Record leasing activity in the Melbourne CBD office market June 215 Summary The recovery in the Melbourne CBD office leasing started in 214 and the momentum in leasing enquiry gathered pace in 215. We have recorded 12, sqm of net absorption over the 12 months to March 215. Domestic banking and professional services will be growth sectors for the Melbourne CBD office market. Banks have been through a phase of contraction in headcount through 29/1 but are expanding again. Technology firms are outperforming, while the education sector has been active in the mid-tier market. Centralisation is expected to continue. Tenants from fringe and suburban locations are seeking to relocate and consolidate their businesses and are looking at prime CBD space, taking advantage of historically high incentive levels. Four successive quarters of positive net absorption The Melbourne CBD is 18 months into a leasing market recovery. Melbourne recorded its fourth successive quarter of positive net absorption in 1Q15 (52, sqm) and 12, sqm over the year to March 215 (Figure 1). The consolidation of Victoria Police at 313 Spencer Street accounted for 28, sqm of this. Notably, prime grade office space accounted for approximately 4% of net absorption with the secondary grade market contributing 6% of the annual net absorption figure. Both the Docklands and Civic precincts have recorded positive net absorption for the last four quarters, with close to 5% of the space absorbed being in the Docklands and 32% in the Civic precinct. Other CBD locations have seen an ebb and flow of tenants in and out of the market creating mixed absorption figure results for the last 12 months. The Victorian economy proved very resilient through the investment phase and end of the resource boom and Victoria has benefited from the resulting low interest rate environment. Victoria is ranked as No 1 in housing finance and No 2 in population growth by Commsec s latest State of the States report. There is some risk to the demand outlook. An over reliance on the housing sector to support economic growth is a particular concern, while an increase in business confidence is required to stimulate business investment and the organic growth that we are beginning to witness. sqm Figure 1: Melbourne CBD net absorption, 28 to 1Q15 8, 6, 4, 2, -2, -4, 27 28 29 21 211 212 213 214 215 Source: JLL Research Record leasing activity in the Melbourne CBD office market June 215 1
Victoria is performing well Lower interest rates and more recently the lower AUD that have resulted from the end of the mining boom have benefited Victoria s more diverse economy. CommSec 1, has reported that Victoria is the top performing state in housing finance and second in population growth. The best description of the performance of States and Territory economies is state final demand plus net exports and Victoria (and Northern Territory) had the fastest annual growth rates in the March quarter up 3.3 per cent. Business services demand is increasing on the back of low interest rates, a strong property market and rising transaction based work which increases the need for bankers, accountants, lawyers and real estate agents. Record leasing enquiries for 1Q15 1Q15 has started with a record number of leasing enquiries. Close to 1 confirmed tenant briefs for office space are currently in the market. Figure 3 shows diverse tenant enquiry. Figure 3: Tenant enquiry by industry type Education 6% Govt. 9% Others 13% Prof Services 38% The Victorian population is increasing at one of the fastest rates since 1982 and is forecast by Deloitte Access Economics to rise by 1.8% per annum between 214 and 22, well above the long term trend. Victoria was named the world s most liveable city in 214 for a fourth consecutive time by The Economist 2 and also holds the title of most popular State in Australia when measured by the level of net interstate migration over the past year. IT 15% Finance 19% Source: JLL Leasing Robust population growth and low interest rates are driving the housing sector and giving the retail sector a much needed boost. Moving forward, Deloitte Access Economics projects that VIC will be one of the engines of the domestic economy, accounting for 22% of real final demand growth between 214 and 219. Figure 2: Share of real final demand, 214 to 219 Demand recovery in the Melbourne CBD has three main drivers: 1. Expansion and strength in the professional services (including IT) and financial services sectors. 