Market Pulse

Sydney CBD Office Market

Cadigal Research
November 2022
Market Pulse Sydney CBD Office Market

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Market Pulse November 2022

Contents

04. Key Data at a Glance

05. In Summary

07. Supply

08. Tenant Demand

12. Tenant Enquiry

14. Vacancy

15. Sublease Availability

16. Rents

17. Outlook

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Market Pulse Sydney CBD Office Market

Key Data
at a Glance
Change last Expected change
12 months next 12 months

SUPPLY

Total Stock*
(sqm, as at Jul-22)
5,233,868 ↑ ←→

Completions*
(sqm, 6 months to Jul-22)
103,274 ←→ ↓

Net Supply*
(sqm, 6 months to Jul-22)
71,242 ←→ ↓

DEMAND

Net Absorption*
(sqm, 6 months to Jul-22)
21,692 ↓ ←→

Tenant Enquiry 298,383

(sqm, as at Sep-22) ←→ ←→

VACANCY

Vacancy Rate* 10.1

(%, as at Jul-22) ↑ ←→

Sublease Availability 101,756

(sqm, as at Sep-22) ↑ ←→

RENTS

Net (Gross) Face Rents

($/sqm average, as at Sep-22)

Premium 1,346N (1,571G) ↑ ↑

A Grade 1,068N (1,255G) ↑ ↑
B Grade 856N (1,036G) ↑ ←→
Incentives
(typical % range for whole-floor 31 - 36 ↑ ←→
tenant, as at Sep-22)

*Source: Property Council of Australia (PCA Jul-22)

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In Summary
There is 277,688sqm (5% of total stock) in major office
projects under construction, with very little (7%) due to
be delivered in 2023 and the bulk (67%) due in 2024.
Net absorption continues to be weak, overall, with the
long-term annual average not having been exceeded
since 2015. However, the market has managed to
record three consecutive 6-month periods of positive
net absorption.
The completion of Quay Quarter Tower led to both
Premium grade, and the Core precinct, outperforming
in terms of net absorption in the first half of 2022.
Tenant enquiry has generally been subdued for an
extended period (since mid-2018) but has shown an
upward trend in the last 12-18 months. Total active
enquiry of 298,383sqm as at Q3 2022 was down 5%
on the previous quarter and 9% below the long-term
average.
After remaining steady over H2 2021, the overall
vacancy rate increased again in H1 2022, to 10.1%. The
current vacancy rate is the highest since July 2005.
Available sub-lease space totalled 101,756sqm as at Q3
2022 and has hovered around 100,000sqm for the last 6
quarters.
Average face rents across the Sydney CBD have returned
to growth, in the order of 3-4% over the last 12 months,
led by Premium grade.
In the year to Sep-22, overall Premium incentives
remained static, B grade incentives edged up marginally
and a slightly higher rise was seen in A grade.
In Premium space, static incentives have led to effective
rents growing at similar rates to face rents whilst the
marginal increase in B grade incentives has tempered
growth in A grade effective rents to around 3% pa.
For B grade, weaker growth in face rents and further
softening of incentives resulted in 12-month growth in
effective rents in the order of 2%.
Projects that have commenced construction this year include Atlassian Central (above) and 33 Alfred Street (below).
Market Pulse November 2022

Supply
The total supply of office space in the Sydney CBD continues
to grow.
After dipping below 5mil sqm over 2020, total stock has increased 5.7% to 5.23mil sqm, the highest level on
record. There have been two major projects completed in 2022, Quay Quarter Tower (87,697sqm office
NLA) and Salesforce Tower (60,283sqm), both Premium towers in the Core preconct.
Another project, Poly Centre (16,565sqm, A grade), is due to complete by the end of the year. This building
is part of the 277,688sqm of major office space currently under construction across the CBD, the bulk of
which (67%) is due for completion in 2024. Several projects have commenced this year, including a full
refurbishment of 33 Alfred Street at Circular Quay (31,759sqm, due Q2 2024) and, at the southern end of
the market, Atlassian Central (56,000sqm, due in 2027).
A number of other projects, at various stages of development approval, have been proposed for the CBD
including 55 Pitt Street (62,135sqm office NLA, developed by Mirvac), Chifley South (c.49,000sqm, Charter
Hall), Lighthouse (c.63,000sqm, GPT/AWOF) and Central Place (c.130,000sqm, Dexus/Frasers). These
developments are unlikely to proceed without a material tenant pre-commitment.

