The Wrap - Jones Lang LaSalle

Latest in Corporate Real Estate News
6th Edition - September 2014
Inside
this issue
MarketActivity
The latest on real estate
market trends
Spotlight on
Productivity
Corporate
Solutions
News
Campus Planning in
Australian Universities
Corporate Solutions Australia | September 2014
We’re calling 2014 the year of the ‘Push-Pull’ due to the curious disconnect between
the current tenant-favoured commercial leasing market in all of the capital cities
and the continued high demand for good quality commercial office buildings
at historically high prices. In all previous cycles, such soft market
conditions have led to an easing of yields – but not this time around.
So what are some of the macro-economic factors creating the push
and the pull?
Push
Pull
Mining and resource sector
Wide prime yield spreads
Low Retail spending
Wide yield spreads between real estate
markets (e.g. CBD and non-CBD office
markets) and sectors (e.g. regional and
neighbourhood retail formats)
Falling AUD exchange rate
Limited investment opportunities in firstchoice markets
A rising unemployment rate
Growing obsolescence of investment
grade stock in office markets and legacy
issues in retail and industrial sectors
Fiscal tightening
Banking sector re-regulation
Low interest rates (and the falling cost of
debt)
Balance sheet re-engineering
Sustainability and productivity – the
current focus on workplace productivity,
cost control and environmental
credentials increases the demand
for premium grade assets and drives
development, refurbishment and
conversion activity.
The competition to purchase high grade assets is both from local institutions and
increasingly from offshore investors and sovereign wealth funds. Such demand is in
turn fuelling new development activity which will flow through to a continuation of good
opportunities for tenants. Adding further impetus to commercial development is the
push, led by both Sydney and Melbourne, for residential developers to acquire welllocated secondary commercial buildings for future residential development, at prices
well above commercial book value.
The move away from the current tenant-friendly conditions appears some way off.
Steve Urwin
Head of Tenant Representation, Australia
02 9236 8030
[email protected]
MarketActivity
Sydney
Sydney currently leads the charge across Australia in adopting new
workplace styles to achieve more with less. Unless large corporates
have a valid reason to move, they’re deciding to stay, with many
working more efficiently in less space: Deutsche Bank recently
renewed at 126 Phillip Street, right-sizing to 10,800sqm; Citi at 2 Park
Street, right-sized to 18,000sqm and leased an additional 4,000sqm
in the suburbs; and PwC signed at International Towers Sydney
(Barangaroo) for 20,000sqm, right-sizing from 30,000sqm. Software
company Symantec also consolidated their business, relocating their
North Sydney office into their existing premises at 207 Kent Street
(2,100sqm).
International Towers Sydney continues to secure tenants for its first
three towers (280,000sqm). Supply additions (completions minus
withdrawals) are predicted to total 242,000sqm between 2015 and
2017. This abundance in supply is likely to see rents remain flat, if not
decrease, and a rise in incentives. It’s a positive time for occupiers
looking to relocate with surplus space in the new stock to choose
from, and potential back fill space from the moves to new sites
including International Towers Sydney. Larger tenants still wanting
contiguous blocks of space in customised new builds will still need
to pre-commit and take into account the time needed for completion.
Against this potential new stock , Sydney’s strong appetite for
residential conversions will continue to maintain a balance of
oversupply by absorbing excess older style stock, with over
$1billion of commercial property being purchased in the last year,
with the intent to redevelop or convert the site for residential use.
With a mass of construction underway, but no new stock yet
available, net face rents held relatively steady over the quarter
dropping -0.1%. Incentives held firm at 37 months free on a 10year lease (30%).
With productivity high on all corporate agendas, more corporations
are also starting to look at the smaller non-CBD markets such as
Parramatta, Chatswood and North Sydney for more cost effective
opportunities. Around 30% of Australia’s top 500 businesses now
have offices in Parramatta, including AON, Lend Lease, QBE,
Suncorp and Telstra. The NSW Government particularly are
looking at the efficiency of being housed in Parramatta, where they
are closer to government activity e.g. Badgerys Creek, at a lower
rent. They recently announced that 3,000 state public servants will
be relocated into Western Sydney, including Parramatta, Liverpool
and Penrith, as part of the government’s decentralisation plans.
This provides a positive outlook for Parramatta’s development
pipeline and continues to reinforce Parramatta’s significance as
Western Sydney’s capital.
