- with gross effective rents rising 12.2% over the full year -- despite a marginal increase in the vacancy rate (due to backfill space becoming available).

Melbourne's rental growth over the year was  more constrained than Sydney at just 2.6 per cent; even though it actually absorbed more office space.

Bottom Line: CBD Office markets are said to be in balance, when there is between a 6% to 8% vacancy rate. And right now, only Sydney and Melbourne are at that point. As such, the other capital city markets are probably running 3 to 4 years behind them in the current cycle.

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