Premium Leasing Activity Rises as Organisations Seek Out Top-Quality Office Space

Organisations are seeking better quality office space, encouraging strong leasing activity in the prime grade sector of the market.

JLL Research's third quarter statistics on national office markets showed the national office markets have experienced a positive net absorption of 45,600 square metres over the quarter across CBD office markets and 234,800 square metres over the 12 months to September 2017.

The national CBD office market vacancy rate trended lower and hit 10.8 per cent in the third quarter – 2.0 percentage points lower than the most recent cyclical peak (4Q14).

JLL head of research Andrew Ballantyne said lead indicators were positive for the office sector over the third quarter and business conditions were at the highest level since early 2008.

"Corporate Australia is becoming more confident about the medium-term outlook with the ABS reporting strong employment growth over 2017," he said.

Leasing enquiry and activity remained strong in Sydney and Melbourne, while Perth's CBD leasing market recovery gathered momentum with a fourth successive quarter of positive net absorption recorded in the third quarter.

JLL head of Australian office Leasing Tim O’Connor said leasing activity was largely concentrated in the premium grade sector of the market.

"The quality of the space, activation of the retail amenity and opening of the Wynyard Walk have increased the pool of tenants for the Barangaroo South precinct," he said.

"A diverse range of small to mid-sized tenants committed to space in Q3 pushing the premium grade vacancy rate down to 7.3 per cent.”

Melbourne recorded positive net absorption in the third quarter (5,700 square metres) and over the 12 months to September 2017 (100,900 square metres). Vacancy tightened to 6.9 per cent – the first time vacancy has been below 7.0 per cent since early 2012.

The Perth CBD recorded a fourth successive quarter of positive net absorption in the third quarter (16,100 square metres) taking the 12 monthly net absorption figure to 51,400 square metres. As a result, vacancy fell by 0.9 percentage points to 21.8 per cent.

A hiatus in the Brisbane leasing market recovery occurred over the quarter, largely explained by the consolidation of the state government into existing space. JLL recorded negative net absorption in the third quarter (-18,400 square metres) and a marginal increase in the vacancy rate to 15.8 per cent.

Adelaide recorded a second successive quarter of positive net absorption in the third quarter (4,100 square metres); activity was strongest from small to mid-sized organisations and vacancy tightened to 15.7 per cent.

Canberra recorded negative net absorption of -3,300 square metres in Q3, while vacancy increased to 13.4 per cent. However, prime gross effective rents continue to drift higher, increasing by 0.7 per cent over the quarter and by 2.9 per cent over the 12 months to September 2017.

O’Connor headcount growth is typically a precursor for leasing enquiry and activity.

"The challenge for tenants in Sydney and Melbourne is a shortage of prime grade contiguous space in existing buildings. Competition for space will lead to a further reduction in leasing incentives over the next 12 months and positive effective rental growth in the Sydney and Melbourne CBDs.”