North Sydney is also seeing a resurgence, with its first new wave
of developments, including a pre-commitment of 30,000 sqm
to Leightons, at 177 Pacific Highway, North Sydney’s first new
commercial tower in six years. Gavin Martin
Head of Tenant Representation, NSW
02 9220 8458
[email protected]
SYDNEY VACANCY Q2 2014 9.9 % | SYDNEY PRIME GROSS EFFECTIVE RENTS - $622.05
MarketActivity
MELBOURNE VACANCY Q2 2014 - 11.1% | MELBOURNE PRIME GROSS EFFECTIVE RENTS - $383.57
Melbourne
Like Sydney, Melbourne’s ageing buildings within the CBD have
investors questioning how best to treat them in order to gain the
strongest return on investment. For occupiers, this is a positive as
it means landlords recognise that the way we work, and what we
expect from our workplace is changing - and they need to keep up
with expectations.
Demand for space in Melbourne has been declining, with many
large corporations downscaling their Melbourne presence. This
has been particularly prevalent in the manufacturing sector where
companies such as Lion Nathan, recently purchased by National
Foods, scaled back functions in Melbourne, and are offering
sublease space.
The adoption of new work styles and increased demand for higher
quality amenities such as end of trip facilities, high-end conference
facilities and business clubs, certainly hasn’t ruled out ageing stock
as a viable option. Melbourne has seen an increase in older buildings
undergoing extensive refurbishments to tailor its offering to existing
and new tenants. ANZ recently worked with JLL’s Project and
Development Services team to adapt 55 Collins Street to meet its
future business model. With a great location, views and surrounding
precinct, ANZ decided to upgrade its existing building for long
term occupancy and continues to attract subtenants to its surplus
accommodation.
Reduced demand from traditional CBD tenants may be
counteracted to a degree by companies that have always been
located in the outer suburbs of Melbourne, relocating into the CBD.
These moves are driven by a need to reset the organisation’s
culture and position them for the long term. Key to this is obtaining
a central location to access a larger pool of talented staff across
Melbourne. Many organisations we deal with report staff are
seeking to: work within a central location, access centralised
public transport (particularly the train), be close to all amenities,
and be able to easily network with their friends and peers. With
the war on talent ever prevalent in the age of the ‘knowledge
worker’, being located within a CBD is crucial for most industries to
entice Generation Y, who are vital to injecting innovation and new
thinking into businesses. We’ve recently seen companies such
Jemena announcing their commitment to 12,000sqm of the new
development at 567 Collins Street, consolidating from suburban
Melbourne, for greater access to new talent and their existing
labour force.
Melbourne is also seeing an increase in corporations taking a
longer-term view to how its accommodation strategy fits with its
future business growth. Following a major repositioning project,
530 Collins is now home to Suncorp who have embraced an
integrated vertical campus workplace. With 1,200 employees,
staff are benefitting from a new central Collins Street location,
incorporating a modern future-proofed workplace.
With declining demand, net face rents dropped 0.2% to $431 psm
p.a. over 2Q14. Incentives were unchanged at 37 months’ rent
free (30%) in the quarter and secondary rents recorded a slight
uplift of 0.3% to $285 psm p.a.
.
Peter Walsh
Head of Tenant Representation, VIC
03 9672 6560
[email protected]
MarketActivity
Brisbane
The mining and resources boom has seen Brisbane’s leasing market
riding high over much of the last decade. While other CBDs were
disposing of excess ageing stock via residential conversions or hotels,
Brisbane continued to lease its commercial space and retained most
stock. That stock now contributes to the average age of Brisbane’s
buildings rapidly approaching 30 years old and approximately 44% of
Brisbane’s CBD office stock being classified as B-grade, which is the
highest of all major capital city markets, compared to an average of
27% across all CBD markets.
With the demand on buildings drastically changing in the last 5 years,
much of the older stock built in the 1960’s, 70’s and 80’s is finding
it hard to remain relevant in the leasing market. New workplace
strategies such as denser fitouts, ABW and campus-style formats,
mean occupiers are using space more intensively. Accommodating
for less desks per employee can mean 95% of desks are occupied
at any one time, putting a strain on facilities such as air-conditioning,
bathrooms and lifts.
Vacancy rates reflect the demand for larger floorplates and highend amenities with Prime vacancy less than 10% and secondary
closer to 20%. As a result, prime net rents fell 0.4% q-o-q psm
p.a. in 2Q14 and incentives increased by one month to 37 months.
