Sydney CBD Office Outlook
Supply, Demand and Vacancy Outlook
There are approximately 544,910 square metres of supply forecast to be added to the Sydney CBD over 2020-2022 with 247,070 square metres pre-committed. New and refurbished supply in the Sydney CBD is forecast to result in 225,770 square metres of backfill space becoming available within the CBD.
Tenant demand is being impacted negatively by restrictions and sentiment driven by the COVID-19 health and economic crisis, which continues to unfold.
With tenant contractions, business closures and increased indecision from office occupants, tenant demand is expected to continue to soften and vacancy rise in the short term.
Outlook – Sydney CBD Fundamentals
New Developments Under Construction
- COVID-19 presents potential challenges to the supply pipeline due to the delay of building materials from international suppliers and the reduced number of workers on-site as per social distancing restrictions and future potential positive COVID-19 cases.
- There are ten new developments currently under construction, including new office space as part of mixed-use projects. These new developments are expected to add approximately 262,750 square metres of office space to the market within the next three years. Around 57% of this space has already been pre-committed, leaving 112,200 square metres of noncommitted new office space likely to reach the market over 2020-2022.
Full Refurbishments/Extensions Under Construction
- There are eleven developments involving the full refurbishment of existing buildings, currently under construction.
- Refurbished developments under construction are projected to add approximately 174,160 square metres of office space within the next three years. To date, 47% of this space has been pre-committed, leaving an additional 92,200 square metres of non-committed refurbished space to reach the market over 2020-2022.
Obtaining pre-commitments has become more difficult due to economic uncertainty and delaying of tenant decisions due to COVID-19. Weakening demand is forecast to result in a short term oversupply of office space and rising vacancy. With projects unlikely to commence without significant pre-commitments, the next cycle of development will be delayed.
- Only projects under construction or able to obtain a significant pre-commitment are likely to proceed in the short-term.
- Therefore only those projects currently under construction or about to commence are forecast to complete before the end of 2022.
Backfill Space Available for Occupancy
- The total amount of space currently occupied by tenants who have pre-committed to new developments which will complete over the next 2.5 years is approximately 198,380 square metres.
- New and refurbished vacant supply and backfill space over the next three years is approximately 402,780 square metres, with 79,640 square metres available in 2020, 187,610 square metres available in 2021 and 135,530 square metres in 2022.
- The largest single backfill availability will be at 33 Alfred Street with the entire building becoming available when AMP vacate to go into Quay Quarter – 50 Bridge Street. Refurbishment of this building will occur on their vacation.
- Another prominent backfill vacancy will be created by Deloitte in Grosvenor Place when they move into a reduced net lettable area at Quay Quarter.
Current leasing requirements, where tenants are considering the CBD, as a potential location, are approximately 307,490 square metres.
Demand – Leasing Requirements and Deals Signed
- According to our lease requirements data (to end of September, 2020), of the tenants considering a CBD location, there were 73 listings for tenants looking for less than 1,000 square metres of net lettable area (accounting for 26,870 square metres).
- The total area by tenant enquiry for spaces less than 3,000 square metres was 57,300 square metres, while the total area required for office space of greater than 10,000 square metres was 189,400 square metres.
- There has been a clear trend of tenants negotiating short term renewals with longer-term decisions delayed until greater certainty returns to the market.
- The Core precinct has witnessed the most leases signed or renewed since the commencement of COVID-19. This is likely to continue to be the case due to the types of firms located within the precinct.
- Our review of the tenant requirements data from September 2020 to December 2022 indicates that tenants will be downsizing by a total of 41,995 square metres.
- The impact of COVID-19 on lease deals completed since March 2020, while evident in the second quarter, has not been significant to date, due to an improvement in deals signed when restrictions eased in the third quarter.
- Lower overall demand is, however, expected to continue temporarily, with a trend towards short term lease renewals in existing space while tenants consider their post-COVID-19 space requirements.
Major Tenant Requirements
- There were a total of 114 active enquiries listed on Property Daily over 2019 and 2020 (up to the end of September). In terms of total area requirements, the Finance and Insurance (34.3%) and Federal Government (15.3%) sectors make up the greatest proportion of total enquiries.
- Many tenants are considering their future office accommodation needs. Those with upcoming leases expiring such the WPP (2021), Bauer Media Group (2021) and the Australian Taxation Office (2022) can take advantage of current leasing conditions and new buildings completing. These large firms are in the market for areas ranging from 4,000 sqm to 16,000 square metres and have stated that they are considering the CBD as a future location.
- Looking at all the publicly announced requirements from both small and large firms, the total space required by the end of the year 2022 is approximately 171,750 square metres.
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.
Sydney CBD Vacancy Forecast Scenarios
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.
Given the uncertain economic conditions as a result of COVID–19, m3property have carried out a scenario analysis of the impact of net absorption adjustments on the Sydney CBD office vacancy rate. We have developed three vacancy forecast scenarios for the market by considering potential variations in tenant demand and potential backfill space availability.
Base case forecasts – Net absorption forecasts are based on the current economic outlook, including the white-collar employment forecasts and current leasing market conditions. m3property is forecasting vacancy to peak at 10.7% by December 2021 and reaches a second peak of 12.7% in 2025
Scenario 1 – based on the long term annual average net absorption being reached over 2020-2022. Under this scenario, the vacancy rate could rise to a peak of 6.7% by December 2021 and reach a second peak of 9.4% in December 2025.
Scenario 2 – based on the previous historical downturn net absorption averages (early 90’s recession, Tech wreak and GFC). Under this scenario vacancy would continue to rise until the end of 2022 (reaching 13.6%) and will reach a second peak by the end of 2025 at 16.0%.
- Sydney CBD vacancy is forecast to reach a peak of 10.7% in 2021 due to weak demand and moderate supply. A second peak is likely in 2025 due to supply following the Metro station and Central Square Tech Hub completions.
- While the most likely path for vacancy over the next five years is around the base case forecast, there is scope for the rate to range down to “scenario one” or up to “scenario two”. If demand quickly resumes and confidence returns to the economy and Sydney office market, we would be likely to see forecast vacancy move towards “scenario one”. However, if the economic recession results in a financial crisis or a second wave of the COVID-19 virus forces further restrictions, the outlook is likely to head up towards “scenario two”.
- The forecasts for the Sydney CBD represent a fairly fast recovery from the COVID-19 lockdowns which severely impacted the market over the June quarter 2020. While we still expect the second half of 2020 to feel the impact of stasis due to tenant indecision and some space reduction due to tenant losses we expect 2021 to see positive net absorption as the markets recover with restrictions easing.