Niche Advisory – May 2019
In January 2019, the vacancy rate for the Sydney CBD market hit its lowest recorded level over the past decade. The vacancy rate of 4.1% is just above the lowest ever recorded level being 3.7% in January 2008.
The vacancy rate for North Sydney is a little higher being 6.8% but is under the same pressures as seen in the Sydney CBD.
Vacancy (and rents) are simply a function of economic supply and demand. The combination of less available space with the increase in demand for space by businesses, has led to this situation.
Recently 14,500m2 of space was taken out of the North Sydney market with no new developments coming online during the same period. However, as we look ahead, there is around 145,000m2 of space scheduled to come online over the next 2 years. This is expected to increase the vacancy rate and thereby place pressure on rents to decrease. This is also seen as being the period when we should see the reversal towards a tenant favourable market.
As a rule of thumb, the commercial leasing market generally follows a seven year cycle. Five of these years are usually a “tenant favourable” market. The remaining two years then being a “landlord favourable” market. At this stage, the landlord favourable market has been running for over two years and there is little reason in sight for the reversal to occur over the next 12-18 months. As stated above, it will occur when we see the large amount of stock come online and/or a downturn in the general economy.
One of the direct consequences from the increase in demand, the decrease in vacancy and the increase in rents, is that many tenants have made the business decision (or have simply been forced) to relocate from the Sydney CBD to North Sydney and Sydney Fringe. This, in turn, leads to the trickle down effect so that demand for North Sydney has increased leading to the decrease in vacancy and the increase in rents.
In terms of the main leasing variables, rents are still increasing with a large spread ranging from $650/m2 to $1,100/m2 (all depending on the grade of building and premises). Incentives being offered by landlords are still low but we have been able to negotiate higher incentives to provide better value for tenants.
Following are some snapshots from
various agency research reports regarding the current state of the market.
North Sydney Office Leasing Statistics
Savills Research
Source: Quarter Time – National Office Q1/2019
North Sydney vacancy rate down from
8.6% to 6.8% with net absorption being negative (more space has been taken up
that provided back to the market).
Colliers Research
Source: CBD Office Research & Forecast Report First Half 2019
Vacancy rates expected to start
increasing around July 2021. Rents which have been steadily increasing, are
expected to slow the rate of increase have been on the steady march up
Knight Frank Research
Source: North Shore Office Market Overview March 2019
The decrease in market yields also leads to an increase in rents as investors need to increase the income stream to cover their debt payments (resulting from the increased price to acquire the building).
