Sydney office vacancy rates likely tightened, trend could linger: Cushman & Wakefield
Office vacancy rates in Sydney in the quarter ended September 2016 are expected to have tightened below the 5.6% recorded in July, making prime-grade renting more expensive and the trend could linger in 2017, according to a new report by commercial real estate firm Cushman & Wakefield.
The developments came amid a contraction in Australia’s economy in the the third quarter, the first since 2011, though New South Wales posted the strongest state final demand of all states and territories with 4.7% annual average growth, with the employment rate also improving.
According to the Cushman & Wakefield report, economic factors and 189,000 sqm of stock withdrawals ensured a shortage of non-premium grade stock across the Sydney CBD in 2016, leading to a tightening in the vacancy rates to below the 5.6% recorded in July.
The tight market lifted Prime-grade gross effective rents by 4.3% quarter-on-quarter.
“The growth was mainly driven by falling incentives as Premium grade face rents were stable; while face rent growth remains positive, the rate of growth slowed over the quarter,” says the report.
B-grade stock also recorded a strong decline in incentives with gross effective rents up 7.9% QoQ to $727 per sqm, a 30% increase on 2015. B-grade partial floor vacancies are now attracting sub-15% incentives.
Among the deals of note were Henry Davis York committing to an anchor tenancy of 7,000 sqm at 60 Martin Place and Atlassian committing to 5,500sq m at 363 George Street.
The report’s 2017 outlook says “tenants will continue to prioritise affordability, followed by proximity to public transport and natural light”.
Low vacancy rates, negative net supply and service sector growth is expected to continue to support rental growth across all grades.
But the report ads that “as Sydney nears the peak of the office leasing cycle we anticipate face rental growth to slow with growth driven by declining incentives”.
Nearly 300,000 sqm of withdrawals are expected to keep vacancy tight in 2017, predominantly associated with the Sydney Metro and Circular Quay redevelopments, it says.