Is the Sydney CBD office market immune from a looming downturn?

July 15, 2013 / By

Demand across Australia’s CBD office markets (excluding the counter-cyclical Canberra office market) declined further through the first half of 2013 to the lowest levels recorded in 10 years. After recording negative 106,800 sqm of absorption in Q1/2013, a further 49,300 sqm of negative absorption was recorded in Q2/2013, taking half yearly totals to -156,100 sqm. The market downturn has been set-off by economic forecasts downgrading China’s GDP outlook and a national economy so far unresponsive to the Reserve Bank’s cash rate stimulus. However, the Sydney CBD only recorded a comparatively low -4,200 sqm of absorption in Q2/2013 and there are indicators that Sydney may navigate the remainder of 2013 a little better than other Australian CBD office markets.

A sensitive indicator of the health of the office market is sub-lease vacancy. Companies shed space quickly at the onset of economic instability, so sub-lease statistics provide an immediate barometer reading of future business confidence. Sub-lease vacancy has been on the rise across Australia nationally over the last 18 months, led by the resource states, Queensland and Western Australia, which have felt the brunt of China’s diminishing appetite for our commodities. In the Brisbane CBD, Jones Lang LaSalle recorded a total of 63 individual tenant downsizing moves over the last 18 months in which a tenant shed more than 1,000 sqm. In Perth, there were 33. Sydney CBD wasn’t immune either: Jones Lang LaSalle recorded 43 individual tenant downsizing moves over the same period. But, adjusting for market size, with Brisbane CBD’s total stock equating to just 44% of the Sydney CBD, and Perth CBD even less at 33%, the Sydney CBD seems to have fared relatively well.

Where most Australian CBD office markets take their cues from localised factors like the resources sector and the domestic banking sector, Sydney’s fortunes hinge more on global market performance and US GDP (as noted in 2012 Jones Lang LaSalle research paper Sydney CBD: Assessing the Downside Risk. [Ballantyne]). As Australia’s financial centre, Sydney is the Australian base to the majority of multi-national finance and insurance companies. For this reason the impact of the Global Financial Crisis (GFC) was immediately felt in the Sydney CBD. Throughout 2008/09, Jones Lang LaSalle recorded a total of 77 individual tenant downsizing moves (> 1,000 sqm). But it’s also for this reason that the market could be immunised against this most recent slowdown.

Sublease vacancy growth in the Sydney CBD has slowed, and at 1.7% is now the second lowest in Australia. Reporting from the June 2013 NAB Monthly Business Survey support this, with conditions in the finance and property sectors solidly improved. Having already been through a wave of blood-letting within the financial sector during the early parts of the Global Financial Crisis, Sydney may be buoyed by two major economies, the United States and Japan, which are recovering slowly but steadily. And while not completely immune from the current market downturn, Sydney’s ties to wider global financial markets could prove a shield against a resource-led downturn in the short-term.


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