Major Office Developments Under Construction

Project Owner / Type Office Precinct Expected Comment

Developer NLA Completion

Quay Quarter AWOF / Dexus / New 87,697 Core Completed 95% committed to AMP, Deloitte, Corrs,
Tower, REST Q2 2022 IMC, JWS and others
50 Bridge St

Salesforce Tower, Ping An / New 60,283 Core Completed 74% committed to Salesforce, TikTok,
180 George St Mitsubishi Estate / Q3 2022 Greenhouse, JLL, Tourism Australia, The
Lendlease Executive Centre and others

Poly Centre, Poly Group New 16,565 Core Q4 2022 23% committed to Transurban and
210-220 George St Boardroom.

York & Co. Milligan Group New 7,772 Midtown Q3 2023 Mixed-use redevelopment of 1886-built
32-36 York St warehouse comprising 12 floors of office

121 Castlereagh St Scentre/Cbus New 11,503 Core Q4 2023 Office component of mixed-use devel-
opment on site of former David Jones
store.

Martin Place Metro Macquarie Group New 62,871 Core Q1 2024 37-storey over-station development,
1 Elizabeth St 80% committed by owner/developer
Macquarie

Martin Place Metro Investa / Manulife New 29,886 Core Q2 2024 29-storey tower over-station develop-
39 Martin Pl ment.

33 Alfred Street AWOF/Dexus Full Refurb 31,759 Core Q2 2024 Full refurbishment of Sydney’s first
skyscraper.

333 Kent Street Addenbrooke Full Refurb 13,832 Western Q3 2024 Full refurbishment of existing 9-storey
/ New building plus addition of 7 new floors.

Parkline Place Oxford / Mitsubi- New 47,500 Midtown Q1 2024 36-level over-station development
252 Pitt St shi Estate above the new Pitt St Metro Station.

Atlassian Central Dexus/Atlassian New c.56,000 Southern 2027 40-level tower with youth hostel at the
8-10 Lee St base. Office space is 100% committed
to Atlassian.

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Market Pulse Sydney CBD Office Market

Tenant Demand
­Net Absorption
Although tenant demand, in terms of net absorption, continues to be weak overall, the market has
managed to record three consecutive 6-month periods of positive net absorption to Jul-22.
Cumulative net absorption since 2016 (6.5 years) is -42,625sqm and the long-term annual average
has not been exceeded since 2015. Encouragingly, the net absorption tallied in the 6 months to Jul-
22 (21,692sqm) is equal to the long-term 6-month average.

Annual Net Absorption - Sydney CBD 1990-2022

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Market Pulse March 2019

By grade, Premium
continues to outperform in
terms of net absorption.
Driven by the completion of Quay Quarter Tower,
Premium dominated net absorption over the
first half of the year, with both A and B grades
recording negative half-year totals.
Across the precincts, the Core (14,964sqm) has
seen the most net absorption in 2022, again as
a result of Quay Quarter Tower coming on-line.
However, the Walsh Bay/The Rocks precinct
(9,023sqm) also made a significant contribution,
on the back of AIM’s relocation to 66 Harrington
Street. The performance of Walsh Bay/The Rocks
(0.37 mil sqm total NLA) is notable as the Core
(2.07mil sqm) contains almost 6 times more office
space.

