Sydney's North Shore

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A CUSHMAN & WAKEFIELD RESEARCH PUBLICATION

SYDNEY’S NORTH SHORE Office Markets

DECEMBER 2017

CITIES INTO ACTION CITIES INTO ACTION

CONTENTS

MARKET OVERVIEW ...... 3

HIGHLIGHTS...... 4

LEASING MARKET...... 9

INVESTMENT ACTIVITY...... 11

INFRASTRUCTURE IMPROVEMENTS...... 12

SUMMARY...... 13 SYDNEY’S NORTH SHORE 6.7 millionpeoplein2037. increase from 5.1 millionpeoplein2017 to Sydney’s 20 year population forecast ofan and we expect thisto continue given theme ineachoftheNorthShore markets, residential conversion hasbeenatypical of secondary grade office stock for Metro project. The saleandwithdrawal University willbenefitfrom theNorwest Ryde, Macquarie Park andMacquarie stations includingChatswood, North a new metro station. From 2019 other 2024 Crows Nest willalso benefitfrom the heartofNorthSydney. Nearby, from see Victoria Cross Station constructed in from theSydney Metro project whichwill 2024 bothdevelopments willbenefit Street (61,000 sqm)duein2020. From due for completion in2018 and1Denison come with100MountStreet (42,000sq m) landscape are anticipated intheyears to Major changesto theNorthShore urban Secondary grade. (Grade B,CandD). space (Premium andAGrade) and49% comprise of51%Primegrade office Chatswood. Collectively thesemarkets Nest/St Leonards and278,919sq min m inNorthSydney, 314,017sq minCrows 873,693sq minMacquarie Park, 822,496sq (Property Council ofAustralia) recorded Suburb by suburbasofJuly2017 thePCA – roughly 45%thesize oftheSydney CBD. Collectively they amountto 2,289,125 sqm Chatswood, andCrows Nest/St Leonards. addition to thesmallerhybrid markets of North Sydney andMacquarie Park, in comprise thepowerhouse suburbsof Office markets in Sydney’s NorthShore Overview Market increase from to is forecast population Sydney’s by 2037 6.7 millionpeople 5.1 millionto A CUSHMAN&WAKEFIELD RESEARCH PUBLICATION

Tenant demand in the North Sydney Highlights office leasing market has $1.62 significantly Demand Tenant demand in the North Sydney office billion increased leasing market has significantly increased in the past in the past 12 months, a flow on from the 12 months tight vacancy of of Sydney’s CBD. sales volume due to Supply Development activity in North Sydney increased in assets has gained significant momentum in put up for sale the year to December 2017 with pre- commitments signed at both 1 Denison Street (Channel 9) and 100 Mount Street (NBN). Vacancy As reported by the PCA in the year 7.9% to July 2017 the North Shore vacancy vacancy rate increased 60 basis points to 7.9%. rate Macquarie Park vacancy increased 140bp to 8.5% over the same period, however this remains significantly below on the North Shore the 11.2% recorded in mid-2014. which has increased 60 basis points Rents North Sydney Prime grade net face rents are circa $690 per sq m per annum with 25% gross incentives. Macquarie Park Prime grade net face rents are circa $360 per sq m per annum with net incentives of 25%. Investment The year to October 2017 saw a significant increase in capital seeking metropolitan located assets. In Q2 and Q3 2017 there was an increase in assets being put up for sale, contributing $1.62 billion in sales volume. Infrastructure The Sydney Metro Northwest project is well underway with the Rouse Hill to Chatswood link to open in 2019. The $2 Billion Northern Beaches Hospital and associated road network have progressed significantly and are due for completion late 2018.

