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Office landlords hold balance of power in Sydney

Office landlords hold balance of power in Sydney

By Ryan Ellem on Jun 08 2018

Sydney’s office landlords will have the upper hand in tenant negotiations into the next decade as the availability of space throughout the CBD and suburban markets tightens.

On the back of a strengthening state economy, demand continues to outpace supply with the CBD’s vacancy rate to topple from 4.5 to 3 per cent, according to LJ Hooker Commercial’s recently released Office Market Monitor. The report found the non-CBD market will also remain tight, hovering around 5 per cent for the next three years.
The forecast follows on from a $5 billion raft of sales during 2017, primarily from domestic listed and unlisted funds and syndicates. The rush of investment flattened average yields for prime and B grade CBD - as well as A grade suburban - office stock by between 30 to 70 basis points. It underpinned capital growth by 9-18 per cent across the markets, with B grade CBD recording a remarkable 40 per cent increase.
Mathew Tiller, Managing Director at LJ Hooker Commercial, said yields would continue to firm over the short to medium term.
“There’s still 12 to 18 months to run as the under-supply and withdrawal of stock gives rise to rental growth,” he said.
“Bargaining power firmly rests with landlords over the next couple of years, especially in the CBD, where 175,000sqm of office has been withdrawn and additions are set to be minimal.
“Developers have been focusing on the suburban markets of Parramatta, South Sydney, North Sydney, Olympic Park and CBA’s campus at Eveleigh, but the market is expected to easily absorb these additions.”’
The Monitor showed prime incentives in the CBD averaged 19%, with an average gross face rent of $1253psm.
The Monitor also suggested a turning tide in Western Australia. Modest net office absorption of 35,000sqm occurred over 2017, with mining and health employers helping to underpin the stabilisation. BHP, as an example, took space previously offered for sub-lease back off the market. Overall, there was 47,000sqm of office space absorbed in the CBD last year, representing the strongest take-up in the last five years.
Brisbane’s office market, particularly in the CBD, has been impacted by the State Government’s consolidation of its workforce. It had a strong influence on the Fringe’s vacancy rising from 13% to 14.1%.
“In Brisbane, the falling cost of accommodation has had an impact on lower grade office stock because of the flight to quality,” said Mr Tiller.
“In contrast to Sydney, tenants hold the balance of power in Brisbane.”
Canberra’s vacancy rate increased from 12.6% to 13.1% over the 12 months to December. However, there is great disparity between the grades of space and location.
From an investment perspective, yields for A grade office buildings firmed 60 basis points to 6.5 per cent in the 12 months to the end of December.
Moderate improvements in average leasing incentives and A grade gross face rents combined to deliver a 4.2% boost in effective rents in the nation’s capital city.
“The Federal Budget had very little influence on the public workforce, so the local office market is anticipated to continue as is over the forthcoming years,” said Mr Tiller.
The last 12 months represented a rise in State Final Demand (4.2 per cent) for the South Australian economy. Over 14,000sqm of net absorption in the 2017 calendar year represented the best outcome for Adelaide since 2009. No new or refurbished supply was introduced in the CBD over the period, which is an anomaly over the last 25 years.
“The slow-up in the construction pipeline allowed Adelaide’s office market to catch-up somewhat, improving its vacancy rate. There is, however, completions on the horizon, including the first tower in the Precinct GPO, which is largely pre-committed to the State Government and BHP. This will have an impact on backfill, so Landlords should be considering a strategy if lease renewals occur around this period.”
For media information:
Ryan Ellem
Network PR & Communications Manager
M: 0427 916 020

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