Rental growth returns to Sydney office market

Sydney, 02 December 2015- Rental growth has increased in the third quarter of 2015 in the Sydney CBD office market according to CBRE’s Q315 MarketView report. This followed growth in the second quarter also, after two years of almost flat growth since the onset of 2013.

Prime net face rents grew by 1.3% to an average $916sqm in Q3, following growth of 1.5% in Q2. This followed nine previous quarters of very little or negative growth. On an annual basis, this took Prime rental growth to 2.8%, the highest annual level in over two years.

Sydney’s secondary grade market was the outperformer however, with secondary net face rents growing by 3.8% over the quarter to average $569sqm. This was the strongest quarterly growth witnessed over the nine previous quarters.

Felice Spark, CBRE’s Associate Director, Research, said all signs pointed to a continuation of rental growth; “We expect rental growth to continue throughout the rest of the year resulting in an annual increase of 3% forecast in Prime grade and 4.2% in Secondary grade.”

Overall in 2015, occupier demand in Sydney’s CBD has driven strong levels of positive absorption, recording 60,405sqm in the six months to June, the highest level in five years. While CBRE’s Q3 MarketView report shows a dip in demand in Q3, the forecast for annual net absorption for 2015 remains strong at 78,500sqm, well above the 10 year historical average of just under 50,000sqm.

Take up YTD in 2015 is up by circa 70% in terms of volume of space compared to the same period in 2014, according to CBRE Research. Enquiry and take-up remained particularly strong in the sub-1,000sqm market in Q3. Demand based on enquiry from Professional Services firms is up by 70% YTD in Sydney compared to the same period last year. Demand for volume of space (sqm) has more than doubled from this industry in the same period also.

The IT sector saw a number of large transactions during the quarter from both new and existing entrants. The finance and insurance sector also made a solid recovery, accounting for 59% of leasing transactions in the past 12 months.

Incentives remain at historical highs, despite the market showing rental growth and relatively tight vacancy. There is little evidence to suggest a significant decline throughout the current supply cycle though, as tenants have become accustomed to receiving circa 30% incentives.

Ms. Spark said retaining sitting tenants has become a top concern for some CBD landlords with the upcoming major urban renewal and tenants pushing for flexible lease terms. Initiatives some landlords have been using include enhancing end-of-trip facilities, promoting the use of concierge services and providing social and wellbeing programs for tenants.

North Sydney has seen an increase in demand similar to the CBD. Net absorption was positive in the first half of the year, following three years of negative whilst the IT sector is the key driver of demand.