The Sydney CBD office market is on the radar of investors, as a multitude of factors push vacancy down and rentals up.
Total vacancy for the market has dropped to 7.7 percent in 4Q16, down from a cyclical high of 10.7 percent four years ago, according to the latest data from JLL. In the past year, Sydney CBD office effective rents have grown by 22.5 percent in 2016, beating other major markets in the Asia Pacific region.
Demand has been driven by the desire of internationals to grow their presence in Australia, but other factors are at work.
Buildings in Sydney’s CBD are being demolished to make way for new transport infrastructure, the Sydney Metro. However, as Andrew Ballantyne – JLL’s Head of Research, Australia – points out, the NSW economy is growing strongly in its own right, and several industries are expanding.
“Offshore banks have increased their lending activities in Australia and, at the same time, are growing their headcount in Sydney,” Ballantyne says. “While the technology sector is less active now than it was in 2015, we still see a positive growth story for Sydney from that sector, too.”
Ballantyne says both the Sydney and Melbourne CBDs will remain firm favourites for occupiers over the short to medium term.
“Fundamentally, organisations like to be close to their customers and in locations that allow them to attract and retain skilled labour. As a result, the trend has been to companies relocating to the Sydney and Melbourne CBDs,” he says.
“While Sydney’s CBD is very tight at the moment, the surrounding decentralised markets are even tighter, and recording strong rental growth. Vacancy in the Sydney Fringe (3.9 percent) and Parramatta (4.2 percent) is lower than Sydney’s CBD, and North Sydney (7.3 percent) is in a similar position.”
The outlook for investment in the Sydney CBD is solid, according to JLL’s Head of Research – Asia Pacific, Dr Megan Walters.
“For investors with their eyes on the Australian market, there is the potential to capitalise on the upturn in the leasing market within the office sector, where lower Grade A or good Grade B assets have the potential for rental growth and lower vacancy risks,” she says.
While the Sydney and Melbourne CBD office markets have strong investment and development potential, other Australian markets are lagging.
“Rental growth is not an Australia-wide phenomenon, it is concentrated in the Sydney and Melbourne office markets,” Ballantyne says. “Sydney and Melbourne have the ingredients for the next development cycle – occupiers are expanding, rents are growing above trend, and cap rates are compressing.”
“The medium-term rental growth outlook for Sydney and Melbourne is positive. We are seeing competition for space exert upward pressure on face rents and downward pressure on leasing incentives.”
“Brisbane and Perth are close to the cyclical low in effective rents. Rental growth will remain muted across those geographies until vacancy starts to trend lower.”