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Market Indicators as at Q4 October 2017

Vacancy 12 Month net Gross Capital Size rate absorption Net rent incentives Market value Market Grade (sq m) (July 2017) (sq m) ($/sq m) (%) yield ($/sq m) Macquarie Prime 650,050 6.2% 912 $357 25% (net) 5.00%- 7,000– Park/North 5.50% 7,600 Ryde Secondary 223,643 15.0% -21,735 $324 30% (net) 5.50%- 5,500– 6.50% 6,200 Total 873,693 8.5% -20,823 North Prime 260,807 6.0% 50,927 $692 25% 4.75%- 10,500– Sydney 6.00% 14,000 Secondary 561,689 6.6% -18,044 $596 26% 5.00% - 9,500– 6.00% 12,000 Total 822,496 6.4% 32,883 Crows Nest/ Prime 102,699 14.9% -12,336 $550 23% 6.25%- 8,100- St Leonards 6.50% 9,200 Secondary 211,318 11.5% -18,690 $320 25% 6.50%- 4,400- 6.75% 5,200 Total 314,017 12.6% -31,026 Chatswood Prime 157,412 6.6% -733 $505 23% 6.10%- 7,600- 6.30% 8,800 Secondary 121,507 7.3% -174 $380 26% 6.25%- 5,500- 6.50% 6,300 Total 278,919 6.9% -907 TOTAL 2,289,125 8.1% -19,873

North Shore office market vacancy rates

35% 30% 25% 20% 15% 10% 5% 0%

Chatswood Crows Nest/St Leonards Macquarie Park North Sydney TOTAL Vacancy

Source: PCA; Cushman & Wakefield Research

5 Supply and Development Activity 42,000 After five years of decline, North Shore relying on a major anchor for a project sq m of office office stock levels are again on the rise. to begin. stock The amount of available office stock The next substantial development in in the North Shore peaked in 2011 at the precinct progressed in August 2017 1,511,581 sq m but fell to 1,405,032 sq m when infrastructure and property group will be added at by 2016. The decline was mainly driven 100 Mount Street, John Holland won the NSW Government by conversion of secondary office North Sydney tender to develop a new commercial stock to residential as developers precinct at 45-61 Waterloo Road, took advantage of Sydney’s booming Macquarie Park. housing market. A 35,000 sq m building is soon to be However, the strong CBD office market constructed, and the 3.2ha plot holds 61,000 is spilling over to the North Shore, with the potential for an additional 82,000 sq m of office 125,000 sq m of office stock to be added sq m of stock to be developed in the stock by 2020. medium term. The NSW Government, Of this, 103,000 sq m will be in North who sold the site for $170 million as a will be added at Sydney including Dexus’ 100 Mount part of its asset recycling program, has 1 Denison Street, Street and Winten’s 1 Denison Street. agreed to lease back 25,000 sq m with North Sydney Approximately 3,000 sq m is planned options for up to 30,000 sq m more. at Mirvac’s St Leonards Square. Nearly The remaining 9,500 sq m of the 34,500 19,000 sq m of new and refurbished sq m building will represent the first Goodman stock was completed in 2017 large speculatively developed space at 8 Khartoum Road and 97 Waterloo in Macquarie Park for approximately Road in Macquarie Park. a decade. In Macquarie Park development activity Although a large volume of stock is set remains substantially pre-commitment to be added, a significant component based with commercial construction has been pre-committed:

Tenant Address Tenancy size Fuji Xerox 8 Khartoum Road, Macquarie Park 11,100 sq m Channel 9 1 Denison Street, North Sydney 15,500 sq m NBN 100 Mount Street, North Sydney 20,364 sq m NSW Government 45-61 Waterloo Road, Macquarie Park 25,000 sq m

After five years of decline, North Shore office stock levels are again on the rise

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North Shore and Macquarie Park Development Pipeline

