Resources a boom for Perth and Brisbane office markets

Australia’s two-speed economy is flowing through to demand for office space, with vacancy rates tightening in Perth and Brisbane, but easing off in Sydney, Melbourne and Adelaide.

The vacancy rate in the Perth CBD, which became Australia’s tightest CBD office market in the first quarter of 2011, tightened again in the second quarter from 5.6% to 5.4%.

Prime gross effective rents in Perth increased by 3.9% in the second quarter and have risen by 11.2% since a trough in the rental cycle was recorded in the third quarter of 2010.

Jones Lang LaSalle’s national head of office leasing, Kevin George, says large resource companies continue to be active in the Perth market.

“Investment spending in the sector remains at very high levels and businesses are moving quickly to secure space to accommodate their expected increase in headcount,” he says.

According to George, the next 12 months will see further rent escalations in Perth.

Prime office rents in Perth are expected to reach $859 per square metre by January, according to forecasts by the Property Council of Australia and Macquarie Bank.

Major office projects due to be completed over the next 12 months are expected to release significant amounts of backfill space, with George expecting a large proportion of the backfill space to be pre-leased prior to availability.

The biggest project is City Square North, at 123 St Georges Terrace in the Perth CBD, being developed by Brookfield Office Properties.

It will have mining giant BHP Billiton as its anchor tenant when it is completed in early June. Other tenants include international gold company Barrick, and PwC.

The development will comprise more than 75,000 square metres of office space in City Square Tower and a total of 7,126 square metres of retail space.

Brookfield has now lodged an application for a second, 16-storey office tower with about 30,000 square metres of net lettable area proposed.

It’s a similar story in Brisbane, where the vacancy rate has dropped to 6.8% in the second quarter of 2011 from 7.9% in the first quarter.

There was a net absorption of 11,000 square metres in the quarter, with the bulk taken up by mining companies.

BHP Billiton Mitsubishi Alliance has leased 6,000 square metres at 12 Creek Street and Rio Tinto leased another 1,600 square metres at 33-35 Herschel Street.

“Tenants are becoming increasingly aware that the window of opportunity to negotiate a favourable leasing outcome in Brisbane is closing,” George says.

“The sentiment in Brisbane will continue to improve when a number of pre-commitments, which are at an advanced stage of negotiation, are concluded for One One One Eagle Street.”

One One One Eagle Street, on the CBD side of the Brisbane river, is being developed by GPT and will accommodate more than 62,500 square metres of premium grade office space across 44 levels when it is completed later in 2011.

However, the Sydney and Melbourne prime office markets have been impacted by the resurfacing of the European sovereign debt issues in the second quarter of 2011 and the flow-on to business confidence in the finance and insurance sector.

Despite a strong net absorption result in the second quarter of 2011 (totalling 28,900 square metres), vacancy increased to 8.0% in the Sydney CBD.

Andrew Ballantyne, director of national office market research for Jones Lang LaSalle, says the primary reason for this increase was the quantum of backfill space left by CBA after its consolidation of multiple tenancies to the new development at Darling Quarter.

Melbourne CBD vacancy rates have risen to 6.0% following a net absorption of 11,600 square metres of prime office space and a rise in vacancy to 6.0%.

The negative result in the Melbourne CBD was largely attributed to the relocation of the Spotless Group from 350 Queen Street to St Kilda Road in a 10-year lease agreement negotiated by Colliers International’s office leasing director Ben Christie.

Rents increased by 1% in the second quarter. Since bottoming out in the second quarter of 2009, prime gross effective rents are up by almost 12%.

In Adelaide, vacancy increased marginally to 7% in the second quarter of 2011. However, the vacancy rate remains below the long-term average and has resulted in prime gross effective rents rising by 2.5% in the quarter and 9.4% over the past 12 months.

In Canberra rents were unchanged despite the rise in vacancy to 13.0% – a record high for the Canberra office market.

Across CBD office markets, positive net absorption of 24,800 square metres was recorded in the second quarter of 2011 with vacancy rate increased slightly to 7.6% from 7.4% in the first quarter of 2011.

While the quarterly net absorption was well down on recent quarters, net absorption in the 2010/2011 financial year was 279,700 square metres.

Jones Lang LaSalle expects below equilibrium vacancy rates in a number of office markets and a moderate development pipeline will combine to cause upward pressure on prime office rents in the June quarter of 2011.