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August 3, 2017

While Central Business Districts have long been the desired location for aspirational corporates, rising rents coupled with demands on space led many to locate outside the core areas. But, as we have seen elsewhere, the trend is reversing in Australia as major occupiers attempt to negotiate the war on talent.

According to the latest JLL data, demand for space in the country’s two biggest cities, Sydney and Melbourne, has risen significantly. The Sydney CBD vacancy rate reached the lowest in over nine years in Q217, and Melbourne CBD has recorded net absorption of more than double the long-term average.

“Companies around the world are fighting to attract and retain the best talent, and location plays a big role in being able to do that,” explains Tim O’Connor, JLL’s Head of Office Leasing in Australia. “Occupiers are putting an increasing emphasis on access to transport and amenities for their people as a means of exposing themselves to a bigger workforce and a deeper talent pool. This goes beyond proximity to retail and services with an increasing focus on health and wellbeing.”

And, while CBDs often offer the best-in-market office space, O’Connor believes that this is not the only driver.

Not every company looking to move into the CBD is after a Premium Grade building – there are often more important drivers,” he says. “To a point, there is product for everyone in a CBD.”

Developers are already seeking to meet these different occupier demands, according to JLL’s Head of Office Leasing in Victoria, Stuart Colquhoun, who says the entry of uncommitted space in 2019-20 has prompted owners to “increasingly focus on place-making and creating a building ‘destination’ to differentiate their product in the market”.

“In the Melbourne market, differentiation is nothing new, but getting customers (tenants) to look beyond the space availability and understand that location is becoming far more relevant – particularly in attracting and retaining the best talent and increasing overall productivity.”

The shifting demand is evident in the metrics with CBD office markets tightening across the country; positive net absorption of 291, 500 sqm, approximately 50 percent above the 10-year average.

“We don’t expect to see any let up in the demand for CBD space in the near future, with Sydney and Melbourne remaining at the fore of activity, demand and rental growth,” says O’Connor. “Small tenant expansion in the Melbourne CBD sub-1,000sqm market is at a high, accounting for 81 percent of net absorption in the CBD,” in the first half of 2017.

JLL’s Head of Leasing, NSW, Daniel Kernaghan, agrees, but says those leading the charge may not be who you would assume.

“We have seen a lot of centralisation over the past 18 months from occupiers that we didn’t expect, such as pharmaceuticals moving into the CBD from the North Ryde and Macquarie Park markets – and we don’t see this as a one-off,” he says.

O’Connor agrees, pointing out it is not just ‘traditional’ CBD occupiers trying to get into the market – advertising groups, pharmaceuticals and education providers are also lining up.

But how will the Sydney and Melbourne CBD markets accommodate occupiers who want to, but can’t get in? Andrew Ballantyne – JLL’s Head of Research, Australia – believes major occupiers may choose an alternative strategy.

“We are likely see organisations reverting to the ‘hub and spoke’ model,” he says, referring to the practice of maintaining a large central office space in the CBD but additional spaces in major suburban centres.

“Now, major occupiers are looking at where their workforce lives and formulating their real estate strategy to align with demographic and social changes so as to meet changing demand.”

“This will become more and more important as we move forward.”

Click here to read more about the Australian commercial real estate market

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Tim O’Connor

Head of Office Leasing, JLL, Australia

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