Office markets rebound in capital cities, new survey reveals leasing enquiries up 38%

The commercial office sector is continuing to rebound following the global financial crisis with new figures form Jones Lang LaSalle revealing leasing enquiry levels increased by 38% during the year to September in main capital cities.

JLL director of office research Andrew Ballantyne says the market is performing strongly with Melbourne as the key player, although the market is still exposed to volatility overseas and the economic outlook in Europe and the US will continue to impact the recovery.

“The figures are certainly a good sign for demand moving forward. We are seeing some large occupiers and they’re moving in for longer-term. The CBD markets in Sydney and Melbourne recorded a tough around June 2009, but we are seeing more momentum now,” he says.

The new research found the aggregated leasing enquiry levels in Melbourne, Sydney, Brisbane and Perth are 38% higher than the same time in September 2009, and are 27% higher than during 2008.

A positive net absorption of 433,000 square metres was recorded during the 12 months to June 2010. In Sydney, one of the markets worst-hit by the downturn in commercial leases, sub-lease availability has declined to just 1.55% of total stock and leasing enquiries were up by 60% during September 2010.

But Melbourne remains the strongest market, where leasing enquiry levels have increased nearly 20% in the 12 months to September. And Ballantyne notes those enquiry levels do not include pre-commitments made by the ATO, Melbourne Water and NAB.

“There are further large pre-commitment requirements in the market with some major decisions to be made by tenants such as Marsh Mercer, Freehills and BHP Billiton that will provide further clarity to the development outlook in the Melbourne CBD,” he says.

Ballantyne says vendors are still offering plenty of incentives to draw tenants back in, with some Sydney landlords still offering 25-30% off the total leasing cost.

“I would say Sydney is still a very tenant-friendly market. We’re getting lots of incentives there, and though it varies by landlord to landlord and by tenant to tenant, there are many forms of contributions occurring and even lump sums of capital.”

“Some examples would be capital, giving out a month’s rent free, and so on. There are incentives being given representing 25-30%, so tenants will get 30% of their total cost back.”

In Brisbane, leasing enquiries have increased by 48% in the year to September as the strength in the resources sector takes hold. Many tenants which took short-term options in 2008-09 are now exploring longer-term contracts, Ballantyne says.

In Perth, the Gorgon Gas project has sparked a wave of activity with Chevron increasing its footprint by between 35-40% in the past 12 months. Ballantyne says leasing enquiries will continue to increase as resource

“Although I wouldn’t say any of these markets are “weak”, I would say that we do expect vacancies to rise in Brisbane and Perth – but that’s more of a supply issue than it is a symptom of any weakness in the market.”

Looking forward, Ballantyne expects markets to continue to improve especially in Sydney and Melbourne, where officer markets will continue to push against supply constraints during 2011-12. He notes that at this point, the largest risk is how overseas markets perform.

“In terms of concerns, we think it’s more to do with shocks that will come overseas. European debt obligations and the weak US economy could pose a risk, especially where unemployment is so high. At this point external shocks will impact the markets.”