New developments threatens to create oversupply in Sydney CBD office market: Ross Horsley

With the recent news that the largest of the three office towers planned for Barangaroo – T1 – will be going ahead, researchers and analysts will be forecasting its likely effect on the vacancy rate.

Many, myself included, had quietly believed that T1 would in fact give way to a second residential tower.  Why? Because I had assumed that market forces would win the day, but it seems we were wrong.

The cyclical headwinds facing the office market have been blowing for a while.  The resources boom is fading and the global growth outlook outside of Asia is weak, even after printing trillions of dollars.  As a result, businesses have been reducing overheads and expensive office space. Of course, natural employment growth will create demand, but we are already a service based economy and the past 10 years have seen the CBD office workforce grow by only 0.8% per annum. 

On the other hand, the structural headwinds, are gaining momentum.  They include activity based workplaces, which are more about cutting costs than cutting edge working environments; so will likely gain in popularity.  Then there is teleworking and hot desking; if people working from home one day per week means companies can rent 20% less space, we can expect to see more of it.  Worst of all for landlords, as they require zero CBD office space, are automation and off-shoring.  Why pay someone in Australia to do something that can be done by a computer or by someone in Bangalore or Manila?

So, in this challenging environment the last thing the office market needs is even more supply.  Already, major projects to be completed in the next three years include:  8 Chifley Square (19,000 square metres), 5 Martin Place (30,000 square metres), 20 Martin Place (18,000 square metres), 48 Martin Place (20,000 square metres), Central park (26,000 square metres), 200 George Street (38,000 square metres) and T2 & T3 (165,000 square metres); not to mention several others around 10,000 square metres.

Of course, many of these buildings are, and will be, significantly pre-committed, but it’s not the new space that is of most concern.  The bigger problem is the backfill space that the likes of Macquarie, Ernst & Young and Westpac are leaving behind.  Literally a bigger problem because the areas these tenants are vacating are larger than the areas they are moving into.  

If the existing market was tight, the new supply would be less of an issue, but the vacancy rate for premium and A-grade space in the City Core precinct, the largest and most prestigious in Australia, is currently 14.3%.  With lease incentives already at 30%+ or more, you have to wonder at what price it will get filled and whether it makes economic sense to build another 100,000 sqaure metres of what is already underway.

Of course, the older stock will eventually be recycled into residential uses, but wouldn’t it just make more sense to meet the demand where it exists now, or just hold off for another few years?  If not, our revised forecast suggests the vacancy rate could reach 15% in 2017.


Ross Horsley is research manager with LandMark White.

 

 

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