2. Growth in the number of government employees in addition to an increase in both public and private education, creating spill over demand for office space. 3. Continuation of the centralisation trend across all sectors. QLD 2.5% WA Others 1.7% 4.4% SA 6.4% NSW 4.% Professional services are the locomotive of employment growth and the take-up of office space in Melbourne CBD. The number of leasing enquiries in this category totals approximately 38% of which 9% are from legal firms. This market based evidence is supported by Deloitte Access Economics data that shows the number of people employed in professional services employment increased by 15.7% between 27 and 1Q15. VIC 27.1% In addition to the traditional sub-sectors of professional services legal and accounting which are supporting growth, the technology sector is becoming a significant participant in the market. 1 CommSec Research State of the States, April 215 2 Economist Intelligence Unit Global Liveability Ranking & Report, August 214 Record leasing activity in the Melbourne CBD office market June 215 2
Table 1 shows the counts of Victorian businesses. The ABS estimate that the number of businesses employing between 2-199 people has increased by 36. As an illustration approximately 8, sqm were leased by the NBN Co and CrownBet in 1Q15 and approximately 15% of current leasing enquiries are from IT companies. Table 1: Counts of Victorian businesses (professional services No of Employees 2-199 2+ 2-199 2+ Accounting serivces 117 3 129 4 12,9 Legal services 112 5 123 6 12, Technology sector businesses* Year to 3 June 212 243 19 279 2 33, *Internet service providers and web search portals, software publishing, Computer System Design and Related Services Signs of recovery in financial sector Finance sector tenants are responsible for the second highest proportion of current tenant briefs with approximately 19% falling into this category. Sub-sectors of financial services are growing - the big four banks, who in recent years reduced headcount in their Australian operations, are recording strong revenue growth and an improvement in operating profit and productivity. Much of this is due to an increase in domestic banking services. We expect the next phase of expansion will see an increase in headcount and investment in subcontractor services. Figure 5: Melbourne CBD White collar employment: underlying office space demand 214-219 Education (23, sqm), 5.% Retail Trade (31, sqm), 7% Other (-7, sqm)1% Year to 3 June 214 Underlying demand (sqm) Student demand for the world s most liveable city Education providers have been active in the CBD and Fringe office sectors in recent quarters and their focus is concentrated on B and C grade buildings in the market. The combination of Melbourne s number one status as the world s most liveable city and a weaker dollar has increased interest from overseas students in Victoria s highly regarded tertiary and vocational education sector. Department of Immigration and Border Protection statistics of granted student visas demonstrates the demand for Victorian courses - 45% of these students are studying courses in Victoria. This trend is further supported by the increase in employment in the education sector. Figure 4: Student visas granted 26-214 (Australia) 35, 3, 25, 2, 15, 1, 5, Source: JLL Research, Department of Immigration In the CBD secondary education provider Ozford College expanded into 31 King Street by taking 2,94 sqm. Haileybury College s purchase of 13, sqm 313 King Street from Aspial Corporation Ltd for $52 million was a notable transaction this quarter. This asset is a secondary grade building in the fringe office market and earmarked for future redevelopment in a variation on the office to residential use trend. Centralisation to continue Health & Admin services (54, sqm), 12% Information Media & Telecommu nications (62, sqm), 13% Public Admin (78, sqm), 17% Professional Services (132, sqm), 28% Financial & Insurance (94, sqm) 2% Centralisation has been a key theme of the Melbourne office markets for over seven years. Since 28 we have tracked approximately 185, sqm of space leased in the CBD office market as a direct result of centralisation. This figure only takes into account transactions involving more than 1, sqm so the total figure is likely to be higher. A characteristic of centralisation is that tenants relocate and consolidate their businesses into A grade space from fringe and suburban locations taking advantage of historically high incentive levels. Record leasing activity in the Melbourne CBD office market June 215 3