Property Precinct NLA (sq m) Type Status Completion 97-99 Waterloo Road Macquarie Park 8,146 Full Refurb Completed 2017 8 Khartoum Road Macquarie Park 10,800 New Completed 2017 100 Mount Street North Sydney 42,000 New Construction 2018+ 472-494 Pacific Highway Crows Nest/ 3,700 New Construction 2019+ St Leonards 1 Denison Street North Sydney 61,000 New Site Works 2019+ 19-22 Atchison Street Crows Nest/ 2,362 New DA Approved 2019+ St Leonards 500 Pacific Highway Crows Nest/ 2,825 New DA Approved 2020+ St Leonards Royal North Shore Crows Nest/ 25,000 New Mooted TBD Hospital site St Leonards 6-8 Julius Avenue North Ryde 34,194 New DA Approved TBD 219-247 Pacific Highway Crows Nest/ 46,000 New DA Approved TBD St Leonards 1 Rivett Road North Ryde 11,380 New DA Approved TBD 18-20 Atchison Street Crows Nest/ 2,300 New DA Applied TBD St Leonards 95 Waterloo Road Macquarie Park 14,874 New DA Applied TBD 11 Talavera Road Macquarie Park 32,000 New DA Applied TBD 8-12 University Avenue Macquarie Park 50,000 New DA Applied TBD 396 Lane Cove Road Macquarie Park 74,000 New Early Feasibility TBD 45-61 Waterloo Road Macquarie Park 117,000 New DA Applied TBD 39 Delhi Road (Lighthouse) North Ryde 30,000 New DA Approved TBD 88 Christie Street Crows Nest/ 26,500 New DA Approved TBD St Leonards 118 Mount Street North Sydney 21,000 New DA Approved TBD 271 Lane Cove Road Macquarie Park 34,000 New DA Approved TBD

Source: PCA; Cushman & Wakefield Research

7 Residential Projects Pipeline

Address Project Suburb Units Status Completion 9 Albany Street Metropolitan St Leonards 125 Completed 2017 Apartments 88 Alfred Street 88 Alfred Street North Sydney 123 Under 2017 Construction 150 Pacific Highway Polaris North Sydney 232 Under 2018 Construction 321 Pacific Highway East Lane North Sydney 36 Under 2018 Construction 31-33 Albany Street The Hume Crows Nest 35 DA Approved 2018 1 Delhi Road Centrale North Ryde 380 Under 2018 Construction 5 Whiteside Street Macquarie Green Macquarie Park 164 Under 2018 Construction 120 Herring Road One Twenty Macquarie Park 196 Under 2018 Macquarie Construction Cnr Herring, Epping Macquarie Park Macquarie Park N/A Under 2018 Roads Village Construction 472-486 Pacific St Leonards Square St Leonards 526 Under 2019 Highway Construction 221 Miller Street The Miller North Sydney 269 Under 2019 Construction 1 Marshall Avenue Embassy Tower St Leonards 269 Under 2019 Construction 61 Lavender Street Blue at Lavender Bay Milsons Point TBD Mooted TBD 30 Alfred Street Aqualand Milsons Point TBD Mooted TBD 229 Miller Street Vantage Residences North Sydney 91 DA Approved TBD Epping Road Ryde Garden North Ryde 830 Under TBD Construction 25 Epping Road Lachlan’s Line North Ryde 885 Site Works TBD 80 Waterloo Road Park One Macquarie Park 412 DA Applied TBD

Source: Cushman & Wakefield Research

Uptake of stock in North Sydney significantly increased in the 12 months to July 2017

