September 2015 – Sydney CBD Office Strata

17 September, 2015 / Vanessa Rader and Jeremy Piggin

2015 has been a standout year for the Sydney CBD office market so far. Vacancy levels are currently the lowest CBD rate in the country at just 6.3%, which has spurred on some face and effective rental growth after a prolonged stable period.

Investment activity has been a strong theme for the year with investment levels in prime assets at a high driving the yield down to lows unseen since pre GFC as the weight of funds compete for assets. The strata market has seen outstanding results in capital values growing strongly for the second consecutive year to now average $6,200/sqm.

Interest in the Sydney office market has not just been restricted to the high end freehold market with investment interest in the strata office market strong over the past 18 months. Total volume of investment was strong during 2014 however a lack of available supply to the market was instrumental in growing the average investment rate to $5,767/sqm. 2015 has set a new benchmark rate after a strong start to 2015 with over $75 million changing hands across 96 transactions increasing the average capital value by 7.48% to $6,200/sqm. This increase has been driven by a strong 6.89% increase in the active Core precinct however the largest increase has come from the Southern precinct albeit off a historic low rate achieved last year given the limited investment pool.

Over the past 18 months the Sydney CBD office market has been in position where new supply additions have been counteracted by withdrawal of stock. This net supply position has aided in the reduction of the overall vacancy rate, however this trend is about to change with the anticipated completion of 670,000sqm of new office stock over the next three years. While withdrawal of stock will continue for refurbishment, this supply will subsequently come back on line with only limited stock being removed completely from the office count. The most anticipated completions are International Towers with the first completion (Tower 2) due in early 2016 (87,500sqm) with the remainder of the office properties on this site expected to be completed by mid-2017 adding 179,000sqm.

The Sydney CBD continues to boast the lowest vacancy rate of any CBD across Australia as at July 2015. Currently the total vacancy rate is 6.3% including a small sublease factor of 0.4%, the Sydney CBD office market currently has 311,678sqm vacant which has shown a strong absorption rate of 60,405sqm for the six months to July 2015. This is the third consecutive six month period of net absorption of over 50,000sqm, coupled with net supply over the last 18 months of just 5,485sqm highlights the rebound in white collar employment and business confidence. Technology continues to be a driving force for new tenancies within the CBD, while finance and professional services have also increase their footprint on the city. The greatest demand has come from the Core and Midtown precincts which yielded a 36,926sqm and 18,061sqm respectively increase in occupied stock over the last six months.

Across the total Sydney CBD the tight vacancy rate of 6.3% has resulted in all quality grades witnessing a decrease in available stock. The flight to quality has ensured that the Premium market continues with the lowest vacancy rate of just 5.2% representing 41,547sqm, A grade slightly higher at 6.7%. The standout being the D grade market, mostly catering for those smaller tenancies; however this market is the smallest across the CBD, vacancy of 5.5% this represents just 10,464sqm. C Grade is the only quality grade which resulted in a small increase in vacancy to 6.9% in July 2015 up from 6.6% in January 2015, while B grade has yielded a six year low at 6.2%. Given the volume new stock to enter the market and known pre-commitments the higher A grade vacancy is likely to be a feature seen in this market for the short to medium term.

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