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| P1www.m3property.com.au
Key Research Contacts:
m3commentary SYDNEY CBD OFFICE
Spring | 2017
m3property.com.au
Jennifer WilliamsNational Director | NSW
(02)8234 8116
Casey RobinsonResearch Manager | QLD
(07) 3620 7906
Zoe HaskettResearch Manager | SA
(08) 7099 1807
Amita MehrotraResearch Director | VIC
(02) 9605 1075
| P2www.m3property.com.au
m3property Research
Market Overview 3
Key Retail Influences 4
Key Indicators 5
Key Sales 7
Outlook 8
CONTENTS
VACANCY TO FALL
AND EFFECTIVE
RENTS TO GROW
Grade: is determined using the PCA report
“A Guide to Office Building Quality”.
Prime: Combination of premium and grade
A.
Secondary: Combination of grades B, C
and D.
Net lettable area (NLA): defined in
accordance with the PCA “Method of
Measurement”.
Net absorption: is the change in occupied
stock within a market over a specified period
of time.
Completion date: determined by issue of a
“Certificate of Occupancy”.
Pre-commitment: contract signed to
occupy space in new or refurbished space
prior to construction commencing.
WALE: Weighted average lease expiry.
A-REIT: ASX listed Australian Real Estate
Investment Trust
DEFINITIONS
•Prime leasing demand continues to be strong, but net
absorption is likely to be low over the short- to medium-
term due to reduced availability of contiguous office space.
•Gross supply levels decreased slightly in the year to June
2017, after reaching a cyclical peak in the 2016 financial
year. Gross supply is forecast to continue to reduce over
the next two financial years.
•Stock withdrawals are expected to peak in the current cycle
over the year to June 2018, despite having seen elevated
levels of withdrawals over the previous two years.
•There was solid rental growth and falling incentives
recorded over the year to June 2017.
•Sales activity was solid over the year to June 2017, albeit
lower than the level achieved over the 2016 financial year.
•Yields across prime and secondary offices continued to
tighten over the year to June 2017 driven by strong
demand from overseas and domestic investors and
developers, combined with limited acquisition opportunities.
•Emergency Services Property Levy changes were
abandoned by the government.
m3commentary Spring 2017
| P3www.m3property.com.au
The Sydney CBD office market is in the growth phase of the property cycle. Low vacancy
and hence reduced availability of space resulted in a reduction in net absorption over the
year to July 2017. Tenant demand, however, remains strong and is driving solid rental
growth. With opportunities becoming increasingly limited in the CBD, tenants are
reviewing opportunities in fringe and other suburban locations.
The Sydney CBD office market experienced high levels of
supply, positive tenant demand, strengthening rental
growth and solid investment demand over the 2017
financial year, making it one of the best performing office
markets in Australia.
Tenant take-up in the CBD was strong for prime stock
over the year to July 2017, but weaker in secondary stock
as reduced available space and rising rents began to
impact tenant occupation decisions. Net absorption is
expected to be below the long-term average over the next
few years, in line with the general decline in available
space. In terms of leasing activity over the year to July
2017, gross absorption increased in the CBD compared to
the same time last year, indicating that tenant demand
remains positive for CBD space.
Demand from firms benefiting from low interest rates,
strong property markets and a strengthening US economy
including engineering and construction, education and
training, business services and finance and insurance
firms are likely to drive CBD office demand in the short-
term. The market is, therefore likely to continue to expand.
Gross supply was strong over the year to June 2017 at
205,794m2. While, stock withdrawals (201,480m2) and
positive tenant demand, offset most of the supply, vacancy
rose slightly from 5.6% in July 2016 to 5.9% in July 2017.
Looking over the next two years, high levels of stock
withdrawals are forecast to continue to reduce supply, with
conversion to residential, hotel and mixed uses, and
redevelopments being the main reasons for withdrawal of
space.
Investment activity was solid and yields firmed over the
year to June 2017 due to continued investment demand
and strengthening market fundamentals.
MARKET OVERVIEW
m3property Research
m3property Investment Sale:
MLC Centre, 19 Martin Place
m3commentary Spring 2017
| P4www.m3property.com.au
ECONOMIC GROWTH
Business investment continues to be restrained, although measures of business sentiment
remain positive. Labour market indicators are mixed and inflation low. While a low official
interest rate is supporting domestic demand, rising rates from the major banks and a
fluctuating exchange rate continue to reduce its effectiveness. According to the Australian
Treasury, in real terms Gross Domestic Product is forecast to grow by 2.50% in 2016-17
and improve to 3.0% in 2017-18.
EMPLOYMENTWhile employment is expanding overall in Australia, under-employment and significant
differences between States continue to be an issue. In New South Wales as at July
2017 employment totalled 3,857,253 people, a rise of 1.2% over the past 12 months.