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Leasing Market

As reported by the PCA, uptake of vacancy, which declined 60 basis stock in North Sydney significantly points over the year to 6.4%. increased in the 12 months to July The Chatswood office leasing market 2017. In fact, 50,927 sq m of prime remained mostly stable over the year, grade net absorption was recorded, with net absorption (-907 sq m) only vastly above the long term average marginally in negative territory year- of 1,810 sq m. on-year and overall vacancy up 30 North Sydney The majority of this was driven by basis points to 6.9%. the completion of North Sydney’s In Crows Nest/St Leonards, over 177 Pacific Highway (39,000 sq m). the 12 months to July 2017, 31,000 The Prime grade market benefited 50,927 sq m of negative net absorption sq m of prime from the strength of the nearby pushed the vacancy rate 410 basis grade net Sydney CBD office market, where a absorption combination of tight vacancy, tenant demand, stock withdrawal and a strong state economy fuelled rental Chatswood office growth. These factors combined to make leasing market North Sydney and the broader North Shore attractive alternatives for remained mostly expiring and prospective tenants. stable over the year, 6.4% In July 2016 the North Shore’s overall vacancy overall vacancy rate reached a with net absorption... rate in North 15 year low of 7.3% after a 2.5 Sydney year downward trend. However the only marginally in downward trend did not continue over the 2016-17 financial year, with a negative territory 60 basis point uptick to 7.9% driven by a 10,000 sq m net supply addition and 28,000 sq m of negative points higher to 12.6%. Residential net absorption. conversion of office stock catalysed Chatswood Despite the slight upturn in vacancy, this result, and has confronted the the continued withdrawal of market with somewhat of an identity overall vacancy underutilised secondary grade stock crisis as a broader trend of secondary has assisted the vacancy rate to grade stock erosion continues. 6.9% remain below the historical average. Complicating the outlook is the (up 30 recent rejuvenation of North Sydney In the year to July 2017, occupier basis points) which is a nearby competitor to demand was strongest in North Crows Nest/St Leonards. Sydney where (as anticipated), proximity to the Sydney CBD and its Macquarie Park witnessed a decline tight vacancy rate positively impacted in tenant demand over the year to overall net absorption and overall July 2017, and significant residential

Net Absorption Net Supply Market (sq m) Vacancy (sq m) North Sydney 32,883 6.4% (down 60bp) 30,014 Macquarie Park -20,823 8.5% (up 140pb) -9,674 Crows Nest -31,026 12.6% (up 410bp) -19,614 & St Leonards Chatswood -907 6.9% (up 30bp) 0

9 Major Leases

Date Address Suburb Company SQ M Oct 2017 100 Mount Street North Sydney NBN Co 20,364 Oct 2017 11 Help Street Chatswood AFEA 636 Oct 2017 60 Miller Street North Sydney Ardent Leisure 1,200 Oct 2017 60 Miller Street North Sydney Flight Centre 6,566 Oct 2017 1 Rivett Road North Ryde 3M 8,080 Sept 2017 124 Walker Street North Sydney Holocentric 600 Aug 2017 45-61 Waterloo Road Macquarie Park NSW 25,000 Government Aug 2017 799 Pacific Highway Chatswood Retriever 563 Communications Jun 2017 140 Arthur Street North Sydney NSW Business 4,086 Chamber May 2017 465 Victoria Avenue Chatswood Carnival 3,500 Australia Mar 2017 1 Denison Street North Sydney Channel 9 15,500 Feb 2017 80 Pacific Highway North Sydney Arthur J 2,026 Gallagher

Source: Cushman & Wakefield Research

conversion withdrawals at 101-107 In North Sydney, current Prime grade Waterloo Road and 16 Byfield Street net face rents are circa $690 per sq removed nearly 20,000 sq m of stock. m, with gross incentives circa 25%. Negative net supply and below- The Crows Nest/St Leonards precinct average net absorption resulted in is slightly more expensive at $550 per a reduction in occupied stock, and sq m compared to Chatswood’s $505 a 140 basis point increase in the per sq m. Both have average gross vacancy rate, which was recorded incentives of circa 23%. at 8.5%. This is still significantly below the In Macquarie Park, Prime grade net 11.2% recorded in mid-2014. face rents are circa $360 per sq m, with net incentives circa 25%. Rents Strong rental growth and low vacancy within Sydney’s CBD has led to flow on rental growth in North Sydney in particular, and rejuvenated it as a alternative CBD. Strong rental growth and low vacancy within Sydney’s CBD has led to flow on rental growth in North Sydney

