Sydney CBD records steepest negative office demand in Q3

Net absorption in the area was -25,100sqm during the quarter.

The office market in Sydney’s CBD recorded net absorption of -25,100 sqm in Q3, driven by large occupiers consolidating within the finance and telecommunications sectors.

According to JLL, positive net absorption was recorded in three out of ten Sydney office markets. The largest positive result was recorded in North Sydney with 6,300 sqm of positive absorption, as small tenants (<1,000 sqm) drove demand.

Here’s more from JLL:

The Sydney CBD had the highest negative result (-25,100 sqm), followed by Parramatta (-14,700 sqm). The consolidation of Link Market Services (6,000 sqm) and negative small tenant leasing activity were the key contributors to this result. The vacancy rate for the Sydney CBD increased 0.1 percentage points to 14.5% over the quarter, and is now at the highest recorded rate since 1994.

CBD stock decreases with two withdrawals and no completions

Total stock in the Sydney CBD decreased by 19,800 sqm mainly due to 39-41 York Street (5,795 sqm) and 133 Liverpool Street (15,000 sqm) being withdrawn from the market. Both buildings will be converted to a hotel and a residence, respectively.

JLL recorded no office completions in the Sydney CBD over the quarter. There was one completion in Sydney metro markets, 88 Walker Street in North Sydney (13,602 sqm). There is currently 463,600 sqm of office space under construction across all of Sydney’s office markets. The largest of these is the Martin Place Over-Station Development at 1 Elizabeth Street (65,000 sqm).

Prime net effective rents decrease by 1.1%

Sydney CBD prime net effective rents decreased by 1.1%. The decline was driven by a minor uplift in prime incentives to an average of 34.9%. Prime yields decompressed by 13 basis points (bps) on the upper and lower end to range between 4.75%–6.13%. Average midpoint prime yields have now decompressed by 100 bps since their cyclical low in Q2 2022.

Sales volumes in Sydney totalled AUD 714.1 million in the quarter, with ten assets transacting. The largest sale was 1 Margaret Street which was sold by Dexus to Quintessential for AUD 296.0 million. Additionally, Barana Group divested 189 Kent Street (which has approved plans for a residential development) to Gurner Build to Sell Development Fund for an estimated AUD 200 million.

Outlook: New office completions to push vacancy rates upwards

A projected 254,700 sqm of office stock should be completed in 2024. While this new stock is expected to achieve healthy levels of pre-commitments, backfill vacancy in the market is expected to place upward pressure on vacancy rates.

Yields are projected to continue to soften over the coming quarters, although not at the sharp levels we have recorded over the past year. Office markets remain illiquid (although liquidity is improving) as the period of price discovery continues to play out.

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