More significantly full-time employment in New South Wales rose by 3.5% over the
same period, however, this was offset slightly by a fall in the participation rate from
64.0% to 63.6%, indicating that under-employment still exists within the state. The
unemployment rate due to increased employment and the fall in participation reduced
to 5.0% as at July 2017 from 5.2% a year prior. In core white collar sector industries
employment increased by 4.5% in New South Wales over the year to May 2017, which
bodes well for the office sector within the State.
JOB ADVERTISEMENTSOverall job advertisements data from ANZ (a forward-looking indicator of labour
demand) indicates an increase in employment in the short-term. This is consistent
with the slow transition in the labour market and the economy, more generally,
towards service based industries and sectors which benefit from a lower Australian
dollar and low interest rate. Job advertisements increased over the year to July by
12.8%.
BUSINESS CONFIDENCENational Australia Bank’s (NAB) index of business confidence rose to 12.0 index
points in July 2017 from 4.0 points in July 2016. This is twice the long-term average
for the index and is back around its pre-GFC levels. Business conditions (which is a
combination of trading, profitability and employment conditions) also increased over
the year to July 2017, to 15.0 index points. This is three times the long-term average
level and the highest it has been since early 2008.
$
KEY INFLUENCES
m3property Research
m3property Investment Sale:
66 Goulburn Street
m3property Investment Sale:
320 Pitt Street
m3commentary Spring 2017
| P5www.m3property.com.au
STOCK AND SUPPLY
Stock in the Sydney CBD office market totalled 5,086,316m2
according to the Property Council of Australia as at July 2017.
This is expected to be supplemented by 112,332m2 of new
gross supply over the 2018 financial year, including the
completion of Barangaroo C2 International House (6,720m2)
and the refurbishments of 10 Shelley Street (27,720m2) and
140 Sussex Street (12,040m2). New supply is expected to be
fully offset by over 200,000m2 of stock withdrawals, resulting in
a reduction in office stock of -92,290m2. Financial year 2019 is
expected to see a moderation of gross supply, to total around
73,000m2. The level of withdrawals is expected to reach almost
100,000m2, resulting in net supply falling by over 26,000m2.
Looking further forward there a number of large redevelopment
projects that will be undertaken over the next few years
including Wynyard Place (due 2019-2020), CQ Tower (2020)
and Quay Quarter (2019-2021). These are set to change the
way people access transport within the city, to activate and
reinvent laneways and add new shopping, leisure and dining
options for residents and worker in the CBD.
Brookfield’s Wynyard Place contains three buildings. The main
premium grade tower (59,000m2) will incorporate Wynyard
station. It is expected to have office floor plates of up to
2,500m2 and contain over 5,000m2 of retail space. NAB has
pre-committed to 31,000m2 within this tower. The project also
includes restoration of Shell House, which will create 7,700m2
of boutique office accommodation and 1,500m2 of retail space
and 285 George Street, which will be around 1,500m2 in area.
Lendlease’s Circular Quay (CQ) Tower is expected to be
Sydney’s tallest office tower on completion at 263m high and is
set to contain around 55,500m2 of NLA. The development will
contain a public bike hub, public plazas with dining options,
shopping, entertainment and leisure facilities.
AMP Capital’s Quay Quarter is set to redesign the area within
Bridge, Alfred, Young and Loftus Streets. It has stage 2 DA
approval to contain five buildings, including three largely office
towers, retail, residential, heritage and pubic domain space.
AMP have pre-committed to the 50 Bridge Street tower.
GROSS ABSORPTION
Gross absorption is a leading indicator of net absorption.
Based on reported signed leases gross absorption was
estimated by m3property to be 314,200m2 over the year to July
2017. This represents an increase of 9.5% compared to the
year prior. The number of tenant moves increased over the
year with this being reflected in the average size of leases
signed falling to 1,277m2 from 1,927m2 a year prior. Gross
absorption is expected to be fairly stable over the short-term as
available space contracts and tenants move from older stock to
newer, more efficient space. This should result in low positive
net absorption over the next few years.
KEY INDICATORS
m3property Research
To end 2018 Projects over 10,000m2 NLA
New International House C2
151 Clarence Street
275-281 George Street
35,082
Refurbishments 10 Shelley Street
167 Phillip Street
140 Sussex Street
201 Sussex Street
259 George Street
2 Bligh Street
104,620
Withdrawal –
Redevelopment
Change of use
Quay Quarter
CQ Tower
Refurbishment
54,081
116,962
13,277
59,043
081624324048566472
0
20,000
40,000
60,000
80,000
100,000
120,000
140,000
160,000
Nu
mb
er
leases r
ep
ort
ed
as
sig
ned
NL
A (
m2)
Sydney CBD Leases Signed
Southern The Rocks WesternWalsh Bay Midtown CoreNo lease signed
Source: Property Daily and m3property
-160,000-120,000
-80,000-40,000
040,00080,000
120,000160,000200,000240,000280,000320,000
Su
pp
ly
(m2)
Sydney CBD supply
Gross supplyNet supply
Source: Property Council of Australia OMR m3property Research (August 2017)
m3commentary Spring 2017
| P6www.m3property.com.au
NET ABSORPTION
Tenant demand was positive in the Sydney CBD, despite the
Property Council of Australia recording negative net absorption
of 7,727m2 over the year to June 2017. The entire loss was in
secondary stock, with prime net absorption totalling 151,840m2.
