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News release

SYDNEY

What is driving the recovery in the Sydney CBD leasing market?

Expansion of the professional services sector is the catalyst for the recovery in the Sydney CBD office market. However, the demand recovery is starting to broaden with the retail banking sector increasing its occupational footprint.


The Sydney CBD office market is in a cyclical upswing and has recorded 99,500 sqm of net absorption over the past 12 months. A new JLL Research report outlines the sectors supporting the upturn, but also notes the demand recovery will be uneven across different tenant sub-sectors.

The JLL Research report titled, 'What is driving the recovery in the Sydney CBD leasing market?' examines tenant demand from the industry sub-sectors that contribute to professional services demand for Sydney CBD office accommodation – legal services, accounting firms and the technology sector (computer system design).

Professional services are the locomotive of employment growth and the take-up of office space in Sydney. Professional services employment has increased by 7% between 2007 and the first quarter of 2015. However, it is not the traditional sub-sectors – legal and accounting – which are supporting growth, but computer system design and relatives services (the technology sector).

JLL's NSW Head of Office Leasing, Daniel Kernaghan said, "Sydney is benefitting from the expansion of home-grown technology firms and multi-national companies listed on the NASDAQ stock exchange. Recent new entrants into Australia include Twitter and Intuit, while LinkedIn and Atlassian have increased their footprint in Sydney over the past 12 months.

"However, the demand recovery for the Sydney market is uneven. Technology and mid-tier legal firms are increasing their headcount and occupational footprint, while we have recorded consolidation from investment banks and tier 1 legal firms.

"Corporate Australia has repaired its balance sheet and is sitting on excess cash reserves. Over the course of the 2015/16 financial year, businesses will seek to invest in new projects to support revenue growth and productivity objectives. Investment will be positive for professional services firms, leading to headcount growth and positive net absorption," said Mr Kernaghan.

The Research report outlines the positives that will contribute to strong tenant demand in the Sydney office market in 2015 & 2016, including:

  • The strong performance of the NSW economy.  Economic commentators have ranked NSW as the strongest performing state in Australia.
  • The continuing downward trend for sub-lease vacancy.  The most recent peak in sub-lease vacancy was 1.8% of total stock (2Q13) with the current reading at 0.76% of total stock.
  • The number of occupied office stock at lower levels than the 40 year average. Sydney recorded its fifth successive quarter of positive net absorption in the first quarter of 2015, at 34,900 square metres and 99,500 square metres over the year to March 2015. (Figure 1)  To put this figure into context, the 40 year average for net absorption in the Sydney CBD is 57,500 square metres.

JLL's Head of Strategic Research, Andrew Ballantyne said, "The lead indicators for the office sector in the Sydney CBD are firm. We have seen positive results from business confidence and employment surveys, which are positive lead indicators for leasing enquiry and the underlying demand for office space.

"The demand recovery has started to broaden to include the financial services sector. The retail banking sector has recorded strong revenue and productivity growth over the past few years. Strong revenue growth has come from retail banking services linked to the upturn in the Sydney and Melbourne residential housing markets.

"Two options exist for the retail banking sector to support revenue – an increase in headcount or increased capital expenditure projects. For the office market we expect to see the expansion of retail banks footprint as they have a modest increase in headcount, but a more significant expansion in footprint of suppliers to the retail banking sector," concluded Mr Ballantyne.