Prime effective rents are now 9.6% lower over the past year, while
secondary effective rents are 5.9% lower.
So what will become of this excess of ageing stock? A debate
has started locally, involving the State Government and Brisbane
City Council, about whether a program of incentives and support
should be implemented, to encourage the conversion of older stock
to alternative uses. Unlike Sydney and Melbourne, ‘Brisbanites’
have been slower to embrace inner city living, particularly in the
CBD. As a result, there have been less residential conversions to
date. With three major tertiary institutions in or near the CBD (QUT,
Conservatorium of Music and Southbank Institute) a viable option
may be student accommodation.
The good news for occupiers is that this excess stock continues to
push rents down and incentives up. Although the sublease market
has stabilised, sublessors are becoming increasingly motivated to
move excess space and are therefore offering extremely competitive
rental packages to prospective tenants. There are currently three
buildings totaling 188,000sqm that are due to complete in the 12
months from late 2015: Daisho’s speculative 58,000sqm 180 Ann
Street (reported to have committed CBA to 12,000sqm recently),
Cbus’ 75,000sqm 1 William Street for the Queensland State
Government, and Grocon’s 53,000sqm 480 Queen Street, which is
currently around 70% leased.
Brisbane continues to see strong activity from large corporate
occupiers and professional services firms, seeking to implement
more modern, flexible and efficient working environments.
Businesses are starting to look at either: site consolidation,
implementation of activity-based working, execution of more openplan layouts or simply an adjustment to the size of their tenancy
to reflect current conditions. The size of market incentives and the
willingness of landlords to take on lease tail liabilities, are allowing
tenants to genuinely consider their options well ahead of lease
expiry.
Michael Greene
Head of Tenant Representation, QLD
07 3231 1355
[email protected]
BRISBANE VACANCY Q2 2014 - 16.5% | BRISBANE PRIME GROSS EFFECTIVE RENTS - $427.71
Perth
During the downsizing epidemic that swept the rest of the nation
from 2007-2010, Perth was in a strong growth cycle and has only
recently started to experience a consolidation due to the winding
back of resource projects, predominantly mineral projects, and the
subsequent knock-on effect of support services to that sector e.g.
engineering , accounting, legal, etc. This consolidation has resulted
in an increased amount of sub-leases being available on the market
– going from 30,000sqm of vacant sub lease stock (Q1-2013), to now
over 100,000sqm in Q1 this year. The effect has been a softening
of rents and incentives levels reaching 30% +, resulting in gross
effective rents falling 6.4% to $620 psm p.a. over Q2, 2014.
2015 and into early 2016, will record the highest amount of new
completions since 1991 with five to six new buildings due to be
completed in the CBD, at least 111,900sqm (across projects under
construction). This surge in new stock is giving tenants in older
buildings the option to evaluate whether they can achieve better
occupancy efficiency and lower occupancy costs in new facilities.
Tenants need to be evaluating not just their rent, rent review
structure and incentives, but also other significant cost drivers
which contribute to total occupancy costs. Some of the newer
stock in Perth CBD provides a good opportunity for occupiers to
benefit from larger floorplates and better base building services
(i.e. HVAC, Power/Electrical/Telco, Lifts) to support higher density
and better utilisation for improved workplaces.
Perth has the greatest amount of buildings over 20 years old,
in surveyed areas of CBDs across Australia. Due to a number
of influencing factors, including recent zoning changes with
increased plot ratio allowances in the CBD, this ageing stock with
large vacancies, is more likely to be completely refurbished, or
demolished & redeveloped, rather than converted to residential as
is being seen in other capital cities. Some landlords are taking
the opportunity to upgrade their ageing assets, during times of
significant vacancy, to ensure the building meets current market
expectations and is appealing to the market on completion.
Perth’s rents haven’t yet hit the tipping point that other major CBD’s
are experiencing to entice fringe or suburban tenants into the CBD.
However, for occupiers looking at floor plates over 1000sqm, the
CBD can prove, when taking into account the full occupancy cost
which extends beyond rent and outgoings, to be more competitive.