Looking forward, net absorption is forecast to be weak but
positive in financial year 2018 due to increased cost of
occupancy and reduced availability of space. Over the
remainder of the five year outlook net absorption is expected to
be positive but below the long term average due to rising rents
in the CBD compared to other markets. In particular back
offices of large firms and government tenants may consider
exiting the CBD over the period.
VACANCY
Over financial year 2017 the Sydney CBD vacancy rate rose
from 5.6% to 5.9%. This was due to positive net supply
combined with negative net absorption over the year. The
vacancy rate is still below the 20-year CBD average of 7.4%.
Secondary stock accounted for 62.9% of stock withdrawals
over the financial year at 148,657m2 and only accounted for
21,750m2 of new supply. However, net absorption decreased
by 159,567m2, as tenants were displaced from buildings that
are to be withdrawn from the market. Vacancy, therefore, rose
from 4.1% to 5.9% over the year. Prime vacancy fell, due to
strong net absorption of 151,840m2, despite strong net supply
of 131,221m2.
Looking forward the vacancy rate is forecast to continue to fall
until the end of 2019. This is due to continued high levels of
stock withdrawals with around 305,245m2 due to be removed
from the market for refurbishment and redevelopment. From
2020 increases to supply from projects such as Quay Quarter,
Wynyard Place, CQ Tower at 176-182 George Street and 33-
35 Pitt Street and 388 George Street are likely to result in
vacancy gradually increasing.
RENTS
Prime gross face rents in the Sydney CBD increased over the
year to June 2017 with growth of around 5.3% being recorded
for prime and 4.9% for secondary office space. Stronger rental
growth is expected for both grades over the year to June 2018,
due to forecast low vacancy and continued positive demand.
Affordability of space is likely to increasingly become a factor
over the next few years where vacancy is expected to
decrease to 4.0% by June 2018 and lower in 2019. Higher
rents are expected to result in the displacement of some
tenants from the CBD to fringe and other metropolitan
locations. Rents are expected to grow from 2017 to 2019,
before moderating when new supply starts to push up vacancy
from 2020.
KEY INDICATORS
m3property Research
$-
$200
$400
$600
$800
$1,000
$1,200
$1,400
$1,600
Gro
ss f
ace r
en
ts (
$/m
2)
Sydney CBD Average Gross Rents
Prime
Secondary
Source: m3property Research
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
Vacan
cy
Rate
(%
)
Sydney CBD Office: Vacancy
SecondaryPrimeTotal
Source: Property Council of Australia OMR July 2017, m3property Research
Average
-200,000
-150,000
-100,000
-50,000
0
50,000
100,000
150,000
200,000
Net
ab
so
rpti
on
(m
2)
Sydney CBD Office: Annual Net Absorption
Source: Property Council of Australia OMR, m3property Research (August 2017)
Long term average
m3commentary Spring 2017
| P7www.m3property.com.au
INCENTIVES
Incentives have fallen in the Sydney CBD to range from 21.0%
to 24.0% for prime stock and between 12% and 18% for
secondary stock as at June 2017. With current prime vacancy
lower than secondary and the rental differential having reduced
over recent years between the grades, it is expected that prime
incentives will fall by further than secondary incentives over the
2018 financial year. This is likely to continue over 2019, before
supply pressures start to push up vacancy again in 2020.
INVESTMENT MARKET
Transaction activity while remaining strong has slowed over the
year to June 2017 compared to the 2016 financial year. The
majority of deals have been for secondary grade assets with
prime assets remaining tightly held, although more prime grade
assets have come to the market over 2017. Sales over the
year to June 2017 were approximately $3,527,241,888,
compared to $4,290,152,620 over the year prior. Some of the
larger sales were 50% of MLC Centre for $722,500,000, 66
Goulburn Street ($228,000,000), 320 Pitt Street ($275,000,000)
and 20 Bridge Street ($335,000,000).
Overseas investors reduced investment activity in the CBD
accounting for 42.4% of sales over the year to June 2017
compared to 66.6% of sales the year prior. Unlisted trusts
have increased activity to account for 28.5% of sales over the
year to June 2017.
A-REITs (12.7%) and developers (8.4%) accounted for the
next largest proportions of sales over the 12 months to June
2017 with both these groups increasing their exposure
compared to the same time last year.
