The commercial office market in Sydney’s central business district will be a major player in 2008. Leasing activity is likely to increase as companies review purchasing choices as borrowing costs affect net profit. Strong demand from tenants supports the new construction cycle, with several new speculative buildings likely to continue.
The vacancy rate is expected to fall before any new shares enter the market. The Sydney market, located in the central business district due to high demand and lack of available options, is expected to become the main beneficiary and an unparalleled player in 2008.
The high demand generated by the growth and expansion of the business stimulated demand, but it was the decline in inventories that caused the vacancy to a large extent. Between January and June 2007, the total area of office space decreased by almost 22,000 m2, the sharpest drop in inventories in more than 5 years.
Continued steady growth in white-collar employment and strong corporate earnings spurred demand for office space in Sydney’s central business district in the second half of 2007, leading to a positive net takeover. Due to increased demand for tenants and a reduction in available space, rent growth has accelerated. The nominal net rent for Sydney’s central business district increased by 11.6 per cent in the second half of 2007 to 715 pounds per million dollars a year. Homeowner incentives continue to decline.
The CBD’s total office market occupied 152,983 square metres in the 12 months ended July 2007. Demand for Class A office space was particularly high, with Class A outside the market at 102,472 m2. Demand in the luxury office real estate market fell sharply with negative demand for subscriptions of 575 m2. For comparison, a year ago the market of luxury office real estate was 109,107 m2.
With negative net demand and rising vacancy rates, the Sydney market maintained it for five years from 2001 to the end of 2005, when the situation began to change, but the vacancy rate remained fairly high until July 2006 at 9.4 per cent. Due to competition from Brisbane and, to a lesser extent, Melbourne, it has been a real battle for the Sydney market in recent years, but now the main strength is to show a real result with probably the best and strongest performance indicators since then. early 2001
Sydney’s office market currently has the third highest vacancy rate of 5.6 per cent compared to all other major office markets in the capital. The largest increase in the vacancy rate in australia’s total office space was seen in Adelaide’s central business district, with a slight increase of 1.6 per cent from 6.6 per cent. Adelaide also recorded the highest vacancy rate in all major capital cities, at 8.2 per cent.
Perth’s commercial market was the lowest vacancy rate, with vacancy rates of 0.7 per cent. In terms of vacancy rates in the subletting, Brisbane and Perth were among the most efficient central business districts with a vacancy rate of just 0.0 per cent. In 2008, the number of vacant space may decrease further, as the limited number of offices to be rented over the next two years is the result of an overhaul of offices, most of which has already been announced.
The really interesting market will become only at the end of this year. Assuming that 80,000 square feet of new and refurbished clubs will return to the market this year, coupled with the minimum number of new clubs coming on the market in 2009, vacancy rates and incentive levels will indeed decline.
Sydney’s CBD office market has surged over the past 12 months, with vacancy rates plummeting to a historic low of 3.7 per cent. This was accompanied by an increase in rents of up to 20 per cent and a marked reduction in benefits during the relevant period.
This trend was driven by strong demand driven by business growth and expansion (unemployment fell to 4%, the lowest level since December 1974).
Any assessment of future market conditions cannot ignore some of the possible storm clouds on the horizon. While the subprime mortgage crisis in the United States is creating a liquidity problem in Australia, both businesses and consumers will find borrowing more expensive and difficult to access.
The Reserve Bank continues to raise rates in a bid to contain inflation, which has led to the rising Australian dollar and rising oil and food prices. The combination of all these factors may constrain market growth in the future.
However, strong demand for Australian goods has so far kept the Australian market relatively volatile. Prospects for Sydney’s office property market in the central business district remain positive. As the supply is expected to be moderate in the coming years, the vacancy rate will remain low for two years and then increase slightly.
Net demand is expected to fall to about 25,500 m2 in 2008, with net supply growth expected to be 1,690 m2, bringing the vacancy rate to about 4.6% in December 2008. The increase in maximum rents in 2008 is expected to remain significant. The increase in base rent minus premiums is expected to be 8.8 per cent in 2008, while Category A shares are expected to grow by about 13.2 per cent over the same period.
With this in mind, if demand continues in line with current expectations, Sydney’s office market in the central business district is expected to continue to benefit from rent increases due to the lack of existing stock or new shares offered until at least 2010.