Sydney’s tight CBD office market creates positive spill-over effects for North Shore

The strength of the Sydney CBD office market has clearly spilled over into the North Shore office market and in particular North Sydney, which has benefitted from occupiers driven by a lack of contiguous space in Sydney CBD looking for space north of the CBD.

The latest data from Savills Australia’s North Shore Briefing Notes shows this increase in demand has helped to drive vacancy rates down and rents up, with A Grade and B Grade net effective rents increasing by 18% and 25% respectively over 2017 in North Sydney, on the back of rising net face rents and significant falls to incentives over the same period.

According to Shrabastee Mallik, Senior Analyst – Capital Strategy at Savills Australia, incentives in North Sydney’s office market fell to historically low levels across both Prime and Secondary grade buildings. Net A Grade incentives fell 500 basis points in 2017 to 25%, whilst net B Grade fell a monumental 1000 basis points to 20%.

“A lack of assets available for sale and affordability compared to the CBD has also seen an increase in interest in office assets in Sydney’s North Shore office markets, driving capital values to record highs.

“Investor interest in North Sydney office assets was further evident with several assets transacting at yields one would expect in the neighbouring CBD. For example, 1 Pacific Highway, North Sydney was sold for $114.5 million to a confidential buyer of Asian origin at an equated yield of 4.80% in October 2017, whilst 75 Miller Street, North Sydney was sold in December for $52 million to an investor from Hong Kong at a reported yield of 5.00%.”

Ms Mallik went to say that, with Sydney’s population forecast to grow by over 2 million people over the next 20 years, residential conversions remain a prominent feature of the market, with developers continuing to purchase secondary grade stock for alternative use, redevelopment purposes.

In the six months to December 2017 alone, nearly 23,000 square metres of stock was withdrawn from the North Shore office markets (primarily in Macquarie Park and Crows Nest/St Leonards) for residential and retail conversions. With expectations of continued withdrawal of stock for residential and/or mixed-use conversions, vacancy rates in the North Shore market should continue to trend down and rents up.

Looking ahead, the announcement by the NSW Government regarding the proposed additional railway station at North Sydney (Victoria Cross) is considered a positive outcome for North Sydney. Once complete, it will improve the amenity and accessibility for tenants in the northern sector of the North Sydney CBD. Also the withdrawal of the various B Grade buildings, such as 181 Miller Street, to accommodate this new station will reduce the level of stock in the market and require numerous tenants to relocate.

Ms Mallik said planning reforms are anticipated to further impact the North Shore commercial market over the coming years. Notably, large sections of Macquarie Park’s commercial core remain under planning review stages.

“Investigation into the long-term future of Macquarie Park’s commercial centre is currently underway by the NSW Government along with the City of Ryde Council. Setting out the long-term strategic planning framework, the new planning schemes are expected to protect and enhance Macquarie Park’s role as a major commercial precinct”.