Centralisation transactions for the first quarter of 215 include Australia Post s move to 8 Collins St and 2Q15 will see Engineers Australia move into 2,3 sqm in 6 Bourke St and Jemena move into 14,4 sqm at 567 Collins Street. The decline in the manufacturing sector has also contributed to centralisation. Automotive manufacturing is coming to an end in Australia however car manufacturers still need to support sales and marketing of their product for the local market. As a case in point Ford has relocated and centralised its sales and marketing operations to 7, sqm in Victoria Gardens in Richmond. Other companies in this category looking to relocate sales and marketing to a CBD location include NEC relocating from Springvale and Porter Davies Homes relocating a sales team that has been based in display homes. Both are reviewing options in Docklands. JLL forecasts for withdrawals of office stock in the Fringe office market for residential re-development suggest a large number of displaced tenants will be looking for space in the market over the next few years. While a number will seek to remain in their existing location, others will seek to centralise. Melbourne CBD incentives, currently at 32% (based on net lease value), allow broad choice for tenants through a combination of fit-out contribution and full or partial rent abatements. In addition varied size floor plates in the CBD continue to support the CBD as the destination of choice. Figure 6: Melbourne CBD & St Kilda Road stock withdrawals, 24 to 219 5, 4, 3, 2, 1, 24 25 26 27 28 29 21 211 212 213 214 215 216 217 218 219 22 CBD Signs of organic growth St Kikda Source: JLL Research Take up in the secondary grade market and the number of enquiries for smaller amounts of space are positive indicators of positive organic economic growth. Approximately 6% of leasing enquiries by number are for less than 1, sqm and the majority of these tenants are seeking fitted space, which augurs well for backfill and sublease space. Table 2: Composition of tenant enquiry by size Composition of tenant enquiries % Seeking fitted Less than 5 sqm 39% 68% 5 to 1, sqm 21% 5% 1, to 2, sqm 24% 43% 2, sqm & above 16% 31% Total 1% Conclusion Source: JLL Leasing The lead indicators for the office sector in the Melbourne CBD are improving. Job advertisement surveys have moved higher over the past 18 months. Further, the ANZ Roy Morgan Confidence Survey indicator edged higher following the RBA interest rate cut to records lows in early May; but confidence remains below the long term average and below the level recorded six months ago. Demand is reliant on the continued strength of housing market, population growth and white collar employment eventuating as forecast. The speed and scale of recovery is very dependent on business confidence as this directly impacts the level of business investment and the timing of property decisions. Weak recovery in business confidence will dampen tenant demand in Melbourne over 215 and 216. We are seeing signs of recovery as the level of enquiries and our absorption figures show, but it is particularly encouraging to see that 6% of activity is for requirements below 1, sqm suggesting organic growth in the small business sector will be a significant contributor to demand. This trend is likely to be further stimulated by 215 Federal budget proposals targeted at the small business sector. Centralisation is expected to remain a significant contributor to demand for some time to come. We forecast net absorption to outstrip supply additions throughout 216, 217 and 218 resulting in vacancy compressing from 9.6% currently to a low of 8.% in 218. Record leasing activity in the Melbourne CBD office market June 215 4
For further information, please contact: Annabel McFarlane Strategic Research Manager Victoria +61 3 9672 6683 annabel.mcfarlane@ap.jll.com Stuart Colquhoun Head of Office Leasing Victoria +61 3 9672 6531 stuart.colquhoun@ap.jll.com JLL Offices in Victoria: Melbourne Level 21, Bourke Place 6 Bourke Street Melbourne VIC 3 tel +61 3 9672 6666 Glen Waverley Building 2 54 Springvale Road Glen Waverley VIC 315 tel +61 3 9565 6666 www.jll.com.au COPYRIGHT JONES LANG LASALLE 215. All rights reserved. For further details or to unsubscribe, please email joneslanglasalle.research@ap.jll.com. The items in this publication have been compiled from the various sources acknowledged. The information is from sources we deem reliable; however, no representation or warranty is made to the accuracy thereof. Record leasing activity in the Melbourne CBD office market June 215 5