The Sydney CBD commercial office market will be the prominent player in 2008. A rise in leasing activity is likely to take place with businesses re-examining the selection of purchasing as the costs of borrowing drain the bottom line. Strong tenant demand underpins a new round of construction with several new speculative buildings now likely to proceed.
The vacancy rate is likely to fall before new stock can comes onto the market. Strong demand and a lack of available options, the Sydney CBD market is likely to be a key beneficiary and the standout player in 2008.
Strong demand stemming from business growth and expansion has fueled demand, however it has been the decline in stock which has largely driven the tightening in vacancy. Total office inventory declined by almost 22,000m² in January to June of 2007, representing the biggest decline in stock levels for over 5 years.
Ongoing solid white-collar employment growth and healthy company profits have sustained demand for office space in the Sydney CBD over the second half of 2007, resulting in positive net absorption. Driven by this tenant demand and dwindling available space, rental growth has accelerated. The Sydney CBD prime core net face rent increased by 11.6% in the second half of 2007, reaching $715 psm per annum. Incentives offered by landlords continue to decrease.
The total CBD office market absorbed 152,983 sqm of office space during the 12 months to July 2007. Demand for A-grade office space was particularly strong with the A-grade off market absorbing 102,472 sqm. The premium office market demand has decreased significantly with a negative absorption of 575 sqm. In comparison, a year ago the premium office market was absorbing 109,107 sqm.
With negative net absorption and rising vacancy levels, the Sydney market was struggling for five years between the years 2001 and late 2005, when things began to change, however vacancy remained at a fairly high 9.4% till July 2006. Due to competition from Brisbane, and to a lesser extent Melbourne, it has been a real struggle for the Sydney market in recent years, but its core strength is now showing the real outcome with probably the finest and most soundly based performance indicators since early on in 2001.
The Sydney office market currently recorded the third highest vacancy rate of 5.6 per cent in comparison with all other major capital city office markets. The highest increase in vacancy rates recorded for total office space across Australia was for Adelaide CBD with a slight increase of 1.6 per cent from 6.6 per cent. Adelaide also recorded the highest vacancy rate across all major capital cities of 8.2 per cent.
The city which recorded the lowest vacancy rate was the Perth commercial market with 0.7 per cent vacancy rate. In terms of sub-lease vacancy, Brisbane and Perth were one of the better performing CBDs with a sub-lease vacancy rate at only 0.0 per cent. The vacancy rate could additionally fall further in 2008 as the limited offices to be delivered over the following two years come from major office refurbishments of which much has already been committed to.
Where the market is going to get really interesting is at the end of this year. If we assume the 80,000 square metres of new and refurbished stick re-entering the market is absorbed this year, coupled with the minute amount of stick additions entering the market in 2009, vacancy rates and incentive levels will really plummet.
The Sydney CBD office market has taken off in the last 12 months with a big drop in vacancy rates to an all time low of 3.7%. This has been accompanied by rental growth of up to 20% and a marked decline in incentives over the corresponding period.
Strong demand stemming from business growth and expansion has fuelled this trend (unemployment has fallen to 4% its lowest level since December 1974). However it has been the decline in stock which has largely driven the tightening in vacancy with limited space entering the market in the next two years.
Any assessment of future market conditions should not ignore some of the potential storm clouds on the horizon. If the US sub-prime crisis causes a liquidity problem in Australia, corporates and consumers alike will find debt more expensive and harder to get.
The Reserve Bank is continuing to raise rates in an attempt to quell inflation which has in turn caused an increase in the Australian dollar and oil and food prices continue to climb. A combination of all of those factors could serve to dampen the market in the future.
However, strong demand for Australian commodities has assisted the Australian market to remain relatively un-troubled to date. The outlook for the Sydney CBD office market remains positive. With supply expected to be moderate over the next few years, vacancy is set to remain low for the nest two years before increasing slightly.
Looking forward to 2008, net demands is expected to fall to around 25,500 sqm and net additions to supply are expected to reach 1,690 sqm, resulting in vacancy falling to around 4.6% by December 2008. Prime rental growth is expected to remain strong over 2008. Premium core net face rental growth in 2008 is expected to be 8.8% and Grade A stock is likely to experience growth of around 13.2% over the same period.
With this in mind, if demand continues as per current expectations, the Sydney CBD office market should continue to benefit with rents rising due to the lack of existing stock or new stock being offered until at least 2010.