This article is from the Australian Property Journal archive
VACANCIES in Sydney’s heated office market are still being forced downwards to record lows, with at least another whole year before the next supply cycle kicks off.
According to Savills, the city’s vacancy rate is “arguably now sitting closer to 3.5% than the Property Council of Australia’s 4.6% figure given in July, while a Colliers International report released during 2018 suggested more than one million sqm of office space is required to satisfy white collar growth over the next 25 years, and the long-term vacant rate may only peak at 6.7% in early 2025.
Knight Frank predicted Sydney’s CBD vacancy rate would tighten to 3% over the next three years, and BIS Oxford expects this could occur by December 2019.
The withdrawal of around 412,000 sqm of office space has heaped further pressure on vacancies.
Demand for office leasing enquiries for between 1,000 sqm and 5,000 sqm characterised the Sydney market throughout 2018, according to Savills – the segment of the market where there is the greatest lack of supply.
Commitments in that range have included Urbis taking up 3,600 sqm, Quantium committing to 2,600 sqm, Australian Registry Investments leasing 2,281 sqm, Parkview Construction of 1,141sqm; and Property NSW taking 1,012 sqm lease.
“It is now a matter of ‘how low can it go’ before the next supply cycle in 2020/2021 eases the pressure,” director for office leasing, Christina Malcolm said of the tight vacancy rate.
Several major players are on the hunt for new office space, with larger requirements totalling about 120,200 sqm. They include Deloitte (35,000 sqm), the NSW government (between 18,000 and 20,000 sqm), SalesForce (23,000 sqm), Caltex (8,500 sqm), John Holland (6,000 sqm), and The Iconic (from 4,000 to 8,000 sqm).
Malcolm said 2019 would take the office leasing market into “unchartered waters”, with an ongoing reduction in supply and continuing strong demand pushing rentals upwards and impacting incentive levels.
“This may result in some companies possibly widening their search criteria to other CBD locations, such as North Sydney, and/or renew their leases, put decisions on hold, or contemplate alternative flexible workplaces until such time as the dam breaks,” she said.
Newly completed, refurbished and pre-commitment projects including Barrack Place, Australia Square Tower, 60 Martin Place and 388 George Street have received significant levels of commitment.
Malcolm said backfill space has also been quickly snapped up in come cases, such as Amazon at 2 Market Street.
“Conversely, enquiries in the small- to medium-sized enterprise market of 100 to 500sqm have generally been a bit more unpredictable, with high quality, ‘hassle-free’, spec-fitted suites continuing to attract and complete transactions.
“Unfitted and open-plan suites are experiencing more subdued levels of interest and a reduced number of tenant inspections.”
Knight Frank expects net absorption over the next two years in the Sydney CBD to average around 27,000 sqm per annum.
“There is a high level of lease expiries due over the next two years, meaning that the level of demand from existing occupiers will be robust. In addition, new market entrants into the CBD from other suburban markets will aid tenant demand levels over the same period as UTS (5,447 sqm) and Pfizer (4,640 sqm) among others move into their new premises.
“While there are multiple drivers of this, the forecast is underpinned by continued employment growth in the Sydney CBD with the traditional occupiers of professional services and financial and insurance services expected to outperform.”
It expects the “aggressive expansion mandates” co-working providers to result in solid take-up over the next two years.
Co-working groups WeWork, WOTSO WorkSpace, Hub have been joined in lucrative market by new entrant JustCo, as well as traditional office landlords in the lucrative industry, including Flex by ISPT, SuitesX by Dexus and Space & Co by GPT.
Australian Property Journal
