2023-10-05-莱坊-Sydney_CBD_Office_Market_August_2023_9页_5mb

Sydney CBD Office Market Summary - August 2023

Core Content Overview

The Sydney CBD office market is experiencing a shift towards prime, amenity-rich, and high-quality assets, with demand driven by occupiers seeking safe, well-located, and modern workspaces. Despite a general economic slowdown, the market remains resilient, with positive absorption in the prime sector and a growing divergence between prime and secondary assets.

Main Market Trends

Positive Demand for Prime Space

• Prime office demand remains strong, with lease deals over the past 18 months driven by professional services (24%) and financial services (27%).
• Tech sector demand has slowed from its peak in 2021-22 due to global workforce downsizing by major tech firms.
• Prime net effective rents increased by 2.1% year-on-year to $759/sqm, still 18% below pre-pandemic levels.
• Prime face rents rose by 3.4% to $1,274/sqm, with core precinct rents growing 4.1% to $1,407/sqm.
• The rental gap between prime and secondary assets has widened to the largest in over five years (28%), reflecting a 7-year high in yield spread (100bps), with prime yields at 5.00-5.75% and secondary yields at 6.25-6.75%.

Supply Dynamics

• New supply in 2023 is limited, with only 19,000 sqm of refurbishment at 255 George Street.
• Major developments in 2024 include:
  • Metro Martin North Tower (75,000 sqm) – 100% committed by Macquarie Group.
  • Metro Martin South Tower (30,000 sqm) – 30% committed by Investa/Mahulu Life.
  • Parkline Place OSD (49,120 sqm) – 77% committed by BDO and PNSW.
  • 333 Kent Street (14,200 sqm) – Expected to be delivered by H2 2024.
• The next wave of supply will significantly increase the market stock base, expected to exceed 5.4 million sqm by end-2024.
• Existing supply has been affected by withdrawals for infrastructure projects, such as the Hunter Street Metro stations, reducing the total stock base by 0.6%.

Development Activity and Pre-Commitments

Completed Developments (2023)

• 255 George Street – 19,000 sqm, vacated by NAB and now occupied by BOQ, ATO, and Eftpos.

Under Construction (2023)

• 121 Castlereagh Street – 12,068 sqm, 50% committed by CBUS.
• 32-36 York Street – 8,366 sqm, 45% committed by Mirvac.

Pre-Committed Developments (2024 onwards)

• 6 Parkline Place – 49,120 sqm, 77% committed.
• 7 Metro Martin North Tower – 75,000 sqm, 100% committed.
• Tech Central – Atlassian Tower – 75,000 sqm, expected to be delivered by H1 2027.
• Other developments include Central Place 1 & 2, 2 Lee Street, 56 Pitt Street, 133 Castlereagh Street, and Darling Park Tower 4, all with varying commitment rates and projected completion dates.

Investment Activity

Current Investment Trends

• Investment activity has slowed, with only one major transaction confirmed in the first half of 2023.
• Inflation and interest rates have caused investors to remain cautious, leading to a limited supply of assets on the market.
• The only confirmed transaction was the $393.1 million sale of 44 Market Street by Dexus to Pacific Alliance Group (PAG), reflecting a 17% discount from its December 2022 book valuation.

Yield Spread and Valuations

• Prime yields have softened by 100bps since mid-2022, and secondary yields have dropped by 125bps, with prime at 5.00-5.75% and secondary at 6.25-6.75%.
• Valuations have declined, with specialist office funds reporting an average annual drop of 7.9% to June 2023.
• Yield spread is expected to widen further as the performance gap between prime and secondary assets continues to grow.

Occupier Demand by Precinct

• Core precincts have seen the strongest demand, with positive absorption and stronger rent growth.
• Midtown and Western precincts have also shown activity, with pre-commits and sub-leases contributing to demand.
• Secondary market absorption has been negative, with -59,911 sqm absorbed in 2023, highlighting the increasing preference for prime assets.

Incentives and Lease Deals

• Incentives remain high, averaging 34%, with some deals in the high 30s.
• Landlords are offering additional inducements such as early access and fitout contributions to attract tenants.
• Lease deal activity has been moderate, with over 110,000 sqm of deals signed in 2023, including direct leasing, pre-commits, and sub-leases.

Key Figures and Data

Conclusion

The Sydney CBD office market is realigning towards quality and amenity, with prime assets outperforming the secondary market. While investment activity has declined, lease deals remain positive, especially in core locations. New supply is expected to increase in 2024, but current absorption levels suggest that prime assets will continue to attract demand, leading to greater divergence in market performance. Incentives and rental growth are expected to remain elevated, supporting the continued demand for best-in-class office spaces.