Sub-lease vacancy rate falls in strong sign of corporate recovery

In one of the strongest signs that corporate Australia is in recovery mode, the sub-lease vacancy rate across the CBD office markets contracted in the first quarter of this year.

Sub-lease availability, seen as a bellwether for business confidence in corporate Australia, recorded a reduction of 11,500 square metres across CBD office markets in the first quarter. The only city not to record a reduction was Melbourne.

The results were contained in JLL's Q1 statistics on the national office market report, which said the reduction was the "first sign that corporate Australia is moving from a consolidation to growth mode". 

But the positive numbers were muted by the national CBD office market vacancy rate, which held steady at 11.7% over the same period. 

JLL’s head of office leasing in NSW & Australia, Tim O’Connor, noted that the "reduction in sub-lease availability we recorded over Q1 is the first phase of a metamorphosis from a weak leasing market to a market that is in the early stages of recovery". 

For a company to remove sub-lease space from the market, he said,  implied that it was likely to make headcount increases over the next two to three years. 

The Sydney CBD experienced the most notable reduction in sub-lease availability - falling by 10,500 square metres in Q1 to 1.27% of total stock. 

"Sub-lease availability is now at the lowest level since Q4 2012 in the Sydney CBD", said the report.

As a result, the Sydney CBD recorded its first positive quarterly net absorption result -1,500 square metres - since Q2 2012. Partly driving that uptake was the higher activity in technology sector. 

Mr O'Connor said that in Sydney, Symantec had leased additional space at 207 Kent Street, while a number of other technology firms had active requirements.

Despite Melbourne experiencing no reduction in sub-lease availability, the vacancy rate in the CBD fell to 10.4%, which a according to JLL is now the tightest of the monitored CBD office markets.

The tenant demand environment remained challenging in the resource-dependent markets of Brisbane and Perth. Both markets recorded a further quarter of negative net absorption in the first quarter. 

The Perth CBD recorded a seventh successive quarter of negative net absorption of -18,600 square metres. The contraction in net absorption over that period, it noted, had totalled -150,000 square metres. As a result, the vacancy rate in the Perth CBD moved out by 1.0 percentage point to 11.8%.

The reduction in Brisbane was a negative-1,600 square metres and the CBD vacancy  remained at a record high of 15.5%. 

JLL’s head of capital markets research, Andrew Ballantyne highlighted that the demand slowdown in the near-city markets of Brisbane Fringe and West Perth, which had a higher concentration of resource sector tenants than the CBD, had been more pronounced. "The West Perth vacancy rate has pushed out to 13.6%, while the Brisbane Fringe is sitting at 14.3%”, he said. 

Adelaide recorded zero net absorption over the quarter and vacancy remained at 13.9%, while Canberra recorded positive net absorption of 8,600 square metres.

O’Connor said: “The Reserve Bank of Australia recently noted that there are encouraging signs that the handover from mining-led demand growth to broader private demand is beginning".

"We expect the Sydney and Melbourne office markets to be the main beneficiaries of this transition over 2015 and 2016.” 

Supply additions across CBD office markets in 2014 were expected to be at the lowest level since 2002, he added.