Sydney CBD Office Market Supply, Demand and Vacancy Outlook - Spring 2020 - Efront
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Sydney CBD Office Market Supply, Demand and Vacancy Outlook Spring 2020
Outlook - Sydney CBD Fundamentals
Summary Total Gross Supply Pre-commitments
(m )2
(m )2
Backfill Space
(m )
2
Net Absorption
(m )
2
Year-end Vacancy
(%)
2020 143,960 69,935 42,290 -135,870 8.8%
2021 202,995 81,130 108,390 21,570 10.7%
There are approximately 544,910 square
2022 197,950 96,000 75,090 76,870 10.1%
metres of supply forecast to be added
Total CBD 544,905 247,065 225,770 -37,430
to the Sydney CBD over 2020-2022 with Table 1: Includes new, full and partially refurbished projects in all stages of the development pipeline.
247,070 square metres pre-committed. Source: Cordells, Cityscope, Property Daily and m3property Research. (To end of September 2020)
New and refurbished supply in the
Office Supply
Sydney CBD is forecast to result in
225,770 square metres of backfill space New Developments Under Construction
becoming available within the CBD. » COVID-19 presents potential challenges to the supply mixed-use projects. These new developments are
pipeline due to the delay of building materials from expected to add approximately 262,750 square metres
international suppliers and the reduced number of of office space to the market within the next three
Tenant demand is being impacted workers on-site as per social distancing restrictions and
future potential positive COVID-19 cases.
years. Around 57% of this space has already been
pre-committed, leaving 112,200 square metres of non-
negatively by restrictions and » There are ten new developments currently under
committed new office space likely to reach the market
over 2020-2022.
construction, including new office space as part of
sentiment driven by the COVID-19
health and economic crisis, which Property Expected Completion NLA (m²) Pre-committed (%)
continues to unfold.
275 George Street 2020 6,347
34-36 Carrington Street 2020 3,141
With tenant contractions, business
Wynyard Place 2021 67,821
closures and increased indecision
181-183 Clarence Street 2020 7,500
from office occupants, tenant demand
Poly Centre, 210-232 George Street 2021 19,000
is expected to continue to soften and
Quay Quarter, 11 Young Street 2021 2,500
vacancy rise in the short term.
Bligh House, 4-6 Bligh Street 2022 9,964
Quay Quarter, 50 Bridge Street 2022 88,274
203 Castlereagh Street 2022 4,000
Salesforce Tower, 180 George Street 2022 54,200
Total 262,747 57%
Table 2. Source: Cordells, PCA, Property Daily and m3property (To end of September 2020)
| Page 2 m3property 3
Obtaining pre-commitments has become more
difficult due to economic uncertainty and delaying of
Full Refurbishments/Extensions Under Construction tenant decisions due to COVID-19. Weakening demand
is forecast to result in a short term oversupply of office
» There are eleven developments involving the full of office space within the next three years. To date,
refurbishment of existing buildings, currently under 47% of this space has been pre-committed, leaving space and rising vacancy. With projects unlikely to
construction. an additional 92,200 square metres of non-committed commence without significant pre-commitments, the
refurbished space to reach the market over 2020-2022. next cycle of development will be delayed.
» Refurbished developments under construction are
projected to add approximately 174,160 square metres
» Only projects under construction or able to obtain a » Therefore only those projects currently under
Property Expected Completion NLA (m²) Pre-committed (%)
significant pre-commitment are likely to proceed in the construction or about to commence are forecast to
short-term. complete before the end of 2022.
Charles Plaza Building, 66 King Street 2020 6,321
55 Market Street 2020 20,382
Project NLA (m²) Pre-committed (m²) Non-committed (m²) Pre-committed (%)
231 Elizabeth Street 2020 22,964
H2 2020 104,185 56,475 47,710 54%
388 George Street 2020 37,530
2021 176,285 80,030 96,250 45%
Shell House, 2-12 Carrington Street 2021 7,800
2022 156,440 96,000 60,440 61%
570 George Street 2021 18,100
Total 436,910 232,510 204,400 53%
44 Martin Place 2021 10,027 Table 4. Source: Cordells, PCA, Property Daily and m3property (To end of September 2020)
2 Market Street 2021 38,000
167 Macquarie Street 2021 9,742 Backfill Space Available for Occupancy
Other 2021 3,295 Backfill Space Availability
2020 2021 2022 2023+
Dept of Defence
Total 174,161 47% » The total amount of space currently
AMP
Deloitte
occupied by tenants who have pre- 35,000
Table 3. Source: Cordells, PCA, Property Daily and m3property (To end of September 2020)
committed to new developments which 30,000
Amazon
will complete over the next 2.5 years is
NAB
25,000
Allianz
First State Super
approximately 198,380 square metres. 20,000
Property NSW
Salesforce
New and Refurbished Buildings - Completion and Pre-commitments
Quantium
QBE
» New and refurbished vacant supply and 15,000
Michael Page
Caltex
Atlassian
Justco
backfill space over the next three years 10,000
Qualtrics
Allianz
100000 is approximately 402,780 square metres, 5,000
New Vacant Pre-committed
90000 Refurbished Vacant with 79,640 square metres available in -
2020, 187,610 square metres available in
Quay Quarter, 50 Bridge
80000
2021 and 135,530 square metres in 2022.
