Landlords within the office market in Sydney are set to rake in cash over the next three years as a combination of strong tenant demand and a dearth of new supply push vacancy rates down and rental prices up, corporate real estate agents suggest.
In a new report, CBRE says it expects office vacancy rates throughout the Sydney CBD to drop from 6.3 per cent as at the end of 2015 to 4.8 per cent by the end of this year and 4.2 per cent by the end of 2018. Vacancies in prime markets (premium and A Grade) are expected to drop down to 4.2 per cent by that time and those in secondary markets dropping to a staggeringly low 3.9 per cent over the same period.
While rental growth is likely to moderate somewhat in 2017 as stock from Barangaroo comes online, CBRE expects prime rental growth of 6.1 per cent this year and a whopping 13 per cent in 2018, along with secondary rental growth (which surged to 13.4 per cent in 2015) of 7.9 per cent and 7.3 per cent during those two years respectively.
CBRE director of research Felice Spark said upward pressure on rents will be driven by a combination of strong tenant demand underpinned by robust economic conditions in key office occupying sectors and low volumes of new net supply amid a dearth of new builds currently breaking ground. New supply within the already existing pipeline will be significantly offset, meanwhile, by withdrawals for refurbishment and residential conversion.
“In terms of what drives a good property market, it’s a combination of two major drivers,” Spark said. “One is general economic performance. So if the economy is going well, you usually see businesses performing well and hiring more people as well as revenue growth driving expansion, which then drives the property leasing market. The second thing to look at is the supply balance in the market.
“When we look at both of those factors in the CBD, we’ve got a very positive situation.”
Cameron Williams, national director of office leasing at Colliers International, agrees that the market overall is tight at the moment, but stresses that conditions vary according to location and grade.
Williams says while some markets at the moment - including A grade stock in the western corridor and for secondary stock in general - are extremely tight, opportunities for tenants exist within the premium core CBD market and also in Barangaroo, the first tower block of which will come online either late this year or early next year.
He says some tenants going forward may well consider upgrading from the crowded A grade market to the lower end of the premium market.
While some office markets around the country have been impacted by a pull-back in demand from resource related clients, demand for space in Sydney is being driven by a strengthening economy throughout New South Wales and an upturn in employment growth in sectors such as finance, technology and, more recently, professional services.
Going forward, this is expected to continue. A recent survey by recruitment outfit Hudson, for example, found that hiring expectations around Australia are now at their strongest level in four years and are strong in New South Wales.
At the same time, a number of developments on the supply side are limiting the net volume of new stock expected to come online.
First, while existing developments such as Barangaroo will provide some relief for tenants in 2017, a current dearth of new builds breaking ground means there is not much by the way of new stock coming online behind that in 2018.
At the same time, as much as 430,000 square metres of current stock is expected to be withdrawn for reasons of refurbishment or conversions to residential use over the next three years, according to CBRE – which says that because of withdrawals, a net of only around 20,000 worth of new stock will be added over this period.
By 2018, this is expected to result in a crunch in the market whereby the demand/supply balance will become extremely tight.
In terms of strategies, Spark says landlords may have opportunities to increase rents and reduce incentive levels going forward as well as to take advantage of opportunities to attract tenants who in turn face difficult challenges in attracting and retaining staff in a tight job market through provisions such as end of trip facilities, cafés, cleaning services and other amenities.
From a tenant’s perspective, Spark said now is a good time to try to lock in incentives as well as for those looking to upgrade to do so within the near future, as this will not get cheaper going forward.
Williams says the anticipated withdrawals will present landlords with opportunities to attract displaced tenants.
He says landlords should also be thinking about when leases are due for expiry as the anticipated tight market conditions around 2018 might provide a window of opportunity to re-negotiate leases from a strong bargaining position at that time.
From a tenant perspective, meanwhile, Colliers director of tenant representation Luke Dutton says it is important to have a property strategy which is aligned with the tenant's business plan and to understand critical elements and associated timing of the procurement process.
Doing so, he said, would enable tenants to engage with the market with sufficient time prior to existing lease expiry to investigate all potential options and thus establish competitive tensions between prospective landlords to the maximum possible extent.