Blog - Commercial
TGC Connect | End of Financial Year Sydney Commercial Market Update
We’re two weeks into the new financial year. So, it’s a great time to take stock and look back at how the Sydney office market has performed over the last 12 months, as well as what we might expect in the year ahead.
The market has slowed down over the past year, but it’s still providing very solid rental returns. Average gross rental rates for Sydney CBD Premium and A-Grade spaces have increased by around 6-7%, now sitting at about $1,275 per square metre. That’s lower than the double-digit increases of the previous two years.
These figures provide a rental yield of between 4.5% and 5%, which is about the same as you could earn on comparable space 12 months ago. Investors can earn a similar yield (between 4.5% and 5.25%) on B-Grade office premises in the CBD, with gross face rents now around $1,000 per square metre.
While the city fringe leasing market is still performing well, it appears that leasing activity has dropped off, particularly in the second half of the year. Gross face rents in the range $650-$850 psmpa prevail on the inner-city fringe.
There has also been a slight increase in incentives (now sitting at around 15%) in both the A and B-Grade city fringe markets as landlords attempt to lure high-quality occupiers to their premises. Rental yields are around 5%.
Other metro markets
Gross face rents for A-Grade premises in North Sydney have risen over the past 12 months off the back of tightening vacancy rates. They’re now hovering at around $900 per square metre, yielding just over between 5-5.5%. Again, this is a similar return to what investors might have expected 12 months ago. B-grade rents in this market average at around $800 per square metre with a yield of between 5.5% and 6%.
Gross face rates for A-Grade space in Parramatta are now about $670 per square metre, while rents for B-Grade space are at $580. These figures attract average yields of 5.5% and 6% respectively.
Average yields are slightly higher in Macquarie Park at 5.75%, despite average gross rental rates for A-Grade premises being significantly lower, between $400-$450 per square metre. This market was affected over the past financial year by the temporary closure of the Epping to Chatswood railway line for track upgrades between September and the end of May.
The North Sydney and Parramatta markets have been the standout performers in terms of capital growth over the past financial year, with both achieving increases of just over 10% for A-Grade space.
Capital growth rates on A-Grade premises in the Sydney CBD have risen by about 4% over the same period, while the Macquarie Park market has been flat.
Vacancy rates in the Sydney market have continued to remain below both long-term national and long-term averages. Parramatta currently has the lowest vacancy rate across Sydney (3%), followed by the Sydney CBD (4.1%), Macquarie Park (5%), and North Sydney (7%).
Vacancy in Sydney’s City Fringe also remains tight. We expect that, with Sydney’s CBD stock supply heavily constrained, the city fringe and other metro office markets will need to absorb office demand in the foreseeable future.
What to expect in the year ahead
A generally weakening economy could have implications for the Sydney office market in the year ahead. Many analysts are tipping employment growth to slow, which could affect the demand for office space. Currently, business confidence is shaky so some businesses will remain cautious when it comes to securing long term leases and headcount growth.
However, conflicting reports say that the current lull in leasing activity will be short-lived and that June 2019 saw business conditions and confidence improve. Whatever the outcome, there will always be demand for high-quality premises in key locations.
The increasing demand for flexible co-working spaces is also likely to continue. Small strata owners should respond to this threat by offering tenants competitive rates and more flexible lease terms.
Rising rents around Sydney are compelling tenants to remain in place instead of relocating. We’re seeing more tenants optimising their existing space to accommodate business growth or subletting part of their space. This has flattened commercial leasing activity and is putting pressure on landlords to increase incentives. In fact, the latest figures show an increase of 35,100 sqm in sublease availability compared to nil activity over 2017 and 2018.
Our Year at TGC
Leasing activity has slowed in the last quarter, but that has not stopped our agents from closing some great deals!
Have a read of our Q2 2019 TGConnect for information about some of our key results. You can also check out our video below for some key highlights from the year.