Perth steams ahead as best-performing CBD office market: Jones Lang LaSalle

The national office vacancy rate eased by 0.6 percentage points to 7.8% in the second quarter of the year despite a net absorption of 73,900 square metres of office space, according to statistics released by Jones Lang LaSalle Research. 

Net office absorption is the amount of space leased minus the amount of space vacated over a given time frame. 

Of the 73,000 square metres absorbed over the three months to the end of June, Perth accounted for 64,000 square metres or 88% of the total.

Prime gross effective rents in Perth increased by 3.2% over the quarter and are now up 31.8% from the cyclical low in the third quarter of 2010.

During this period the Perth vacancy rate increased from 2% to 2.9% principally due to the completion of Brookfield’s 45-storey City Square office tower in June, which has added 85,000 square metres of office and retail space to the CBD.

Mining giant BHP Billiton is the tower’s anchor tenant, taking 60,000 square metres of space.

Perth now has only 8,633 sqm of new office space under construction, equating to 0.5% of total stock.

Prime gross effective rents in Perth increased by 3.2% over the quarter and are now up 31.8% from the cyclical low in the third quarter of 2010.

“The price signals from the space market in Perth have yet to translate into development activity. We expect that a number of pre-commitments will conclude over the next six to 12 months,” says Kevin George, Jones Lang LaSalle’s national head of office leasing.

“Nevertheless, the first completions in the next development cycle are unlikely to occur until 2015 at the earliest, keeping Perth vacancy at a very low rate over the next three years.”

The other big project to complete over the June quarter was GPT’s 111 Eagle Street in Brisbane, which consists of 44 levels and 64,000 square metres of net lettable space.

George says the completion of City Square North 111 Eagle Street “finally dispels the myth that these markets have significant development pipelines”.

“Both of the projects were substantially leased before practical completion, vacancy is low and the development outlook is moderate,” he says.

In the Brisbane CBD, net absorption was 11,700 square metres, with the office vacancy rate increasing from 6.1% to 8.8%.

“Projections of mid-teen vacancy rates in the Brisbane CBD following the completion of 111 Eagle Street have proven to be inaccurate,” says George.

“The pre-production phase of large-scale resource and energy projects is very labour intensive and continues to underpin the demand for office space. Similar to Perth, I expect a number of pre-commitments to be announced over the next 12 months.”

Net absorption was essentially flat (+1,000 square metres) in the Sydney CBD, but the vacancy rate tightened by 0.1 percentage point to 8.6% in the second quarter. Prime gross effective rents were unchanged over the quarter.

George says the pre-commitments made by Westpac, KPMG and Lend Lease to the first two commercial towers planned for Barangaroo South shows that major leasing transactions can still be concluded.

The Melbourne CBD was one of the weakest markets, recording negative net absorption of -16,400 square metres with the vacancy rate increasing from 5.8% to 7.4% in the second quarter.

“The 2011-12 financial year will be remembered as Melbourne’s annus horribilis. The finance sector contracted, while the Victorian government confirmed 3,500 public sector job cuts in the May budget. As a result, sub-lease availability increased to 1.3% of total stock,” says Jones Lang LaSalle head of capital markets research Andrew Ballantyne.

There is a further 236,700 square metres of space under construction in the Melbourne CBD to be delivered by the first half of 2014.

“If demand remains weak in the 2012-13 financial year, vacancy could be moving out towards 10% in Melbourne,” says George.

The Adelaide CBD office market recorded net absorption of 5,800 square metres, with the vacancy rate tightening to 7.7%.

Canberra recorded a fourth successive quarter of positive net absorption of 7,800 square metres with the vacancy rate tightening to 9.9% – the first time vacancy has been below 10% since the fourth quarter of 2009.