Andrew Campbell
Head of Tenant Representation, WA
08 9483 8478
[email protected]
PERTH VACANCY Q2 2014 - 12.7% | PERTH PRIME GROSS EFFECTIVE RENTS - $620.34
MarketActivity
Canberra
The most talked about Federal Budget in years generated a
blizzard of headlines but the one that stood out most for people
in the ACT was a cut of some 16,500 public servants jobs. While
not all of the lost positions will be in Canberra, it is still an eye
watering number in a city of 300,000 people. (Thornhill, 2014)
So what does this mean for property and the rental market in a
city that already has a vacancy rate of over 13%? Government
leasing enquiry has been slow for a long time and will continue
to be, as government departments contract or scale down their
current tenancies. With a lack of demand from the government
sector, the main players in the Canberra leasing market will
become small to medium private tenants.
In a similar story to Sydney, any move needs to be justified by
productivity gains. If an existing fitout works and the size of the
space is appropriate, then the likelihood of a renewal will be
higher than that of a move.
The private sector will potentially heighten demand within
Canberra, as they benefit from some of the government changes
e.g. Lockheed Martin recently became preferred supplier for the
provision of Centralised Processing services to Defence, resulting
in the need for new premises to see out its six-year contract.
With ageing stock and limited new builds, rents and incentives
in Canberra continue to be in favour of the occupier. Prime net
rents of $412.67 psm p.a make Canberra the most affordable
office stock in Australia, with incentives also at 22% of the gross
rental, the highest they’ve been in over 20 years. Ageing stock in
Canberra is likely to undergo a similar cycle to the refurbishment
and demolition that other states are currently experiencing;
however it may not come to fruition for years due to slower
demand. New stock continues to be pre-commitment driven with
little new stock. Traditionally Canberra was a supply led market,
where developers would build to relevant specifications and
be able to uncover tenants relatively quickly. Post GFC, newbuilds seem to be pre-commitment led only to ensure sufficient
occupancy.
With Governments PRODAC (Australian Property Data Collection)
guidelines now calling for a reduction in usable office area from
16 sqm per occupied workpoint to 14 sqm, government tenants
may gradually start to review their current workplace footprint and
look to adopt an activity based working style or similar futureproofed workstyle. This will further contract government leasing,
however it may also drive a demand in refurbishments or builtfor-purpose new builds. Access to capital is a real constraint for
many Government Agencies. Whilst ABW can produce significant
cost savings, there is still potentially a large upfront investment
involved in refitting space. However, Canberra’s current property
market conditions represent a good opportunity for Government
Agencies to negotiate with their landlords to secure an incentive
to contribute towards the rent or fitout costs.
Gavin Martin
Head of Tenant Representation, NSW & ACT
02 9220 8458
[email protected]
CANBERRA VACANCY Q2 2014 - 13.2% | CANBERRA PRIME GROSS EFFECTIVE RENTS - $309.06
Spotlight on - Productivity
This year, JLL has focused on productivity and
understanding what that means to you, your business,
your people and your workplace.
PEOPLE
To understand your drivers more, we initially
interviewed senior executives from across Australia,
from a variety of industries. We wanted to know how
they defined productivity, how or
if they measured it, and what they
PRODUCTIVITY
felt were the key enablers and
inhibitors in achieving productivity
gains. As a result of the interviews, we established a
productivity framework that addressed the inhibitors
and enablers of productivity, which
were: people, leadership, systems & ESSENTIAL FOUNDATIONS
processes and work environment.
LEADERSHIP
When examining where CEOs are spending the majority of their time,
over 60% was spent on people. Whilst acknowledging that people are
of course the golden key to productivity, we realised that unless you
constantly address and review the effectiveness and methodology of
the other three pillars being: 1. Leadership, 2. Systems & Processes
and 3. Work Environment – people could never achieve long lasting and
significant productivity gains. It’s these three pillars that allow people
the vision, motivation, tools and environment to truly succeed.
SYSTEMS & PROCESSES
Column1
10%
19%
WORK
ENVIRONMENT
PEOPLE
LEADERSHIP
WORK ENVIRONMENT
Find out more about the framework in our whitepaper: Perspectives on
Productivity #1: Corporate Australia.
How CEOs spend their time
SYSTEMS &
PROCESSES
9%
62%
So if we know that 1/4 of the productivity equation lies in the work
environment, how do we ensure it responds to the needs of your
business and people?
The third part of our journey tested our productivity framework against
135 board members from across a variety of industries at the Company
Directors Directorship14 Conference in May 2014. Once presented
with the framework, we facilitated an open discussion with the board
representatives about their views on productivity, how they can help
drive productivity gains and what their key focus areas are. The
outcomes confirmed that the productivity framework was robust with all
key issues fitting within one of the three foundational pillars.
