The Office Perspective | 10 September 2024

The JLL Victorian Office Investments team's latest edition of The Office Perspective is now out!

Please contact me on 0415 767 915 / [email protected] or any member of the JLL team if you would like to receive our more detailed weekly updates via email each Monday morning.

This update will cover:

• JLL APAC Office Market Dynamics
• JLL Melbourne CBD Update | September 2024
• Articles of Interest

JLL APAC Office Market Dynamics

JLL’s APAC Capital team have collaborated to provide a comprehensive summary of all core markets in Asia Pacific.

Please see our brief summary of the APAC and Victorian markets below. To receive a copy of this report, please contact me on 0415 767 915 / [email protected].

Asia Pacific

• Cost considerations remain a top priority; many tenants prefer renewals.
• Regional rent growth is positive but sluggish due to weak demand in Greater China and slowing Asian markets.
• Investment volume increased y-o-y, driven by domestic end-users, yet capital value lagged behind rental growth.
• Leasing volume decreased by 2% y-o-y in Q2 2024; performance varied across markets.
• Japan and India saw rent increases, while Greater China had limited new demand.
• High-interest rates affected investment appetite.
• Near-term demand driven by cost-effective upgrades and focus on quality.
• APAC rents are expected to stabilise and gradually increase in 2025.

Victoria

• Melbourne CBD had negative net absorption of -26,600 sqm in Q2 2024.
• Small tenants (<1,000 sqm) drove demand; headline vacancy increased to 19.6%.
• Fringe market had negative net absorption of -8,318 sqm; S.E.S. market positive with 10,885 sqm.
• One CBD office completion: Melbourne Quarter Tower (69,500 sqm, 35.8% pre-committed).
• Ten CBD projects under construction will deliver 205,663 sqm by early 2026.
• Prime net effective rents fell by -0.8% to AUD 328 p.s.m. p.a.
• Prime CBD yields range from 5.75% to 8.00%, down 63 bps on the upper end.
• Demand outlook for the Melbourne CBD market softening over 2024-2025 due to cost-cutting and hybrid work.
• Local investors and syndicators are anticipated to be most active, with the bid-ask spread narrowing.

Grade A Office Rental Clock & Direct Real Estate Investments

JLL Melbourne CBD Update | September 2024

Nick Peden from our Melbourne CBD Sales team has recently published the JLL team’s most recent update on the CBD market.

We are pleased to share with you our team’s key observations following our ongoing activity within the Melbourne CBD market:

Recent Market Observations

• Since the start of August, we have witnessed a noticeable increase in buyer enquiry, with a genuine desire to secure Melbourne CBD property on the rise. It has been interesting to see a dramatic increase in general interest from local private investors, some of which haven’t been in the market for over a decade. Interest from private offshore sources has been steady as well as interstate buyers, predominantly from NSW and WA.
• The JLL Research team has recently conducted some incredible analysis on the current vacancy within the Melbourne CBD and concluded that 10% (or 38 office buildings) account for 63% of the total vacancy. The majority of these assets are located in either Docklands (~250,000sqm) or the western core (~160,000sqm). The total remaining vacancy of the 90% of Melbourne CBD office assets is 9.9%. This analysis shows that the Melbourne CBD office leasing market is actually performing reasonably well and the availability of premium office space is limited.
• Moving into the back end of 2024, we expect transactions to increase as market clarity emerges and more opportunities appear in the Melbourne CBD office market as the economic recovery gains momentum. The market is expected to see greater stability and improved leasing conditions, particularly in prime locations.

Articles of Interest – National Office Market

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Article #1 – The Australian – Desks back in Salesforce

Key points:

• Salesforce Tower in Sydney is prioritising fixed desks over collaborative spaces, bucking the trend in other tech buildings.
• The company has realised that not everyone wants or can work in big group settings and that some teams, such as sales, prefer dedicated desks with multiple screens.
• The tower has 1600 work points and 1300 staff, providing more desk space than necessary to accommodate future growth.
• Salesforce aims for a balance between density and broad space in its office layout.
• The tower has about 65% dedicated work points and 35% collaborative space, including meeting areas, lounges, eating areas, and event space.
• The decision to locate Salesforce Tower in Sydney's CBD was deliberate, as it allows the company to support local communities and provides the best food, fitness, and public transport options.
• Salesforce has designed its towers with similar layouts but uses locally sourced products and designs to cater to travelling employees and international customers.
• The company emphasises finding the best work station setups for staff and accommodating different preferences for open environments or working independently.
• The goal for Salesforce Tower is to create a vibrant and connected space where people can work, socialize, and have a sense of community.

Article #2 – The Australian – Time to buy REITs

Key points:

• Barrenjoey analysts believe the tide has turned for property stocks as borrowing costs stabilize and asset devaluations taper off.
• They see the beginning of a new cycle and recommend a more positive stance towards the real estate investment trust (REIT) sector.
• Rate volatility and earnings downgrades have kept investors on the sidelines, but now average gearing levels are stabilizing and credit conditions for REITs are easing.
• The sector has seen some strong earnings results during the August earnings season.
• The outlook for growth in operating earnings and distributions for 90% of the stocks in the sector is expected to improve over the next 12 months.
• Bank funding costs have eased, leading to lower margins for REITs and more favourable cap rates.
• Capitalisation rates (cap rates) have expanded around 75 basis points and gearing ratios have stabilised for the first time in 18 months.

We hope you have enjoyed this edition of The Office Perspective. Please reach out to our specialised team if there is anything we can assist you with.

Tim Carr - JLL Victorian Office Investments

Capital Markets at JLL