70000
» The largest single backfill availability
Wynyard Place
388 George
60000
Supply (m2)
will be at 33 Alfred Street with the entire
Quay Quarter, 5-7 Young
2 Market
200,000
Quay Quarter, 11 Young
187,610
231 Elizabeth
50000 building becoming available when AMP
181-183 Clarence
Salesforce Tower
Poly Centre
44 Martin Place
vacate to go into Quay Quarter - 50 135,530
570 George
275-281 George
167 Macquarie
55 Market
40000
34-36 Carrington
150,000
203 Castlereagh
Bridge Street. Refurbishment of this
Shell House
30000 building will occur on their vacation.
4-6 Bligh
100,000
66 King
20000 » Another prominent backfill vacancy will 79,639
75 Pitt
10000 be created by Deloitte in Grosvenor
50,000
Place when they move into a reduced
0
net lettable area at Quay Quarter.
0
Second Half 2020 First Half 2021 Second Half 2021 First Half 2022 2020 2021 2022
New Vacant Space Refurbished Vacant Space Available Backfill Space
Chart 1. Source: Cordells, PCA and m3property (To end of September 2020)
Chart 2 &3. Source: Property Daily and m3property (To end of September 2020)
4 Sydney CBD Office Market - Outlook m3property 5
COVID-19 job losses to impact
Sydney CBD vacancy
Demand - Leasing Requirements
and Deals Signed
Tenant Leases Signed (square metres)
» According to our lease requirements data (to end of
September, 2020), of the tenants considering a CBD Current leasing 120000 » The impact of COVID-19 on lease deals
location, there were 73 listings for tenants looking for
less than 1,000 square metres of net lettable area
requirements, where tenants 100000
completed since March 2020, while
evident in the second quarter, has
(accounting for 26,870 square metres). are considering the CBD, 80000 not been significant to date, due to an
» The total area by tenant enquiry for spaces less than as a potential location, are 60000
improvement in deals signed when
restrictions eased in the third quarter.
3,000 square metres was 57,300 square metres, while approximately 307,490m2. 40000
the total area required for office space of greater than » Lower overall demand is, however,
10,000 square metres was 189,400 square metres. 20000 expected to continue temporarily,
» There has been a clear trend of tenants negotiating with a trend towards short term lease
0
short term renewals with longer term decisions Leasing Requirement by Sector renewals in existing space while
delayed until greater certainty returns to the market. tenants consider their post-COVID-19
space requirements.
» The Core precinct has witnessed the most leases Business Services
Legal
7% Core The Rocks Western Midtown Walsh Bay Southern
11%
signed or renewed since the commencement of
Health & Personal
Media, Chart 7. Source: Property Daily and m3property (To end of September 2020)
COVID-19. This is likely to continue to be the case due Advertising &
6%
Entertainment Government (State)
to the types of firms located within the precinct. 11% 5%
» Our review of the tenant requirements data from
Technology & Communication
3%
Engineering & Construction
Major Tenant Requirements
September 2020 to December 2022 indicates that 3%
Company Lease Expiry Space Required (sqm)
tenants will be downsizing by a total of 41,995 square Other
metres. Government
5%
» There were a total of 114 active enquiries
(Federal) Clayton Utz Jun-21 16,000
15% listed on Property Daily over 2019 and 2020
(up to the end of September). In terms of
Bauer Media Group Jun-21 4,000-5,000
Finance & total area requirements, the Finance and
Insurance
34% Insurance (34.3%) and Federal Government
Australian Federal Police Jun-21 20,000
Chart 4. Source: Property Daily and m3property (To end of September 2020) (15.3%) sectors make up the greatest
proportion of total enquiries.
