Sydney Office Rents Rising, Incentives Falling Across the Board

27 January 2017

Australia’s leading office market, Sydney CBD, has experienced a significant rise in net effective rents across both prime and secondary buildings, a trend which is forecast to continue in 2017.

Savills latest Sydney CBD Office Briefing Report highlights an improved leasing environment with strong tenant demand, stock withdrawals and falling incentives resulting in significant net effective rental growth.

According to Savills research, net effective rents in the Sydney CBD enjoyed year-on-year growth in 2016 of +60% for B Grade office space, +48% for A Grade and +26% for Premium. Contributing to this growth were substantial falls in incentives in 2016 of -34% in dollar terms for A Grade, -26% for Premium and -25% for B Grade. Net face rents rose +28% for B Grade, +14% for A Grade and +6% for Premium.

View the Sydney CBD Office Metrics for 2016.

Tony Crabb, Savills Australia National Head of Research & Consultancy, said both prime and secondary rents are rising in Sydney on the back of a shrinking pool of secondary stock.

“The scarcity of secondary space has driven up both face and effective secondary rents and has caused a similar effect, albeit more muted, in the prime market as tenants are forced to upgrade,” he said.

“Net effective rental growth was most pronounced due to the effect of declining rental incentives as highlighted by the 60% jump in B Grade net effective rents year-on-year. There was also a substantial increase in A Grade net effective rentals (up 48%) and Premium net effective rentals (up 26%).

“Looking forward, we anticipate that net effective rents will continue to increase, particularly for secondary and A Grade accommodation. This will be a function of continued demand from displaced tenants, the ongoing shortage of secondary stock and the ongoing effect of declining incentives.”

View the Sydney Office CBD Net Effective Rents over the past 10 years.

Rob Dickins, Savills Australia National Head of Office Leasing, said Sydney tenants will have a modest choice of options for prime accommodation in 2017 as some backfill space becomes available.

“We estimate approximately 102,400sq m will be released this year, however about two-thirds of this space is pre-committed. The majority of the 21,750sq m of new supply entering the market is also pre-committed, such as the 15,000sq m Darling Harbour Live building which CBA will occupy. These new options will be welcome news for tenants given the likelihood of further upheaval in the secondary market in 2017,” he said.

“Secondary stock withdrawals during 2016 totalled some 39,000sq m for residential or hotel redevelopment purposes. This has effectively forced many displaced tenants to actively compete on B Grade space or upgrade their space requirements to either A Grade or Premium, as several have done. This has created upward pressure not only on secondary rents, but also in prime rents to a lesser extent.”

“We expect this trend to continue in 2017 as further tenants are displaced owning to the withdrawal of a further 62,900sq m of mostly B Grade space for the Sydney Metro project.”

Simon Fenn, Savills NSW Managing Director, said the rental growth in the Sydney CBD office market is welcome news for owners and investors.

“Sydney A Grade and B Grade markets offer investors the opportunity of increased rental returns as we anticipate continued reduction in market incentives over the short to medium term,” he said.

“A Grade yields tightened 75 basis points during 2016 while B Grade yields tightened significantly by 113 basis points in the course of the year. Recent rental growth and the prospect of further growth bodes well for investment yields given the implications for total returns.”

“Investment appetite from both local and international investors for core Australian office assets remains high and continues to benefit from the spread between property income yields and long-term Government bond yields. This investment environment is expected to support continued investment demand for quality Australian commercial property assets.”

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