YIELDS
Prime yields tightened by 50 basis points over the 12 months
to June 2017, to range between 4.63% and 5.50%. Over the
same time frame secondary yields tightened by around 63
basis points to range from 5.25% to 6.25%.
Low interest rates, strengthening market fundamentals and
strong capital flows into property have largely driven this
tightening in yields in the CBD.
Looking forward, while bond rates have started to rise, yields
are likely to continue firming in the short-term due to strong
rental growth, which should drive continued investment
demand in the Sydney market.
KEY INDICATORS
m3property Research
-
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
4,500
5,000
Sale
s v
olu
me (
$m
illio
ns)
Sydney CBD Office Sales Volume
Source: m3property Research *Office Sales over $5 million to end of July 2017
*
5.63%
7.25%
5.06%
6.38%
8.50%
5.75%
4.00%
4.50%
5.00%
5.50%
6.00%
6.50%
7.00%
7.50%
8.00%
8.50%
9.00%
Av
era
ge y
ield
s
Sydney CBD Prime and Secondary Yields
Prime
Secondary
Source: m3property Research
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
35.0%
Incen
tiv
es (
%)
Sydney CBD Incentives
Prime
Secondary
Source: m3property Research
m3commentary Spring 2017
| P8www.m3property.com.au
Property Date PricePassing
Yield
Market
YieldIRR $/m2 Purchaser Type
66 Goulburn Street Aug 17 $252,000,000 NA NA NA $10,897 Overseas Investor
MLC Centre (2x25%) Jun 17 $722,500,000 4.50% 5.6% NA $18,669 A-REIT and Unlisted Fund
320 Pitt Street Jun 17 $275,000,000 6.27% 6.45% 6.90% $9,431 Overseas Investor
275 George Street Jun 17 $82,000,000 DS DS DS $11,232 Developer
59 Goulburn Street May 17 $158,000,000 5.20% 5.97% 7.15% $8,141 Unlisted Fund
20 Bridge Street Apr 17 $335,000,000 3.86% 4.23% 5.63% $16,465 Overseas Investor
183-185 Clarence Street Jan 17 $22,750,000 DS DS DS $6,319 Developer
56 Clarence Street Jan 17 $64,000,000 5.15% 5.78% 5.99% $12,473 Private Investor
55 Clarence Street Jan 17 $169,000,000 5.70% 6.26% 7.66% $11,345 Overseas Investor
SIGNIFICANT SALES TO DATE
m3property Research
m3property Investment Sale:
20 Bridge Street
m3commentary Spring 2017
DS - Development site, NA - Not available
Andrew Duguid
Managing Director | NSW
(02) 8234 8101
Don Semken
Senior Valuer | NSW
(02) 8234 8102
Simon Hickin
Director | SA
(08) 7099 1812
Gary Longden
Director | VIC
(02) 8234 1040
Ross Perkins
Managing Director | QLD
(07) 3620 7901
KEY COMMERCIAL VALUATION
CONTACTS
Net supply is expected to reduce over financial year
2018 to -92,288m2 and remain negative in financial year
2019 before increasing again from 2020.
Net absorption is forecast to be moderate, over the next
few years in part due to the lack of available contiguous
space. This is likely to pressure tenants to consider
fringe and suburban markets for larger and back office
space requirements.
Vacancy rates are expected to fall over financial year
2018 until the end of 2019. Positive demand should
result in pre-lease activity rising over the next few years,
driving new development completions in 2020 and 2021.
Forecast development activity in this period is expected
to result in an increase in vacancy over those years.
Prime gross face rents are forecast to increase by
around 5.8% over the year to June 2018. Secondary
space is expected to see similar growth over the year.
Incentive levels are also likely to reduce across both
grades.
Sales activity is expected to be solid in 2017 with some
prime stock already coming to the market. Overseas
investors and domestic trusts continue to pursue
investment opportunities in the Sydney CBD.
Investment yields are set to tighten further over 2017
driven by strengthening fundamentals and continuing
investor demand. However, with 10 year bonds starting
to rise the rate of firming has already slowed and this is
expected to continue to be the case over the short-term.
OUTLOOKSYDNEY CBD OFFICE
m3property Research
m3property provides national
coverage in all States and
Territories.
DISCLAIMER
© m3property Australia. This report is for information purposes only, it has been derived, in part, from sources other than m3property and does not constitute
advice. In passing on this information, m3property makes no representation that any information or assumption contained in this material is accurate or complete.
To the extent that this material contains any statement as to the future, it is simply an estimate or opinion based on information available to m3property at that time
and contains assumptions, which may be incorrect. m3property makes no representation that any such statements are, or will be, accurate. Any unauthorised use
or redistribution of part or all of this report is prohibited.