Australia’s office market is showing signs of recovering from the setbacks brought on by the global financial crisis but the recovery will still be hinged on improved economic fundamentals.

The Property Council’s latest Office Market Report shows Australia’s office vacancy dropped from 10.0 percent to 9.5 percent in the six months to January 2011.

Property Council CEO, Peter Verwer, says the result was driven by resurgent demand for office space. Net absorption, the best indicator of demand for office space, was 302,673sqm over six months to January 2011.

“In a short period we have moved from a rapidly shrinking market to one in which demand is growing at almost twice the historical average,” Verwer says.

There is further evidence of a demand-led recovery in the sub-lease market. Over the six months to January 2011, more than 90,000 square meters of sub-lease space was absorbed by new tenants, pushing sub-lease vacancy down from 1.5 percent to 1.1 percent.

“Demand has returned to Australia’s office market as business sentiment has recovered,” Verwer says. “Tenants are making decisions again. Many occupiers are primed for expansion, and favorable leasing incentives are persuading businesses to reassess leasing opportunities.”

“Over the six months to January 2011, the lift in demand for office space was strong enough to produce the first vacancy decrease in the Australian office market for three years.”

Verwer adds that while future supply is unlikely to trouble Australia’s office market over the short to medium term, the recovery will be subdued.

“These latest figures show the supply pipeline is reasonably balanced in major office markets around the country, except for Perth and Canberra,” he says. “New supply for Australia’s largest office market, the Sydney CBD, will be quite moderate over the short to medium term.”

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