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Sydney landlords riding a high rental wave

8 Nov 2016 Padstow 0 Comment

Sydney’s office leasing markets have hit a sweet spot for landlords with rents tipped to rise in line with demand and flat supply, according to agents.

Knight Frank’s director, office leasing, Kymbal Dunne said office rents in the CBD are rapidly increasing, however businesses could struggle to meet the growth of rents.

There are predictions the Sydney prime office vacancy will head towards 3 per cent in the medium term.

“Businesses are likely to increasingly sacrifice space to manage rent, which is where activity-based working is ramping up in the Sydney CBD market,” Mr Dunne said.

“Face rents in the Sydney CBD office market are anticipated to rise at levels greater than expected, but effective rents will grow faster and will probably double in five years.”

According to Knight Frank’s senior research manager, NSW, Alex Pham​, average gross face rents for prime and secondary space in the CBD have risen by 13.2 per cent and 16.6 per cent, respectively, in the past year.

“These are the strongest levels of rental growth since 2008,” Mr Pham said.

Mr Dunne said Sydney tenants are already competing against each other for limited supply, with the Sydney CBD office market supply at around 95 per cent occupancy, and the market is only expected to get more competitive.

He said office stock has reduced through the withdrawal and redevelopment to residential and public infrastructure. “Combined with this, demand has been unusually strong with 10,000 new white collar jobs in 2016 – three times the 10-year average,” he said.

The strength has seen boundaries blurring in the Sydney office leasing market as a lack of available stock drives a growing number of tenants to broaden their horizons, according to a new CBRE market review.

CBRE senior director Jenine Cranston said there has historically been limited evidence of Sydney office tenants crossing boundaries. However, as office vacancy rates in the CBD and metropolitan markets reach all-time lows, occupiers are increasingly prepared to consider alternate locations.

Ms Cranston said there were now numerous examples of Sydney CBD tenants taking space on the north shore given the current shortage of city-based options.

One of the most recent deals involves construction group Dragados relocating from 1 Alfred Street to North Sydney’s 99 Mount Street after finalising a 182.4 square metres lease commitment.

Key drivers include the 100,000 sqm of enquiry that has resulted from Sydney Metro site acquisitions and residential conversions such as 1 Alfred Street and 71 Macquarie Street.

“Strong rental growth associated with the fall in CBD vacancy rates is driving some tenants to shift location due to financial necessity,” Ms Cranston said.

“With B-grade rents at an all-time high, and in some cases pushing $1,000/sqm gross, some city tenants are being compelled to look at cheaper markets as a solution.”

The head of CBRE’s north shore office leasing team, Stefan Perkowski, said the blurring of boundaries had driven a rapid turnaround in the North Sydney office market in 2016.

This had been highlighted by the benchmark rentals of $795 per sqm that were being achieved in quality assets.

“In the B-grade market, we have seen face rent records consistently achieved throughout third quarter and incentives negotiated to sub 15 per cent – a level that hasn’t been achieved since before the Global Financial Crisis,” Mr Perkowski said.

“The best results have been achieved in newly repositioned assets such as 99 Mount Street and 107 Mount Street where landlords have spent capital on significant refurbishment.”

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