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News release

SYDNEY

The Sydney office market is reminiscent of an athlete on a hot streak​​

Multiple industry sectors are in an expansionary mode in the Sydney CBD. However, the next wave of tenant expansion is expected to come from Asian based banks seeking to increase market share in Australia.


The Sydney CBD office market is in the midst of a 'hot streak' with multiple industry sectors in an expansionary mode and tenants being displaced as office stock is withdrawn. As a result, net absorption is well above trend, according to a new paper released by global commercial real estate firm JLL.

JLL Research has recorded net absorption totaling 145,700 sqm over the 12 months to 1Q16 – well above the 45 year average of 62,800 sqm.

JLL's Head of Strategic Research – Australia, Andrew Ballantyne said, "The Sydney CBD is a cyclical office market and has recorded periods of above and below trend growth. We have likened this to a sporting analogy when an athlete performs at a level above their historical benchmark – commonly described as a hot streak."

Mr Ballantyne said, "While academics have debated the validity of sporting hot streaks, the explanatory variables to forecast net absorption in the Sydney CBD are easier to comprehend. However, the challenge is projecting those variables, overlaying the cyclicality generated by lease expiry and adjusting for tenant migration flows between the CBD and decentralised markets."

"The hot streak present in the Sydney CBD office market has been precipitated by the recovery of the NSW economy, an improvement in the labour market and a commitment by the NSW State Government to reduce the State's infrastructure deficit," said Mr Ballantyne.

Under JLL's definition of a strong market – net absorption more than 10,000 sqm above the historical average – Sydney is in the midst of a hot streak.

Mr Ballantyne said, "Based on our definition of a hot streak – the Sydney CBD office market is expected to remain hot over the remainder of 2016 and into 2017."

JLL's Head of Office Leasing – NSW, Daniel Kernaghan, who authored the report with Mr Ballantyne, said, "The sectors contributing to growth – professional services, technology and education – typically gravitate to A Grade and secondary grade assets."

As a result, A Grade vacancy has tightened to - the lowest level since mid-2008 – while secondary grade vacancy is 6.3%, the lowest level since 2002.

Mr Kernaghan, said "Owners of Premium Grade assets have achieved leasing success by splitting floors and investing in speculative fit-outs to attract the smaller tenant market where demand is firm."

However, JLL has identified a more significant trend that will have a positive impact on the demand for Premium Grade assets.

Mr Kernaghan said, "A number of Japanese and Chinese banks are increasing their exposure to Australia to service their existing client base. However, each of these institutions has a mandate for growth and will look to provide debt financing solutions to domestic firms in order to grow market share. Multinational banks have traditionally gravitated towards Premium Grade assets and the expansion of Asian based banks will be a new source of demand for the Premium Grade sector."

"Stock withdrawals will also generate fresh leasing enquiry in the Sydney CBD. Over 230 tenants are in the process of being displaced from the compulsory acquisition of assets for Sydney Metro and upcoming residential conversion (1 Alfred Street and 71 Macquarie Street)," said Mr Kernaghan.

The JLL report also highlighted the significance of the supply-side of the equation. JLL projects stock withdrawals will total 227,300 sqm or 4.5% of stock between 2015 and 2018. As a result, the size of the Sydney CBD office market is expected to contract in both 2017 and 2018.

Mr Ballantyne said, "We have undertaken detailed monitoring of the Sydney CBD office market since 1970. It is not unprecedented for the Sydney market to contract for two successive years. However, on previous occasions, it has occurred when economic growth is well below trend or vacancy is in double-digit territory."

In previous hot streaks, the Sydney CBD office market has recorded above trend net effective rental growth.

Mr Kernaghan said, "This cycle appears to be mirroring previous cycles with the ingredients of positive leasing enquiry and the potential of a contracting market encouraging owners to become more aggressive in lease negotiation. We project prime net effective rents will increase by an average of 6.7% per annum between 2015 and 2020."