Will Australian CBD office markets surprise on the upside in 2014?

February 10, 2014 / By

The Australian office leasing markets were weak in 2013. The nervousness across corporate Australia was reflected by a rise in sub-lease availability to 342,600 sqm, or 2.0% of total stock across CBD office markets. Lead indicators such as business confidence and job advertisements point towards a stronger year for enquiry and activity in 2014. Nevertheless, Jones Lang LaSalle forecast net absorption to be a below trend 62,500 sqm in 2014.

Sub-lease availability is a barometer of business confidence. Historically, it has proved to be a volatile indicator and responds quickly to changes in business sentiment – both positive and negative. The question is, therefore, will the recent improvement in business confidence lead to a sharper reduction in sub-lease availability than we are currently forecasting?

Jones Lang LaSalle has tracked sub-lease availability data since 1990. The economic recession in the early 1990s led to a sharp increase in sub-lease availability across Australian CBD office markets. Sydney peaked at 3.2% of total stock, while Melbourne reached an eye watering 3.6% of total stock. However, the reduction of sub-lease between 1991 and 1996 had a significant positive contribution to net absorption. Overall, the reduction in sub-lease space contributed to 32% of the 716,000 sqm of net absorption recorded over that time period.

The observation was replicated in 2009. Sub-lease availability peaked at 306,200 sqm across CBD office markets, before contracting to 157,300 sqm and 126,300 over 2010 and 2011 year end. As a result, net absorption was above trend in 2010 (442,800 sqm) and 2011 (323,600 sqm).

In the latter part of 2013, we recorded a moderation in sub-lease availability in Sydney and Melbourne. This supports our prognosis that Sydney and Melbourne will be at the forefront of the office sector demand recovery. Perth (4.9% of total stock) and Brisbane (3.1%) have higher sub-lease availability. With the mining cycle transitioning from the investment to production phase, and less demand from engineering services firms, a proportion of this sub-lease may stay on the market for a longer period.

As mentioned earlier, we forecast net absorption of 62,500 sqm across Australian CBD office markets in 2014. Let’s assume we see a 20% reduction in sub-lease (a conservative reduction compared to previous cycles) over 2014. This would under-write our net absorption forecast in 2014. If stronger business confidence and conditions translate into positive hiring intentions and expansionary leasing enquiries, we may find we have to revise up our demand projections for 2014.

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