Rent, capital values sustain growth across Sydney’s major office markets

Sydney’s major office markets have continued their upward trajectory, with sustained growth across rents and capital values throughout the final quarter of 2018.

New research from Savills Australia shows that net face rents in Sydney’s CBD recorded further growth during Q4 2018, increasing by 9.0 percent throughout the year after breaking the $1,000 per sqm mark in September.

“We are seeing a continuation of the natural flow-on effect to Sydney CBD’s fringe markets, with these markets benefitting from greater levels of enquiries as a result of limited space in the CBD,” Savills Director for Research & Consultancy, Shrabastee Mallik, said.

“However, there should be some relief to tenants this year, with close to 85,000sq m of net supply set to hit the market.

“The last time we had any notable office space hit the Sydney CBD office market, it was 2015, when the construction of the International Towers at Barangaroo was completed.

“For the past three years, Sydney has been subject to withdrawals associated with government infrastructure projects, office, residential and hotel conversions.”

Ms Mallik went on to say that from 2019 to 2021, Savills research projected close to 400,000sq m of office space coming online.

“With just under 60 percent of this upcoming stock available, we definitely see some power being transferred to the tenants,” she said.

“While we believe that 2019 will still largely favour landlords, we will see tenants getting some respite from 2020 onwards.

“In 2019, just under 35 percent of upcoming supply is available, with anecdotal evidence from leasing agents on the ground suggesting most of this will become leased out throughout the remainder of the year.”

According to NSW Director for Office Leasing, Christina Malcolm, incentives are likely to remain stagnant this year, with marginal increases in rents on a net face basis.

“Each segment of the market is unique,” she said.

“In 2018, we saw the greatest level of activity across smaller floor spaces, with leasing activity in the 1,000sq m to 5,000sq m range accounting for more than half of total leasing volumes.

“There is likely to be a continuation of this trend in the current calendar year.”

Ms Malcolm said tenants from the Property & Business Services sector dominated total leasing activity in 2018, accounting for more than 60 percent of total leasing volumes.

According to the Department of Employment, strong demand fundamentals in the Sydney CBD office market are expected for the next five years, with employment forecasts equally robust.

“White-collar employment is set to grow by 12.3 percent in the next five years,” Ms Mallik confirmed.

“Growing requirements across white-collar employment sectors will be more evident in Sydney, as we see an ongoing trend in multi-national and global companies setting up operations, particularly as the city is increasingly viewed as Australia’s gateway to Asia.

“The benefits to Sydney’s suburban office markets will become more evident, as rental advantage and complementary infrastructure activity make them a more viable option for occupiers.”

Rental growth in North Sydney remained strong throughout 2018, with net face rents growing 7.0 percent.

“On an effective basis, this was even more pronounced at 10.2 percent, as incentives continued to fall during the latter half of last year,” Ms Mallik said.

“In Parramatta, net face rents grew by 9.0 percent in the same period.”

Savills research highlighted strong investor demand in Sydney in 2018, with several major transactions pushing total sales volumes across the office sector to the second highest level on record.

In 2018, $5.15 billion of office sales were recorded in the Sydney CBD alone.

“The purchase of 10 and 12 Shelley Street in December was one of the biggest deals of the year, reinforcing the strong fundamentals of the Sydney CBD market,” Ms Mallik said.

“The level of interest from both domestic and foreign investors is as strong as ever, as they look to capitalise on the market.

“It is clear that prime-grade office assets with strong rental covenants and attractive locational advantages will remain in high demand for the foreseeable future.”