The second stage of our discovery involved an in-depth look at how
employees work across the globe. We surveyed 400 employees, from
all levels of seniority, from a variety of countries, to understand how they
spend their time, and what activities they believe provide the greatest
value to a company. What we found was a strong disconnect between
what people were doing (predominantly emailing) as opposed to what
they felt provided value, which was brainstorming, thinking and talking.
Find out more about the insights of the board in our soon to be released
whitepaper: Perspectives on Productivity #2: The Boardroom.
If you’re interested in continuing the productivity conversation in relation
to your workplace, please give me a call.
For a workplace to be truly productive it must facilitate and encourage
the type of activities that will add value to each business. No one size
fits all. For some industries such as the legal sector, quiet focus hubs
to allow for concentrated work may be imperative, whereas for creative
industries, like advertising and media, collaborative, relaxed spaces
may provide a greater return.
Tony Wyllie
Head of Integrated Portfolio Services, Australia
02 9220 8729
[email protected]
Find out more about creating value via your workplace in our whitepaper:
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All our whitepapers can be found at:
jll.com.au/occupiers.
If you would like to be sent one directly, please contact:
Shona Baxter
Acting Head of Marketing, Corporate Solutions
02 9220 8520
[email protected]
Corporate Solutions News
A focus on Education
Campus Planning in
Australian Universities
Corporate Solutions Australia | September 2014
At a time when Universities across Australia face a multitude of pressures such as: ageing campuses, rising
expectations of students and staff, tougher regulatory environments and increased red tape and processes, we’re
helping them create value through their real estate portfolios.
We’ve recently partnered with Monash University in Melbourne to establish a campus planning framework, which
will bridge the gaps between all of its campus plans and operations. The framework will ultimately ensure that what
is built on campus is aligned with the University’s master plan and strategic goals. Our insights from Monash and
continued focus on effective campus planning is explored further in our most recent whitepaper: ‘Campus Planning in
Australian Universities’ available via our website.
Project & Development Services
Our PDS team is currently working with Tabcorp to consolidate 500 staff from
several existing locations into one new Head Office at 680 George Street, Sydney leaving behind its Ultimo Headquarters of 49 years.
The strategy will enable Tabcorp to significantly reduce its real estate footprint and
expenditure, as well as enjoy the benefits of collaboration and efficiencies that come with bringing together currently disparate Business
Units. The change management process will be led by our workplace strategy team, whilst our project and construction management
team will lead the construction programme, manage the relocations, delivery of the fitout at 680 George Street, make good at Ultimo
and Rosebery, and manage the relocation of Sky.
Integrated Facilities Management
Our IFM team were recently awarded The Bureau of Meteorology’s facilities
management services. The Bureau’s portfolio is geographically dispersed across 841
sites of which we will be providing Exclusive Services (to varying degrees) for 438 sites.
The portfolio includes Office Accommodation, Field Stations, Special Purpose Facilities,
Regional Maintenance Centres, Radar Sites, Auto Weather Stations, IPS equipment and
Tsunami equipment.
Tenant Representation
The 4-hectare land owned by AstraZeneca in Sydney’s Macquarie Park was significantly underutilised, with a head office that was outdated and did not fit the company’s future requirements.
After our Strategic Consulting team evaluated options, recommending the sale of the site and
relocation of the head office, our sales team successfully sold the site for a record price in
Macquarie Park. Our tenant representation team in Sydney then successfully negotiated a precommitment for Astra Zeneca’s brand new 32,000 sq ft head office to be developed on the site
by the purchaser.
JLL’s Project and Development Services are currently working with Astra Zeneca on the technical brief for its new head office.
For further information on Corporate Solutions, please contact:
Tony Wyllie
Head of Integrated Portfolio Services, Australia
Corporate Solutions
Phone: 02 9220 8729
Email: [email protected]
Chris Hunt
Head of Integrated Facilities Management, Australasia
Corporate Solutions
Phone: 02 9220 8389
Email: [email protected]
Kevin Hastings
Head of Project & Development Services, Australasia
Corporate Solutions
Phone: 02 9220 8655
Email: [email protected]
Our office locations:
Adelaide • Brisbane • Canberra • Glen Waverley • Mascot •
Melbourne • North Sydney • Parramatta • Perth • Sydney
www.jll.com.au
Any
Thoughts?
Disclaimer
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publication has been obtained from sources generally regarded to be reliable. However, no
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suffered by any party resulting from reliance on this publication. JSL0127
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