Sydney’s CBD office market is in the midst of a hot streak that will likely extend into 2017, according to new research.
JLL recorded net absorption of 145,700 sqm over the 12 months to 1Q16 – well above the 45 year average of 62,800 sqm. Net absorption, the most reliable indicator for demand, has been climbing for two years, moving above-trend in 2014 (70,000 sqm), increasing to 144,800 sqm in 2015.
Leasing activity has been concentrated in the A Grade and secondary sectors with vacancy tightening to 5.5 percent and 6.3 percent. Grade A vacancy is at its lowest since 2Q08, while secondary grade vacancy is the lowest since 2002.
The result has been driven by demand from the professional services, technology and education sectors. However, the contribution from small to medium tenants should not be under-estimated.
“JLL estimates that 38 percent of stock in the Sydney CBD is occupied by a tenant less than 1,000 sqm,” says JLL’s Head of Strategic Research in Australia, Andrew Ballantyne. “A high proportion of these tenants occupy B Grade space and the level of activity in this cohort of the market has pushed secondary grade vacancy to 6.3 percent, the lowest level since 4Q02.”
“Furthermore, over 230 tenants are in the process of being displaced from the compulsory acquisition of assets for the Sydney Metro, and residential conversions such as 1 Alfred St and 71 Macquarie St.”
The Premium Grade market still faces headwinds, but vacancy in this segment declined to 11.4 percent in 1Q16, down from 14.4 percent in mid-2014.
“A number of Premium Grade owners have been proactive in splitting floors and investing in speculative fit outs to orientate vacant space towards the smaller tenant market, where activity is firm,” says JLL’s Head of Office Leasing – NSW, Daniel Kernaghan.
“The next wave of demand for the Premium Grade sector will come from offshore banks seeking geographical diversification in earnings and exposure to the Australian lending market.”
JLL’s forward outlook for Sydney’s CBD office market is positive. The development cycle will peak this year and limited new development scheduled for completion over 2017-19.
JLL’s conservative estimate for withdrawals shows 227,300 sqm, or 4.5 percent of the CBD’s total stock, will be withdrawn over the 2015-18 period – a scenario which forecasts a contraction in total net lettable area for the market in 2017-18.
With office stock declining, and demand for space climbing, the environment is ripe for future rental increases.
“JLL recorded an increase of 15.7 percent for prime net effective rents in the Sydney CBD over the 12 months to 1Q16,” Ballantyne says. “The ingredients of positive leasing inquiry and a contracting market have the potential to push effective rents higher.”
JLL expects prime net effective rents will increase by an average of 6.7 percent per annum over 2015-2020.
Head of JLL Office Leasing, New South Wales