The completion of six new office towers over the next two years including three at Barangaroo will slow the recovery in the Sydney office market, new research suggests.
In its Sydney Commercial Property 2014 to 2024 update report, BIS Shrapnel says the city is over the worst of recent weakness in office employment growth and that demand for space will strengthen as service industries reap the benefits of a lower Australian dollar and the economic recovery broadens to include public infrastructure. The firm warns, however, that vacancy rates will remain at around current levels of eight to nine per cent until the end of 2016 as this is met by new space which will become available as the new towers open.
“Over the second half of the decade, we expect net absorption in the Sydney CBD will be much stronger than we’ve seen this half,” report author and BIS senior project manager Lee Walker said. “The problem is that the recovery in demand will be met by rising supply.”
As has long been expected to be the case, the Sydney office market is set to be tested over the next two years as the new completions add around 350,000 square metres of space to existing stock.
Along with the three new towers at Barangaroo – one of which is set to open next year and the other two in 2016 – these include the 19 level Premium Grade building at 5 Martin Place, Mirvac’s incorporation of three existing buildings in its 200 George Street development and a new tower being built by Charter Hall at 333-339 George Street.
While the withdrawal of secondary buildings for residential or hotel conversion will help rebalance the market over the next three years, Walker cautioned that this impact should not be overstated.
Although 30 buildings involving up to 250,000 square metres of space have proposals for conversion, he said, some of these will not go ahead because of existing leases across multiple tenancies. As a result, it is more realistic to expect closer to 130,000 square metres in terms of conversions that actually will happen.
Nevertheless, BIS says the next two years present an opportunity for buyers to position themselves for a five-year surge in market conditions beginning in 2017 as a post-2016 lull in completions forces vacancy rates down toward five per cent and underpins an almost doubling of prime gross effective rents.
“The next two years provide an opportunity to position into what will be a really strong upswing,” Walker said.