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Metro a boost for Sydney CBD landlords

By Ryan Ellem on Jun 21 2017

The Sydney Metro has proved to be a boon for CBD office landlords, enabling them to reduce incentives and realise rental growth as the major infrastructure project reclaims towers in the precinct.

LJ Hooker Commercial’s recently released Office Market Monitor found CBD landlords reduced incentives from 21% to 19%, lifting stated prime net rents by 9% over the year, as the Metro and residential conversions forced tenants to compete for limited stock.

Although Sydney recently recorded its largest intake of new office space last year - with the completion of two towers at Barangaroo South and 200 George Street - the city has minimal new stock forecast by 2019.

“Although we’ve seen a rise in CBD office completions, that supply has been offset by the withdrawal of 330,000sqm, which is a record amount,” said LJ Hooker’s Head of Commercial, Mathew Tiller.

“The balance of power has swung to landlords as vacancy rates have fallen. In the CBD, the vacancy rate is expected to fall to 3% by 2019; in the suburbs, it’s expected to fall to around 5%.

“Rents are now nudging replacement costs so we will see a new wave of development triggered in the near future. But with the lag time between concept and completion – especially in the CBD – we’re not likely to see any major supply increase in the next two years, which will create a pinch-point.

“But even with any new additions in 2019, the demand is likely to absorb the additional supply.”

Mr Tiller predicted an increase in investment activity over the next 12 months as landlords looked to realise their capital gains. Ongoing competition should see yields firm further; however, with the current average prime yield sitting at 5.2%, any tightening will be at a slower speed than previous years.

Parramatta remains the most in-demand suburban office space in Sydney, with the A-grade vacancy rate sitting at only 4.3% - significantly lower than North Sydney (6.2%).

Tenants in Melbourne also have a strong appetite for office with the CBD vacancy rate currently at 6.4%. Prime incentives are higher, however, at 28%.

Supply levels are more sustainable in the Melbourne CBD, with around 240,000sqm of space currently under construction.

“And Melbourne’s apartment construction appears to have hit its peak, so there’ll be a reduction in the amount of office space withdrawn for residential conversion,” said Mr Tiller.

The Monitor also predicts Brisbane’s vacancy rate has peaked, with a gradual take-up of space as the wider economy recovers.

“Brisbane has some major projects with the $3bn Queens Wharf development and the State Government edging closer to the Cross-River Rail project, and that will bring more professional employment to the city,” said Mr Tiller.