iCare Jun-21 8,000-13,000
» Many tenants are considering their future
office accommodation needs. Those with WPP Oct-21 12,000-15,000
Leasing Requirements by Size (square metres) Leasing Requirement by Number of Listings
upcoming leases expiring such the WPP
(2021), Bauer Media Group (2021) and the AON Australia Jun-22 5,000+
10000+ 189,400 Australian Taxation Office (2022) can take
1000-2999 advantage of current leasing conditions Southern Cross Austereo Jun-22 4,500-5,500
16%
and new buildings completing. These large
5000-9999 22,500
firms are in the market for areas ranging Australian Taxation Office Oct-22 13,000-16,000
Positive net absorption from
2021 and delays in new
supply starts over 2020-
2021 are forecast to drive a
vacancy fall in Sydney CBD
over 2022-2023.
Outlook
» Sydney CBD vacancy is forecast to reach a peak of 10.7% in
2021 due to weak demand and moderate supply. A second
Sydney CBD Vacancy Forecast Scenarios
peak is likely in 2025 due to supply following the Metro
As a result of COVID 19, high unemployment rates and economic uncertainty are expected to impact tenant demand over the
next 12 – 18 months. Falling demand, combined with upcoming supply, is forecast to result in CBD vacancy increasing to 8.8%
by the end of 2020, and reaching 10.7% in 2021, before reducing in 2022 and 2023.
station and Central Square Tech Hub completions.
Sydney CBD Forecast Total Vacancy » While the most likely path for vacancy over the next five
years is around the base case forecast, there is scope for
16.0% Base Case – Vacancy rate forecast based on the current economic outlook.
Scenario 1 - Long term average for annual net absorption achieved over 2020-2022.
14.0% Scenario 2 - Downturn averages for annual net absorption attained over 2020-2022. the rate to range down to “scenario one” or up to “scenario
12.0%
two”. If demand quickly resumes and confidence returns to
10.0% the economy and Sydney office market, we would be likely
8.0% to see forecast vacancy move towards “scenario one”.
6.0% However, if the economic recession results in a financial
4.0% crisis or a second wave of the COVID-19 virus forces further
2.0% restrictions, the outlook is likely to head up towards
0.0% “scenario two”.
Base case Scenario 1 Scenario 2 » The forecasts for the Sydney CBD represent a fairly fast
Chart 8. Source: m3property (October 2020)
recovery from the COVID-19 lockdowns which severely
» Given the uncertain economic conditions as a result of » Scenario 1 – based on the long term annual average net impacted the market over the June quarter 2020. While we
COVID–19, m3property have carried out a scenario analysis absorption being reached over 2020-2022. Under this
of the impact of net absorption adjustments on the scenario, the vacancy rate could rise to a peak of 6.7% still expect the second half of 2020 to feel the impact of
Sydney CBD office vacancy rate. We have developed three by December 2021 and reach a second peak of 9.4% in
vacancy forecast scenarios for the market by considering December 2025.
stasis due to tenant indecision and some space reduction
potential variations in tenant demand and potential backfill
» Scenario 2 – based on the previous historical downturn due to tenant losses we expect 2021 to see positive net
space availability.
net absorption averages (early 90’s recession, Tech wreck
» Base case forecasts – Net absorption forecasts are based and GFC). Under this scenario vacancy would continue to
absorption as the markets recover with restrictions easing.
on the current economic outlook, including the white- rise until the end of 2022 (reaching 13.6%) and will reach a
collar employment forecasts and current leasing market second peak by the end of 2025 at 16.0%.
conditions. m3property is forecasting vacancy to peak at
10.7% by December 2021 and reaches a second peak of
12.7% in 2025
8 Sydney CBD Office Market - Outlook m3property 9
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NSW Office Valuation Team
Andrew Duguid Joel Ducey
NSW | MANAGING DIRECTOR NSW | DIRECTOR
+61 417 343 772 +61 423 289 026
andrew.duguid@m3property.com.au joel.ducey@m3property.com.au
Josh Marks Yash Shah
NSW | ASSOCIATE DIRECTOR NSW | VALUER
+61 415 241 753 +61 403 057 070
josh.marks@m3property.com.au yash.shah@m3property.com.au
Jordan Huber Stanley Ferro
NSW | VALUER NSW | VALUATION ANALYST
+61 481 718 937 +61 439 717 711
jordan.huber@m3property.com.au stanley.ferro@m3property.com.au
m3property.com.au /m3property
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