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2017 SYDNEY COMMERCIAL PROPERTY MARKET FORECAST
2017 is set to be a very interesting year for commercial real estate in Sydney. Our sales and leasing agents at TGC tell us what to expect …
Demand for space and rental rates will continue to increase while incentives decrease.
Last year, NSW was the highest performing economy in Australia, and these positive results are expected to continue throughout 2017 and beyond. Businesses will continue to expand and demand for space in prime locations will increase, which will put even more pressure on Sydney’s tight vacancy rate and tilt the market further in favour of the landlord.
In fact, over the past year, Sydney’s office vacancy rate has fallen to an average of 5.6 per cent (with B-grade vacancy as low as 3.5 per cent). And these rates are predicted to drop even further over the next few years. Landlords will see this as an opportunity to increase rents and reduce tenant incentives.
“We’ve already seen incentives take a dive in the past six months – from approximately 25 per cent to around 15, and even lower for B-grade space,” says Adam Hennessy, Director of Office Services at TGC. “And this figure is likely to drop even further as space becomes more scarce.”
Sydney’s infrastructure upheaval and widespread residential development will continue to affect the non-residential markets.
Prime real estate in CBD and fringe areas like South Sydney remain hot property for investors. But, as we know, Sydney’s CBD and inner suburbs are undergoing the biggest infrastructure upheaval of the past 80 years.
The Sydney Metro development is well under way and has already displaced hundreds of tenants. In 2017, construction will continue to disrupt our lives and the market, by eating up a tremendous amount of space in and around the Sydney CBD. All in all, 19 buildings in the CBD and another 17 buildings in North Sydney and Crows Nest are scheduled for demolition this year.
This trend can also be seen in the city fringe areas where, more and more, industrial and commercial tenants are being displaced due to developments associated with WestConnex or residential redevelopment.
“The fringe leasing market is getting tighter and tighter, especially in the 400sqm+ range” says City Fringe Leasing Manager, Linda Knock.
“The traditional warehouses that people utilise as office spaces are disappearing. They’re being re-developed for residential purposes and a lot of these displaced businesses really have nowhere to go,” says Knock.
Tenants with upcoming lease expiry will be challenged with rising rents.
Prime and secondary market rent is set to increase considerably over the next 12 months, with prime real estate rent forecasted to increase by 18 per cent and secondary by 19 per cent. Landlords will be keen to capitalise on this strong rental growth and the increases will be felt most by tenants who are due for a lease renewal.
“It’s likely that existing tenants will not take the jump in their rent lightly. While some may accept and renegotiate their lease, others may choose to stay on hold-over or make the move to Sydney’s more affordable secondary market,” says CBD Leasing Director, Hamish Mackay.
“With limited availability, even for B and C grade-space, tenants looking to secure new premises will be presented with quite a challenge,” says Mackay.
To combat this, businesses may be forced to look at other locations in Sydney or into new working concepts such as shared offices, flexible work arrangements or using their existing spaces more efficiently.
Foreign investor interest in Australian market will remain strong.
In light of Brexit and the Trump presidency, Australia’s political stability is making the commercial real estate market more attractive to foreign investors.
“This upward trend is unlikely to change over the next year, especially while interest rates remain relatively low,” says Director of TGC’s Asian Division, William Shen.
“In addition to commercial strata and freehold purchases, we’re also seeing a growing interest from overseas investors, particularly from China, who are looking to buy 4-5 star hotels,” says Shen.
Though the Chinese will remain our biggest overseas investors in terms of new acquisitions, recent banking and foreign exchange controls introduced by the Chinese Government, which restrict lending and international cash transfers, may block some potential sales.
Investors interest will shift to the commercial market.
Despite investment already running at a high level, 2017 will see investor interest in commercial property strengthen even further. While residential prices are set to slow down, the commercial sector will continue to grow, particularly in the high demand CBD and fringe areas.
“We can expect prices for quality commercial property to increase, as interest continues to spike and rental returns become even more attractive for owners,” says Eric Lundberg, Director of Special Projects.
“Alongside this, there are major new opportunities for quality city fringe strata developments, microbusiness incubators, co-working environments and other forms of development that break established patters and meet the needs of cutting edge disruptive business models,” says Lundberg.
Small businesses will flourish but find it especially hard to find space.
Due to changing policies and a strong economy, small business (especially small migration, education, soliciting and accounting firms) will continue to flourish in 2017. However, these businesses will find it particularly tough, with demand for small office space far outweighing supply.
“Unless larger organisations are willing to subdivide their buildings, it will be difficult for small businesses to find space under 100 square meters,” says CBD leasing agent, Freddy Tran.
The Australian retail market will continue to be shaken by international sellers.
In the past 12-18 months, Australian retailers have really felt the effects of activity by international retailers (like Zara, H&M and Sephora) in the Australian market. And, in 2017, it’s likely that these retailers will roll out even more stores and that a new wave of international players (including Amazon who was originally planning to launch in the first quarter of the year) will enter the market. This will shake up the retail sector in more ways than one – profitability will take a hit and retail vacancy rates will decrease.
Over the next four years, Wynyard Station will also undergo a billion-dollar office and retail redevelopment with the ambition to transform this area into Sydney’s central hub. Sitting adjacent to the new light rail development, the new development is set to change the retail landscape as we know it.
“It’s certainly going to be an interesting couple of years for retail. HSBC, Mick Simmons and Ugg have all recently committed to leases along George Street with the idea that it will be as strong (or stronger) post the completion of council works,” says Sales & Leasing Director, Scot Robertson.
And the upgrade of Wynyard Station is only going to fuel this fire. To quote former Premier Mike Baird; “It’s going to be the new jewel of Sydney’s CBD.”
TGC has access to a variety of office spaces in Sydney and an experienced team of commercial property experts who are happy to answer any questions. Contact us or call on 1300 458 800.