Colliers International has identified the North Sydney office market as one of a number of major metropolitan Sydney markets that will benefit from a perfect storm of conditions that will continue to drive down vacancy rates.
The combination of an historically high infrastructure spend, a strong New South Wales economy, significant stock withdrawal for residential conversion and compulsory acquisition for infrastructure projects are helping to hand some control back to landlords.
In recent years, the demand for residential developments has led to withdrawal of underperforming assets for conversion. The forthcoming Sydney Metro rail network project will amplify these effects as it triggers a new flurry of activity, with secondary assets being withdrawn for proposed new stations. Over 33 buildings in metro markets will be compulsory acquired for the Metro Rail project.
“North Sydney is on the forefront of this transition, with significant investment activity underscored by the implicit uplift in infrastructure and leasing conditions,” said Dan Walker, Director in Charge of North Sydney for Colliers International. “In the last year, over 48,000sqm was withdrawn from the market. Much of this was for the residential conversion, with over 1,700 units and 57,000 square meters of residential floorspace in the current pipeline.”
According to The Modern Australian Metro Market: contemporary ingredients for success, the latest Metro Office research from Colliers International, an additional five buildings amounting to 19,223sqm will be withdrawn for the proposed Victoria Cross Metro line station.
This will impose further pressure on a historically tight secondary market, with the secondary grade vacancy currently at its lowest level since the peak of the economic downturn. The B Grade market in particular is expected to experience the greatest tightening as displaced tenants scramble to secure deals. This demand is exemplified by the fall in incentives given to smaller sized leases, with incentives dropping from 30% to 25-27%.
“The North Sydney secondary market now has the tailwinds for effective rental growth,” said Louise Rowe, Director of Office Leasing at Colliers International. “The amount of space leased in the second half of 2015 was 74% higher than the first half of the year and 28% higher the corresponding period in 2014.”
Investment activity continues to grow, with over $301 million of sales occurring during the second half of 2015. Although this 26% below the corresponding period in the previous year, the average transaction value was at a 23% premium. North Sydney remains a beneficiary of foreign interest, with 70% of this sales volume originating from China.
“While investment volumes were below those in 2014, they were above the high levels witnessed in 2007,” said Mr Walker. “The significant infrastructure development makes these metro markets more appealing for the longer term investor. Public transportation fears, that once concerned those investing in metro markets, are finally being addressed. Access to a larger working population will be achieved directly through the increasing residential development in these precincts, and indirectly through the shorter travel times thanks to the new infrastructure projects. Given the comparatively higher yields on offer combined with a lower price point, metro assets will continue to lure investors.”