Sydney Cbd Office Market Overview September 2016
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RESEARCH SYDNEY CBD OFFICE MARKET OVERVIEW SEPTEMBER 2016 HIGHLIGHTS The significant withdrawal of stock Secondary rental growth About 10,000 new white-collar jobs (circa 539,099m2 over the next four outperformed prime rental have been added to the Sydney years) amid declining gross supply growth, with gross effective CBD employment pool over the could potentially lead to a period of growth rates measuring 16.6% 2016 financial year. This represents undersupply in the Sydney CBD, and 13.2% respectively in the 12 annual growth of 3.3%, triple the 10 post completion of Barangaroo. months to July 2016. year average of 1.1%. KEY FINDINGS SUPPLY & DEVELOPMENT The Sydney CBD is entering a period of unprecedented Up to 539,099m2 of office stock stock withdrawals, with 585,682m2 earmarked for in the Sydney CBD is expected to be withdrawn permanently from permanent withdrawal over the next four years. 2016 to 2019. The Sydney CBD market is entering a relatively in line with the 10 year average The strong withdrawal pipeline period of significant withdrawal of stock of 14,947m2. amid declining gross supply for Sydney Metro construction, residential could potentially send the Sydney conversion or re-development. The first Looking ahead, we expect the gross CBD to a period of under supply half of 2016 saw 110,731m² withdrawn supply pipeline to remain fluid for the beyond 2017. from the market, more than half of which remainder of 2016, with circa 120,000m2 The Sydney CBD office market was withdrawn permanently. On an coming online. The new supply will 2 2 recorded double-digit rental annual basis, 157,948m has been taken include 101,729m at Barangaroo Tower 1 2 growth in the 12 months to July offline in the 12 months to July 2016, the (48% committed), 12,500m at 333 2016 with secondary and prime highest withdrawal level in 18 years. George St (92% committed) and 6,713m2 gross effective rental growth rates at One Wharf Lane, 161 Sussex Street measuring 16.6% and 13.2% Permanent withdrawals for alternative (22% committed). respectively. uses in the first six months of 2016 2 include 234 Sussex Street (11,107m — Beyond 2016, the projected supply is The overall vacancy rate is converted to residential), 130 Elizabeth expected to taper off significantly whilst expected to fall to 3.5% by the 2 Street (9,140m —residential), 110 withdrawals accelerate due to the end of 2018 with secondary 2 Bathurst Street (1,428m —hotel) and 230 construction of Sydney Metro and vacancies declining at a faster 2 -232 Sussex Street (1,022m —hotel). In residential conversion. These dynamics pace than prime vacancies. addition, a number of existing buildings could potentially lead to a period of A distinct lack of investable have also been withdrawn for re- undersupply in the Sydney CBD office stock coupled with improved development. These include 182 George market in the medium term. 2 leasing fundamentals in the Street and 33-35 Pitt Street (26,206m in 2 Sydney CBD will ensure the total) and 151 Clarence Street (15,280m ). Knight Frank is tracking up to 539,099m2 investment market remains tight of office stock earmarked to be withdrawn going forward. On the other hand, supply additions were permanently over the 2016-2019 period. equally strong with 126,474m² of new This is equivalent to 10.6% of the total stock having been added to the CBD stock at the beginning of 2016. In market over the six months to July 2016. addition, a further 300,000m2 is expected This is more than double the 10 year to be temporarily withdrawn for gross supply average of 60,842m2 and refurbishment over the same period. has taken the rolling annual gross supply 2 to 275,972m as at July 2016. Major withdrawals for residential conversion over the next two years will Underpinning the supply pipeline in the include 1 Alfred St (27,118m2) and 71 first half of 2016 was the completion of Macquarie St (9,447m2). In addition, the Barangaroo Tower 3 (79,221m²—76% construction of the Sydney Metro project committed), 200 George Street will see 39 Martin Place (14,525m2), 55 (38,676m2—100% committed) and the Hunter St (13,622m2) and 175 Castlereagh refurbishment at 1 Farrer Place (GMT) St (11,848m2) being demolished in 2017. ALEX PHAM (8,532m2—fully leased). Beyond this, significant withdrawals will Senior Research Manager occur at AMP’s proposed Quay Quarter 2 On a net supply basis, 15,734m of office Sydney (QQS) re-development. space has been added to the market in Construction of the new buildings will the six months to July 2016. This is remove up to 75,000m2 of existing stock. TABLE 1 Sydney