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Investment Activity

The twelve months to September 2017 totalling $1.43 billion. Another $190 saw a significant increase in capital million of investment was recorded seeking metropolitan based assets, over 7 transactions in the less whether small or large in value, and prominent suburban markets. At with an increased risk profile. Evidence Cromer on the Northern Beaches emerged throughout 2017 of an Cushman & Wakefield negotiated EG’s increase in assets being listed for sale purchase of a 7.5ha site from Roche and in Macquarie Park, residents have Products Australia for $55m. Also banded together to sell their adjacent negotiated by Cushman & Wakefield 19 properties to developers. was the $32.5 million sale of 2-6 and transactions in 8 Rodborough Road and 357-373 Across the North Shore office markets, the North Shore and Warringah Road Frenchs Forrest strong demand from residential to Charter Hall, on behalf of Home Macquarie Park developers has played a role in the Consortium. office markets contraction of yield spreads between prime and secondary stock. We anticipate Sydney Metropolitan sales volumes to remain strong over While yields in North Sydney have the next 12 months. Yield tightening contracted over the year, they are still will continue, although the recently approximately 100 basis points softer announced Chinese capital controls than those of the Sydney CBD. may slow growth rates. Despite this, In the twelve months to September there is strong demand from domestic 2017 Cushman & Wakefield recorded and other foreign investors, all $190 19 transactions in the North Shore operating in a long-term low interest million recorded and Macquarie Park office markets, rate environment. over 7 transactions in suburban Notable sales markets Address Market Price Purchaser 15 Blue Street North Sydney $168m Aqualand 116 Miller Street and North Sydney $135m Maville Group 173 Pacific Highway 82 Waterloo Road Macquarie Park $120m Romeciti purchase of 123 Epping Road Macquarie Park $118m Shimao/B1 Roche Products 1-5 Railway Street Chatswood $115m Lotus/iProsperity Australia site for 1 Pacific Highway North Sydney $114.5m Private Investor $55 8 Khartoum Road Macquarie Park $95.3m Private Investor million 2 Elizabeth Plaza North Sydney $81m BlackRock 146 Arthur Street North Sydney $78m Aqualand Projects 72 Christie Street St Leonards $76m Proprium Capital 132 Arthur Street North Sydney $70m Shanghai Shenglong 100 South Creek Road Cromer $55m EG

Sales by submarket Locale Volume Count North Sydney $796.5m 10 Macquarie Park and North Ryde $333.3m 3 Crows Nest/St Leonards $98m 2 Chatswood $204.6m 4 OTHER $190.32m 7 TOTAL $1,622.72m 26

Source: Cushman & Wakefield Research 11 Tenant demand in the North Sydney Infrastructure Improvements office leasing market has significantly Major transport and health infrastructure Stage 2 of the Sydney Metro (Chatswood projects are in progress across the to Sydenham, $11.5b to $12.5b) comprises increased entire North Shore and Northern Beaches seven new stations including one at Crows in the past totalling $27 billion and are expected Nest and Victoria Cross in North Sydney. 12 months to drive economic activity in the Construction will involve new railway coming decade. tunnels from Chatswood, under the harbour to Sydenham, and is projected to On the rail front, the $8.3 billion Sydney be completed in 2024. Metro Northwest (North West Rail Link) is underway which will initially link the North Victoria Cross Metro Station will be West (Rouse Hill) to Chatswood. constructed adjacent to Winten’s 1 Denison Street, and less than a block from Dexus’ On completion in 2019 this will add eight 100 Mount Street. The public transport new stations: accessibility improvements are expected • Cudgegong Road to benefit the North Sydney office market • Rouse Hill over the coming decades. Improved • Kellyville public transport access to a large portion • Bella Vista of Sydney’s population is expected to • Norwest make North Sydney a more attractive • Showground option for prospective tenants, and this • Castle Hill may form the catalyst for additional • Cherrybrook office development within the precinct. To allow for the new generation metro On the roads, the NorthConnex project rail an upgrade of the train line between worth $3 billion moves forward and Epping and Chatswood is required, and involves twin 9km tunnels linking the M1 from late 2018 buses will replace trains Pacific Highway Motorway to the Hills M2 for around seven months on this section motorway. Opening is forecast for 2019. of the line. When completed the Sydney Elsewhere, the Northern Beaches is in the Metro Northwest will provide customers midst of significant change. The new $2 with new generation, fully automated billion Northern Beaches Hospital, with metro trains every four minutes in the 488 beds over nine levels and parking peak. On the North Shore line from for 1,400 vehicles, is well underway and Chatswood towards the city, there will will open in late 2018. A $500 million be a train every three minutes. road upgrade is taking place around the

