An office market swing in favour of landlords expected over the past 12 months did not materialise, according to Jones Lang LaSalle, with tenants staying put in Sydney and Melbourne. However, demand exceeds supply in Perth.
Sydney and Melbourne remain neutral, with financial and professional services tenants delaying relocations until global economic conditions have stabilised.
“The majority of activity [in Sydney] is renewals and restructures as tenants adopt a ‘wait and see’ approach before making major new relocation commitments,” Jones Lang LaSalle’s head of tenant representation in NSW, Gavin Martin says.
According to Jones Lang LaSalle, the vacancy rate in Sydney’s CBD office market is above the 30-year average, but is expected to tighten over the next three years as the supply pipeline tightens.
“2012 is set to be the first year of zero completions in the CBD since 1970 … As a result, we expect to see rental growth of 5.6 percent per annum between 2011 and 2014 and a decline in vacancy,” Martin says.
In Melbourne, tenants have been behaving cautiously over the past six months and incentives increased in the latter part of 2011, according to Jones Lang LaSalle.
“A number of tenants have pre-committed to development stock over the past two years. Most recent pre-commitments include Westpac’s 14,000 sqm at Collins Street and Medibank Private’s 30,000 sqm at 720 Bourke Street. There is currently 284,700 sqm of space under construction,” Jones Lang LaSalle head of tenant representation in Victoria, Peter Walsh says.
“While some of the pre-commitments were made by tenants from outside the CBD that will not create backfill space in the city and some of the CBD backfill space has already been leased, vacancy is projected to rise over the next two years. As a result, prime gross effective rents are forecast to grow below trend over the next 24 months, creating a tenant favourable leasing market,” Walsh says.
Meanwhile in Perth, strong demand from the mining and resources sector has bolstered the office market, which continues to favour landlords.
Andrew Campbell, Jones Lang LaSalle head of tenant representation in WA, says tenants with a lease expiry over the next four years in Perth will face a challenging environment.
“The development pipeline (88,500 sqm) is 88 percent pre-committed and BHP Billiton will retain a high proportion of its backfill space across existing locations following its move into Brookfield Place,” Campbell says.
“Any new quality grade building to come out of the ground in Perth will almost certainly be 90 to 100 percent pre-committed.”
In Brisbane, currently ranked ‘neutral’, mining and resource companies are tipped to take up CBD space through 2012 and into 2013, which will see the market shift in favour of landlords.
Michael Greene, Jones Lang LaSalle director of tenant representation, says despite the overall strength of the Brisbane market, global economic conditions have seen transaction activity ‘flat-lining’ over several months.
“The recent slowdown in sentiment is concerning given the comments by the resources industry about cost blowouts in projects and the volatility of commodities prices,” Greene says.
“Until these uncertainties are resolved sentiment in the market will remain patchy.”