The Sydney CBD business office market will be the prominent player in 2008. A surge in leasing activity is likely to take place as companies reconsider purchasing opc wirkung choices as the cost of borrowing eats away at the bottom line. Strong tenant demand underpins a new round of construction with several new speculative buildings now likely to proceed.
Vacancies are likely to fall before new stock comes onto the market. Due to strong demand and a lack of options available, the Sydney CBD market is likely to be one of the main beneficiaries and the standout player in 2008.
Strong demand due to business growth and expansion has boosted demand, however, it has been the decline in inventories that has been instrumental in reducing vacancies. The entire office stock fell by almost 22,000 m² from January to June 2007, which represents the largest decline in stock in over 5 years.
Continued solid growth in white-collar employment and healthy corporate earnings sustained demand for office space in the Sydney CBD in the second half of 2007, resulting in positive net absorption. Driven by this tenant demand and dwindling available space, rental growth has accelerated. Prime core rent in Sydney CBD increased by 11.6% in the second half of 2007 to reach US$715 per square meter per year. Landlord incentives continue to decline.
The total CBD office market absorbed 152,983 sqm of office space in the 12 months ended July 2007. Demand for A-class office space was particularly strong, with A-class off-market office space absorbing 102,472 m². Demand on the premium office market has fallen significantly, with negative absorption of 575 m². For comparison: a year ago the premium office market absorbed 109,107 m².
With negative net absorption and rising vacancy rates, the Sydney market struggled for five years between 2001 and late 2005 when things started to change, however vacancy remained at a fairly high 9.4% through July 2006. With competition from Brisbane, and to a lesser extent Melbourne, it has been a real battle for the Sydney market in recent years but its core strength is now showing the true result with probably the best and most solid performance indicators since early 2001.
At 5.6 percent, the Sydney office market currently has the third-highest vacancy rate of any of the capital’s other major 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 had the highest vacancy rate of any major capital at 8.2 per cent.
The city with the lowest vacancy rate was Perth Commercial Market with a vacancy rate of 0.7 percent. In terms of sublease vacancy rates, Brisbane and Perth were among the better performing CBDs with a sublease vacancy rate of just 0.0 per cent. The vacancy rate could fall further in 2008 as the limited office space to be delivered over the next two years is from major office refurbishments, much of which has already been completed.
The market will only become really interesting at the end of this year. If we assume that the 80,000 square feet of new and refurbished sticks coming back onto the market this year along with the tiny amount of stick additions coming onto the market in 2009 are absorbed, vacancy rates and incentive levels will increase really sink.
The Sydney CBD office market has rallied to an all-time low of 3.7% over the past 12 months with a sharp drop in vacancy rates. This was accompanied by rental growth of up to 20% and a significant decline in incentives in the corresponding period.
Strong demand driven by business growth and expansion has fueled this trend (unemployment has fallen to 4%, its lowest level since December 1974). However, it was the decline in inventory that was a major contributor to the vacancy rate falling over the next two years and limited space coming onto the market.
Any assessment of future market conditions should not ignore some of the potential storm clouds on the horizon. If the US subprime crisis causes a liquidity problem in Australia, businesses and consumers alike will find that debt is more expensive and harder to come by.
The Reserve Bank has continued to raise interest rates to quell inflation, which in turn has boosted the Australian dollar and fueled further increases in oil and food prices. A combination of all these factors could dampen the market going forward.
However, strong demand for Australian commodities has helped the Australian market remain relatively unfazed to date. The outlook for the Sydney CBD office market remains positive. With supply expected to be moderate over the next few years, vacancy rates for the Nest will remain low for two years before picking up slightly.
Looking ahead to 2008, net demand is expected to fall to around 25,500 m² and net additions to supply are expected to reach 1,690 m², resulting in vacancy falling to around 4.6% by December 2008. Prime rent growth is expected to remain strong throughout 2008. Premium core net rent growth is expected to be 8.8% in 2008, and prime stocks are expected to experience growth of opc wirkung around 13.2% over the same period.
With this in mind, if demand holds up in line with current expectations, the Sydney CBD office market should continue to benefit from rising rents due to a lack of existing or new stock until at least 2010.