Subdivision a possible solution for Sydney CBD landlords with vacant office space

More Sydney CBD office landlords should be considering sub-dividing vacant floor space with the added incentive of a higher return, a study by Savills Research suggests.

The property group found high levels of activity at the smaller end of the market found with almost half of the lease deals that have occurred in the Sydney CBD office market in the past 24 months having been sub-1,000 square metres.

Of the 221 leasing deals brokered in the last 24 months 100 (or 45.2%) have been for space between 500 and 1,000 square metres and a further 67 deals (or 30.3%) have been for space between 1,000 and 2,000 square metres.

Savills only included leasing deals greater than 500 square metres in its survey.

Strong demand for smaller office spaces comes as many prime Sydney CBD office floors sit vacant.

Savills found that almost 25% of 279 floors that were available as at the end of June 2013 have been on the market for 12 months or longer

“There are a number of prime full floors currently available that have been on the market for more than two years,” says Simon Hemphill, divisional director of research NSW at Savills.

Savills notes that there is also the added incentive that a smaller suite, based on the economies of scale, will attract a higher premium than that of a larger floor plate.

“Subdividing floors present benefits to both landlords and tenants alike.

"Landlords see a reduction in their vacancy periods as these tenants have the ability to move much sooner than tenants occupying greater than 1,000 square metres. It also allows growing tenants to occupy better grade buildings and take advantage of the quality services on offer,” says Josh Pails, associate director of office leasing at Savills.

Likely tenants of office space below 1,000 square metres include the property and business services sector - the most active industry in office leasing, accounting for 39% of all leases signed in the last two years - and the IT & communications industries

Savills Research found the majority of lease deals signed in the last two years sub-1,000 square metres had occurred in the ‘core’ precinct, followed by the ‘western’ precinct of the Sydney CBD.

‘The Core precinct continues to be the most desirable location in Sydney CBD but the migration of tenants towards Western precinct that started a few years ago has heralded a decline in leasing activity in the Midtown precinct.” says Hemphill.