Sydney bound to record its lowest office development activity since 2012

Only 19,791sqm of new office stock is expected to be completed in the CBD this year.

JLL expects a lull in office development activity in the Sydney CBD in 2023, with only 19,791 sqm of stock projected to complete. This year will record the lowest development activity in the market since 2012. 

In the Sydney metropolitan market, the vacancy rate is forecast to remain elevated over the foreseeable future, with tenants gravitating towards newer stock. 

Here’s more from JLL:

Yields are projected to soften further over the course of 2023. The spread between prime and secondary yields is likely to expand further as tenants continue moving into quality stock, which will likely increase the vacancy rate in secondary assets. There are a number of sales campaigns currently active for quality prime stock in the Sydney CBD, which will provide insight into asset pricing.

Positive net absorption driven by centralisation activity

The Sydney CBD recorded positive net absorption of about 3,900 sqm over 1Q23. The positive result was driven by centralisation activity from the North Shore and South Sydney markets, as well as small tenant demand (<1,000 sqm). Positive demand and the withdrawal of 26-30 Lee Street (12,587 sqm) resulted in the vacancy rate decreasing from 14.0% in 4Q22 to 13.7% in 1Q23. 

Positive net absorption was recorded in four out of ten of Sydney’s office markets. The largest positive result was recorded in the Sydney Fringe (5,413 sqm), driven by small tenant leasing activity (<1,000 sqm). Parramatta recorded the largest negative result (-21,317 sqm), driven by consolidation activity in the finance and public sector.

Office supply decreases due to withdrawal activity

Office stock in the Sydney CBD marginally decreased to 5.2 million sqm over the quarter. This was due to the withdrawal of 26-30 Lee Street (12,587 sqm). There is currently about 212,100 sqm of stock under construction in Sydney CBD, with projected completion dates between 2022 and 2024.

We recorded only two office completions across Sydney’s office markets over 1Q23 totalling 30,888 sqm. These developments were 558 Pacific Highway, St Leonards (16,738 sqm) and Blue & William, 2-4 Blue Street, North Sydney (14,150 sqm). The Sydney markets recorded three withdrawals totalling 22,537 sqm. These withdrawals were for demolition for redevelopment, demolition, and refurbishment. 

Prime rents lift as tenants compete for quality office space

The Sydney CBD recorded prime net effective rental growth of 2.2% over 1Q23, mainly driven by an uplift in face rents. Average prime incentives increased by a minor amount to 34.8%. Prime net face rents recorded growth of 3.3% over the quarter, driven by new additions to the basket as well as growth in higher-quality office stock.

Prime yields softened across all Sydney office markets, with the Sydney CBD prime yield range expanding 12 bps on the upper end and 50 bps on the lower end to 4.50%-5.75%. The softening is a reflection of sentiment in the market in light of a rising cost of debt environment, as well as global economic headwinds which are impacting pricing levels.  

Note: Sydney Office refers to Sydney's CBD office market (all grades).