CBD Office Market Indicators as at July 2016 Annual Net Average Average Total Stock Vacancy Annual Net Average Core Grade Absorption Gross Face Incentive* (m²) Rate (%) Additions (m²) Market Yield (%) (m²) Rent* ($/m²) (%) Prime 2,858,074 6.7 192,198 218,021 900 - 1,200 25.0 - 29.0 5.00 - 5.75 Secondary 2,224,141 4.1 -44,953 -99,997 650 - 850 19.0 - 25.0 6.00 - 6.75 Total 5,082,215 5.6 147,245 118,024 Source: Knight Frank Research/PCA *Assuming full floor, mid rise, clear space and a 5 year lease 2 SYDNEY CBD OFFICE SEPTEMBER 2016 RESEARCH MAJOR OFFICE SUPPLY Barangaroo T2 - 88,200m² [Westpac/Gilbert + Tobin/St George/BT] 1 LLITST - Q3 2015 - 89% committed Barangaroo T3 - 79,221m² [KPMG/Lendlease] 2 LLITST - Q2 2016 - 76% committed 80 Pitt St# (ex QBE) - 11,400m² 3 Yorkban P/L - Q1 2017 - 0% committed 333 George St - 12,500m² [Clyde & Co/Aimia/WeWork] 4 Charter Hall Core Plus Office Fund - Q3 2016 - 92% committed 200 George St - 38,676m² [EY/Mirvac] 5 Mirvac/AMP - Q2 2016 - 100% committed Barangaroo T1 - 101,729m² [PWC/HSBC/Marsh & McLennan] 6 LLOneITST - Q4 2016 - 48% committed 225 George St# (ex Ashurst) - 15,789m² [JLT] 7 DEXUS/CIC/CSC - H1 2016 - c.87% committed 32 28 29 One Wharf Lane, 161 Sussex St - 6,713m² 5 24 8 7 M&L Hospitality - Q3 2016 - 22% committed« 6 17 9 30 30 The Bond, 30 Hickson Rd# (ex Lendlease) - 16,228m² [Roche] 9 DEXUS - H2 2016 - 31% committed 1 13 10 Shelley St# (ex KPMG) - 27,778m² [Suncorp] 2 10 Brookfield - H1 2017 - 100% committed 255 Pitt St# (ex Challenger, Apple) - 15,427m² 23 11 ISPT Core Fund - H1 2017 - 75% committed 25 201 Sussex St, DPIII# (ex Marsh & McLennan) - 10,343m² [Advant] 26 12 3 GPT (GWOF)/AMP (ACPF)/Brookfield - H1 2017 - 48% committed 14 4 10 22 259 George St# (ex Suncorp) - 20,352m² 13 Memocorp Australia - H2 2017 275 Kent St# (ex Westpac) - 16,130m² 20 14 Blackstone/Mirvac - H2 2017 21 680 George St# (ex EY) - 28,033m² 15 Brookfield/Arcadia - 2017 55 Market St# (ex St. George)§ - 4,644m² 16 CIC - Q3 2016 Barangaroo C1 & C2 - circa 19,160m² 17 LLOneITST - 2019+ - 0% committed 8 Darling Square, Haymarket - 20,000m²> [CBA] 18 Lendlease - H1 2018 - 100% committed 11 201 Sussex St, DPII# (ex PWC) - 33,000m² [IAG] 19 31 GPT (GWOF)/AMP (ACPF)/Brookfield - 2018 - 100% comm. 19 12 151 Clarence St - 19,910m² [Arup] 20 Investa - Q3 2018 - 29% committed 388 George St# - 36,151m² (ex IAG) 21 Investa/Brookfield - Q4 2018 - 0% committed 60 Martin Place - 40,000m² 22 Investa/Gwynvill Group - H2 2019 - 0% committed 33 Bligh St - 26,000m² 23 Energy Australia/Investa - 2020+ - 0% committed Quay Quarter Sydney (QQS) - 90,000m² 15 24 AMP - 2021+ 275 George St - c. 7,000m² 25 LaSalle Investment Management - 2019+ 18 Wynyard Pl - 68,000m² [NAB] 26 Brookfield - 2020 - 44% committed 255 George St# - 22,500m² (ex NAB) 27 AMP - 2020 CQ Tower, 182 George & 33 Pitt St - 55,000m² 28 Lendlease - 2021+ Source of map: Knight Frank 55 Pitt St - 30,000m²+ Under Construction/Complete 29 Mirvac - 2020+ DA Approved / Confirmed / Site Works 210 & 220 George St - 17,000m² 30 Mooted / Early Feasibility # Major refurbishment/backfill Poly Real Estate - 2021+ « 2 floors of 1,491.4m2 are under offer as at September 2016. NB. Dates are Knight Frank Research estimates. Darling Park Tower 4 - 70,000m² § Westpac extended lease for 3 years. 31 Includes select CBD major office supply (NLA quoted) GPT/Brookfield/AMP - 2022+ > Office NLA only. Total NLA is 27,900m². Major tenant precommitment in [brackets] next to NLA ≠ Under the current plans, a maximum above-ground GFA of 150,000 Central Barangaroo - TBC# 32 LLITST refers Lend Lease International Towers Sydney Trust m² and an unlimited amount underground are allowed. It is uncertain TBC* - 2024+ (50% CPPIB, 25% APPF Commercial, 15% Lend Lease, 10% how much of this will be office space as at September 2016. LLOneITST refers Lend Lease One International Towers Sydney *A consortium consisting of Grocon, Scentre and Aqualand is report- Trust (37.5% Lend Lease, 37.5% QIA, 25% APPF Commercial) edly the lead contender for development rights. 3 Notwithstanding the decline in the overall vacancy rate, there are significant TENANT DEMAND & RENTS divergences in vacancy rates across the Tenant demand in the Sydney CBD CBD, the depletion of secondary stock has different grades and precincts. Whilst the continued its momentum, evidenced by seen some secondary tenants moving up secondary vacancy rate fell sharply from the net absorption of 53,162m2 in the six to the prime market, resulting in the net 6.2% in January 2016 to 4.1% in July months to July 2016. This is more than outflow of –2,662m2 in the secondary 2016, as a result of the significant double the 10 year average of 23,450m2.