APPD Market Report Article


February 28, 2023

Andrew Ballantyne, Head of Research, Australia


AUD 919


Positive demand driven by pre-commitments in Salesforce Tower

  • The Sydney CBD recorded positive net absorption of about 12,400 sqm over 4Q22. The positive result was driven by pre-commitments into recently completed office stock (Salesforce Tower, 180 George Street). Small tenant activity (<1,000 sqm) was a key contributor to this result as well. As a result of backfill vacancy becoming available, the vacancy rate rose 0.3 percentage points (ppts) to 14.0%.
  • Positive net absorption was recorded in 4 out of 10 of Sydney’s office markets. Sydney Fringe recorded the largest positive result (about 14,900 sqm), driven by small occupiers (<1,000 sqm) leasing space. North Sydney recorded the largest negative result (about -18,300 sqm) as small occupiers consolidated out of secondary grade stock, and a large tenant which centralised to the Sydney CBD.

Office supply increases from new office completions

  • Total stock in the Sydney CBD increased to 5.2 million sqm over the quarter due to the office completion of Salesforce Tower, 180 George Street (57,965 sqm) and Poly Centre, 210 George Street (18,331 sqm). There is currently about 212,100 sqm of stock under construction in Sydney CBD, with completion dates between 2022 and 2024.  
  • Two office completions were recorded across Sydney’s metro markets over 4Q22 at 1 Eden Park Drive, Macquarie Park (10,000 sqm) and Tower 2, 1 Lawson Square, Sydney Fringe (1,500 sqm). The metro markets recorded six withdrawals totalling 19,271 sqm. Majority of these withdrawals were concentrated in North Sydney (14,377 sqm). There is about 147,000 sqm under construction across metropolitan Sydney.

Prime rents lift as tenants compete for quality office space

  • The Sydney CBD recorded net effective rental growth of 0.6% over 4Q22, mainly driven by an uplift in face rents. Average prime incentives increased by a minor amount to 34.6%. Prime net face rents recorded growth of 1.5% over the quarter, as occupier demand remains strong in prime grade office space with desirable view corridors.
  • Prime yields softened across all Sydney office markets, with the Sydney CBD prime yield range expanding 13 bps on the upper end and 25 bps on the lower end to 4.38%-5.25%. 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.  

Outlook: Softer demand expected for poorer quality stock

  • A lull in development activity in the Sydney CBD is expected in 2023, with only about 19,800 sqm of stock projected to complete. This will be the lowest year of development activity since 2012. In the North Shore, the completion of new office stock over 2023 will support the positive levels of demand in the newer stock. The vacancy rate is forecast to remain elevated over the foreseeable future.
  • Yields are expected to soften further over the next 12 months. The spread between prime and secondary yields is likely to widen. Part of this divergence is due to tenants who will likely continue moving into quality stock, thus increasing the vacancy rate in older-style office accommodations.

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

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