Sydney, 16 February 2016 - Sydney CBD is undergoing a period of significant urban renewal with far reaching implications for all commercial property markets. The activation of certain precincts and de-activation of others will create winners and losers in the CBD real estate market, compelling owners and tenants to put robust strategies in place.
There is a solid pipeline of urban renewal projects expected by 2020, including Barangaroo, Darling Harbour Live, Wynyard Place and Quay Quarter. A total of 600,000sqm of new office space is expected to enter the market over the next five years. Coinciding with these projects is George Street light rail, the rejuvenation of Martin Place and the addition of multiple 5 star hotels.
With large additions in the Western corridor, including Barangaroo, the centre of the CBD is effectively shifting north west. The influx of supply in the western corridor is unprecedented, with the precinct more than doubling its office supply from 1990 to 2020. In tandem, there is a significant amount of stock being withdrawn for residential conversion, predominantly from the shrinking Midtown precinct, while the Southern precinct remains primarily secondary stock.
Perhaps the biggest impact of the urban renewal projects is the overall improvement of the quality of office stock. For tenants, this will mean better quality space, while landlords will see long-term enhanced returns. Owners of secondary stock may find it harder to lease, resulting in potential capex as they attempt to attract tenants.
Retail will also be positively impacted with new space expected in all urban renewal areas - predominantly focusing on restaurants, bars and fashion. The additional retail supply is expected to be supported by an increasing number of CBD residents, hotel guests and nearby workers.
The divergence in capital values between office and retail use offers tempting upside for many landlords. In particular, the pedestrianisation of George Street and the regeneration of Martin Place are expected to result in an influx of retail supply as existing office landlords look to unlock value. In the long term, retail along George Street may compete with Pitt Street mall which currently commands some of the most expensive retail rents in the world.
The challenge for retail will be the ability to deliver an offering that services the changing CBD population. The current retail market is skewed towards office workers and tourists. With an increasing number of tenants, many of whom won’t have cars, there will be a strong demand for CBD supermarkets and large format show rooms, as well as more mid-range dining options.
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