Small tenants continue to support demand

• The Sydney CBD recorded negative net absorption of 7,900 sqm over Q4 2023. The negative result was mainly driven by NSW Department of Corrections (9,112 sqm) relocating into existing space across Sydney. Small tenant leasing activity (<1,000 sqm) continued to support overall demand levels, although this was outweighed by larger tenant consolidations over the quarter.
• Negative net absorption was recorded in 7 out of 10 of Sydney’s office markets. The largest positive result was in the Sydney Fringe (7,900 sqm), driven by Afterpay which will relocate into pre-committed space (4,488 sqm) in The Brewery Yard, 5 Central Park Avenue. North Sydney recorded the largest negative result (-28,200 sqm), driven by consolidation activity from financial services sector.

Supply projected to increase in 2024

• We recorded no completions and three withdrawals (totalling 15,100 sqm) in the Sydney CBD. There is currently 212,100 sqm of stock under construction in the Sydney CBD with completion dates spanning 2024 and 2025. The largest project under construction is 1 Elizabeth Street (65,000 sqm) which is one of the towers being built above the Martin Place Metro station.
• We recorded two office completions across the Sydney metropolitan markets over Q4 2023 which were M_Park Building A, 11 Khartoum Road, Macquarie Park (16,920 sqm) and The Brewery Yard, 5 Central Park Avenue, Sydney Fringe (5,769 sqm). There is 203,500 sqm under construction across Sydney’s nine metropolitan office markets.

Rents continue to grow for prime grade stock

• The Sydney CBD recorded prime net effective rental growth of 0.5% over Q4 2023, mainly driven by an uplift in face rents. Average prime incentives increased by a minor amount to 35.0%. Prime net face rents recorded growth of 1.5% over the quarter as occupier demand remained solid for prime grade stock in certain parts of the market, such as around Circular Quay.
• Prime yields softened across all Sydney office markets, with the Sydney CBD prime yield range expanding 25 bps on the upper and lower end to 5.00%-6.38%. The softening is a reflection of sentiment in the market, in light of an elevated cost of debt environment as well as global economic uncertainty which is impacting pricing levels.

Outlook: New office completions to push vacancy rates upwards

• There will be a substantial amount of development activity in the Sydney CBD over 2024 with 180,400 sqm of stock projected to complete. This will be the second highest annual completion figure over the past 20 years. However, this stock has received healthy levels of pre-commitments (~65%). The largest development is 1 Elizabeth Street (65,000 sqm) which is projected to complete in the first half of 2024.
• The flight-to-quality theme will likely widen the vacancy spread between newer and older stock as tenants continue moving into quality space, leading to a higher vacancy rate in older-style office accommodation. A number of large office sales are expected to transact over the first half of 2024, which will provide further insights into asset pricing in the current macroeconomic environment.