Sydney office vacancy rate hits 13.7% in Q3

The city recorded net absorption of -33,200 sqm.

According to a JLL report, Sydney CBD recorded negative net absorption of -33,200 sqm over the quarter. Larger consolidations included Westpac, vacating 16,100 sqm at 275 Kent Street, and AMP offering 6,600 sqm of sublease space to market at Quay Quarter Tower. As a result, total vacancy rose to 13.7%. 

However, positive demand in Grade A space (6,900 sqm) was recorded, driven by centralisation moves.

Here’s more from JLL:

Positive net absorption was recorded in four out of ten Sydney office markets. Some positive demand was recorded in Sydney South (9,900 sqm), driven by large occupiers leasing space, while Parramatta recorded the largest negative result (-42,700 sqm) as governments and large corporates consolidated or offered space for sublease.

Office supply largely stable across Sydney

Total stock in the Sydney CBD was stable at 5.2 million sqm over the quarter. Upcoming projects at Salesforce Tower, 180 George Street and 210 George Street are scheduled to reach practical completion in 4Q22. There is currently 256,700 sqm of stock under construction in the CBD, with completion dates between 2022 and 2024.

Supply was largely stable across the Sydney metro markets, with only one completion recorded at 151-153 Crown Street, Darlinghurst (2,632 sqm). There is 207,500 sqm under construction in the Sydney metropolitan office markets, with Victoria Cross (60,000 sqm) in North Sydney being the largest office project that is under construction outside of the Sydney CBD.

Prime rents lift as tenants compete for quality office space

The Sydney CBD recorded prime face rental growth of 1.6% over the quarter, as occupier demand remains strong for premium and higher quality Grade A office space, particularly high rise space with desirable view corridors. Prime effective rents rose by 1.2%, driven by the uplift in face rents as average prime incentives were largely stable at 34.3% in 3Q22.

Prime yields softened across all Sydney office markets, with the Sydney CBD prime yield range expanding 12 bps on the upper end and 25 bps on the lower end to 4.25%-5.00%. The softening is a reflection of sentiment in the market, in light of a rising cost of debt environment as well as global economic headwinds which are impacting pricing levels.

Outlook: Softer demand expected for poorer quality stock

The completion of new office stock in 4Q22 will be supportive of positive levels of demand. However, larger corporates continue to reassess their space requirements, which could result in further consolidation activity over the short term. The vacancy rate is forecast to remain elevated as new supply enters the market. Prime face rental growth is expected to continue its upward trajectory.

Yields are expected to soften further over the next 12 months. Secondary and poorer-quality prime assets with greater capital expenditure requirements and vacancy risk are likely to see the greatest fall in capital values. Transactions expected to complete by the end of 2022 will provide further insights into asset pricing in the current macroeconomic environment with higher cost of debt pressure.