Net Absorption by Building Grade

Buiding Grade 6 Months 12 Months

to Jul-22 to Jul-22

Premium 32,856 40,926

A Grade -5,920 5,022

B Grade -13,667 -8,758

C Grade 6,528 -9,184

D Grade 1,895 1,498

Sydney CBD 21,692 29,504

Net Absorption by CBD Precinct

Precinct 6 Months 12 Months

to Jul-22 to Jul-22

City Core 14,964 23,953

Midtown -1,829 16,322

Western Corridor 4,158 -7,543

Walsh Bay / The Rocks 9,023 9,342

Southern -4,624 -12,570

Sydney CBD 21,692 29,504

Source: PCA Jul-22

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 Market Pulse Sydney CBD Office Market

Tenant Demand

Substantial leasing activity was recorded in Q3 2022 at (clockwise from top) Quay Quarter Tower, Liberty Place and 420 George St

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Market Pulse November 2022
Market Pulse November 2022

The recently completed Quay Quarter Tower continues to provide major leasing activity.
However, the latest transaction in the building was a sublease, with local investment bank
Barrenjoey leasing 5,830sqm over three floors from AMP.
Of the 10 recent major lease transactions listed below, four tenants – namely law firm
Bartier Perry, Catholic Schools NSW, insurer HDI Global and software company
Smartsheet - upgraded, in terms of PCA building quality, whilst none downgraded their
premises. Smartsheet’s relocation was driven by the compulsory acquisition of its former
premises, 9 Hunter Street, for the Sydney Metro West project.
Just one tenant in the sample, alcoholic beverage company Diageo, moved from outside the
CBD (McMahons Point on the North Shore) with the other nine being existing CBD tenants.
Within the Sydney CBD, the Core precinct has seen alot of leasing activity with four tenants
moving into the precinct and another three moving within the Core.
There were examples of both growth and contraction across the major moves with
Barrenjoey, McGrathNicol, HDI Global and Smartsheet all leasing more space whilst
Colgate-Palmolive and RPS took less than previously.

Recent Major Lease Transactions

Tenant Address Precinct Level Area (sqm) LCD Type

Barrenjoey Quay Quarter Tower Core 17-19 5,830 TBA Sublease

Bartier Perry #
161 Castleregh Street Midtown 24-25 2,910 Aug-23 New

Diageo 99 Macquarie Street Core 6-7 2,372 Nov-22 New

McGrathNicol 44 Martin Place Core 9-12 2,285 Jul-23 New

AEMO# 20 Bond Street Core 18-19 1,935 Sep-23 Sublease/New

Catholic Schools NSW# Angel Place Core 7 1,934 Aug-23 New

Colgate-Palmolive 420 George Street Midtown 28, pt.29 1,720 Mar-23 New

HDI Global 20 Martin Place Core 19-20 1,620 May-22 New

RPS 420 George Street Midtown 13 1,540 Apr-22 New

Smartsheet 60 Margaret Street Core 33 1,495 Aug-22 New

#
Cadigal was involved with these transactions.

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 Market Pulse Sydney CBD Office Market

Tenant
Enquiry
Tenant enquiry has generally been subdued for an extended
period of time (since mid-2018), but in the last 12-18 months it
has shown an upward trend, albeit with some volatility.
A total of 298,383sqm of enquiry was recorded as at Q3 2022,
down 5% on the previous quarter and 9% below the long-term
average.
The 298,383sqm of enquiry is made up of 154 separate
requirements translating to an average enquiry size of
1,938sqm. This reflects the lack of larger tenants in the market
with 16% (24) of the 154 active enquiries in the 3,000sqm+
size range. The average enquiry size has declined, from above
4,000sqm in 2011, to below 2,000sqm in 2022.
Examples of larger enquiries that have recently come to market
include law firm HWL Ebsworth (seeking 8,000-10,000sqm),
international banking group BNP Paribas (5,000-6,000sqm),
Akuna Capital (3,500-5,000sqm) and outdoor advertiser
JCDecaux (2,000sqm).
Enquiry continues to be led by Finance & Insurance (21.4% of
total enquiry), Public Administration & Safety (17.6%) and
Legal Services (10.4%), together making up half (49.3%) of the
298,383sqm total. Info Media & Telecomms (9.1%), whilst
the next largest source of enquiry, has fallen in significance,
especially compared to 2015-2016 where it regularly comprised
about 30% of total enquiry.

