Over the last few months I have been watching the Chicago Board Options Exchange SPX Volatility Index (VIX) rise and have been waiting for the impacts to emerge in the Sydney office market indicators. The index has been elevated for over three months reflecting the heightened financial market volatility since August this year. As would be expected, the S&P/ASX 200 VIX looks very similar.

Figure 1 shows demand for Sydney CBD office space has had a reasonable (inverse) relationship with the VIX, particularly over the last 10 years. As I have noted in previous blogs, the Sydney market is quite heavily reliant on the finance and insurance sector as a major driver of demand. So far, the data on Sydney remains surprisingly firm but business sentiment has been subdued. In Q3 2011, Sydney CBD net absorption was reasonably strong and roughly in line with previous quarters. There was a small uptick in sublease vacancy (the most sensitive measure of tenant demand) but the increase was very marginal and remains under 1% in all Australian CBD markets.

Figure 1 Sydney CBD quarterly net absorption and S&P 500 VIX
Source: CBOE, Jones Lang LaSalle

The level of the VIX suggests some weakness in demand for Sydney CBD office space over the short term, however there has been very limited evidence of tenants contracting. Instead, what we have observed so far is some tenants delaying their decisions to commit to new office space. Other forward looking indicators are also pointing to some softening in demand over the short term. While we are not forecasting any contraction over the next six to twelve months we do expect demand to slow, and depending on how long this volatility persists, risks to demand forecasts for Sydney CBD are certainly to the downside.

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