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Summary

The year to December 2017 was characterised by Sydney’s strong CBD leasing market spilling over to the North Shore. A precinct rejuvenation is underway in North Sydney, led by the development of new office towers at 1 Denison Street and 100 Mount Street, both of which are well positioned to benefit from the addition of Victoria Cross Station and the Sydney Metro in 2024. Over the long term this transport infrastructure is expected to make the North Shore both more accessible and more attractive to prospective tenants. However despite this, the hospital, including a new four lane tunnel withdrawal of secondary grade under the Warringah Road / Wakehurst stock continued as residential Parkway junction. In August the Northern developers looked to take $3 Beaches Council published its final advantage of Sydney’s booming billion Hospital Precinct Structure Plan, outlining housing market. On one hand, rezoning to allow for over 5,000 homes the smaller hybrid markets of and a mixed-use town centre adjacent Chatswood and Crows Nest/ NorthConnex project to the hospital. The existing high school St Leonards now face somewhat is moving forward will be relocated next to the Warringah of an identity crisis with an Aquatic Centre. increased residential presence. In addition, the proposed Northern However on the other hand, Beaches Link tunnel will connect to the quality of office stock, the Warringah Freeway, crossing under particularly in North Sydney, Middle Harbour and connecting with is improving rapidly. $2 the Burnt Bridge Creek Deviation at On the investment front, the billion Balgowlah. The Wakehurst Parkway North Shore markets attracted will be upgraded to two lanes in both strong activity with numerous directions between Seaforth and Frenchs assets exchanging over the Northern Beaches Forest. So far preliminary planning and year. Yield spreads between Hospital with over concept design have been completed, Prime and Secondary grade 488 beds is well and a State Significant Infrastructure stock compressed over the underway Application has been lodged with year as residential developers the Department of Planning and made plays to acquire sites Environment. The next steps in the with development upside. We project timeline include detailed design anticipate Sydney Metropolitan completion, environmental assessment, sales volumes remaining strong 2,000 and gaining planning approval. over the next 12 months and for weekly links The NSW Government’s B-Line Rapid yield compression to continue, Bus Transit opened in November 2017, albeit at a slower rate. We expect adding over 2,000 weekly links between strong demand from domestic the CBD and Northern Beaches. and other foreign investors, all between the CBD Upon completion, six new commuter operating in a long-term low and Northern car parks providing around 900 spaces interest rate environment. Beaches with the will encourage commuters to park and NSW Government’s ride. All construction will be completed B-Line Rapid Bus by 2019. Transit

13 1 Denison Street , North Sydney

8 Khartoum Road, Macquarie Park

45-61 Waterloo Road, Macquarie Park

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8 Khartoum Road, Macquarie Park 100 Mount Street , North Sydney

45-61 Waterloo Road, Macquarie Park

15 CITIES INTO ACTION

WILL JACKSON Negotiator +61 450 525 305 [email protected]

MARK MARTIN Senior Director, Agency +61 412 699 662 [email protected]

Authors:

RHYS BYRNE Research Analyst +61 406 388 362 [email protected]

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Disclaimer: The information in this material is general in nature and has been created by Cushman & Wakefield for information purposes only. It is not intended to be a complete description of the markets or developments to which it refers. The material uses information obtained from a variety of sources which Cushman & Wakefield believe to be reliable however, it has not verified all or any information and does not represent, warrant or guarantee its accuracy, adequacy or completeness. Any forecasts or other forward looking statements contained in this material may involve significant elements of subjective judgment and assumptions as to future events which may or may not be correct and are beyond the control of Cushman & Wakefield. Cushman & Wakefield is not responsible for any loss suffered as a result of or in relation to the use of this material. To the extent permitted by law, Cushman & Wakefield excludes any liability, including any liability for negligence, for any loss, including indirect or consequential damages arising from or in relation to the use of this material. All expressions of opinion included in this material are subject to change. © 2017 Cushman & Wakefield. All rights reserved.