Current Tenant Enquiry by Size

(enquiries over 500sqm)
Enquiry Size Area (sqm) Number

3,000sqm+ 150,000 24

1,000-2,999sqm 101,995 63

HWL Ebsworth, BNP Paribas, Akuna Capital and 500-999sqm 46,388 67

JCDecaux have all recently come to market to consider
options in the Sydney CBD. Total 298,383 154
Data as at Sep-22 Source: Cadigal

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 Market Pulse November 2022

Known Tenant Enquiry (over 500sqm)

Property & Other

Real Estate Services
Services
9.0%
Finance & Insurance 5.1%

Services
21.4%
Manufacturing
4.2%

Current Legal Services

Tenant Enquiry 10.4%
Architectural,
Engineering &
by Industry Sector
Technical
Services
(ENQUIRIES OVER 500SQM)
5.9%
Accounting
Total =
Services 298,383sqm
3.4%
Source: Cadigal Public Administration &
Safety
17.6%

Info Media,
Telecomms & Education
& Training
Related Services
9.1% 2.9% Transport,
Undisclosed
8.8% Postal &
Warehousing
2.3%

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 Market Pulse Sydney CBD Office Market

Vacancy
After remaining steady over H2 2021, the overall vacancy rate in
the Sydney CBD increased again in H1 2022, to 10.1%.
The current vacancy rate is the highest since July 2005 and 140 basis points above the long-term (32-year) average.
The latest rise was impacted by the inclusion of a partially-filled Quay Quarter Tower.

The combined precinct of Walsh Bay / The Rocks continues to have the lowest vacancy rate across the market,
contracting further from 6.9% to 4.5%. However, this was more than offset by increasing vacancy in the Core (from
8.5% to 10.5%) and Southern precincts (11.6% to 14.4%) whilst Western (8.7%) and Midtown (11.3%) remained
static.
Across building grades, Premium (8.6%, up from 4.9%) no longer has the lowest vacancy rate and, together with A
grade (11.6%, from 10.8%), led the overall vacancy rate higher with B, C and D grade vacancy rates all falling over
the first half of the year.

Total Vacancy Rate (Jan 1990 - Jul 2022)

Building Grade As at As at Precinct As at As at

Jul-22 Jan-22 Jul-22 Jan-22

Premium 8.6% 4.9% City Core 10.5% 8.5%

A Grade 11.6% 10.8% Midtown 11.3% 11.2%

B Grade 10.6% 11.3% Western Corridor 8.7% 8.8%

C Grade 8.6% 10.1% ThreeWalsh

industry
Baysectors – Public4.5%
/ The Rocks Administration
6.9%(25.8%), Finance & Insurance
(18.9%) and Information Media & Telecommunications (10.9%) - are currently
D Grade 7.2% 8.6% Southern
providing 14.4% accounting
the bulk of tenant enquiry, 11.6%for at least 56% of the total.

Sydney CBD 10.1% 9.3% Sydney CBD 10.1% 9.3%

Source: PCA Jul-22

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Market Pulse November 2022

Sublease
Availability
Available sub-lease space in the Sydney CBD totalled 101,756sqm as at Q3 2022, up marginally (2.7%) on the
previous quarter.

After peaking above 160,000sqm in Dec-20, available sub-lease

space has now hovered around 100,000sqm for 6 quarters.
Significant tranches of sub-lease space are currently available at Tower 2 (22,861sqm from Westpac) and Tower
3 (11,319sqm from Lendlease) at International Towers, as well as at 8 Chifley Square (8,074sqm from Corrs via
Dexus) and the recently-completed Quay Quarter Tower (6,940sqm from AMP).

Sublease Availability

Source: Cadigal

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Market Pulse Sydney CBD Office Market

Rents
Face rents have returned to growth across the In Premium space, static incentives have led to
Sydney CBD, in the order of 3-4% over the last 12 effective rents growing at similar rates to face rents
months. Growth has been towards the upper end of whilst the marginal increase in B grade incentives
the range for Premium stock, a little less for B grade has tempered growth in B grade effective rents,
and slightly less again for A grade space. shaving about 0.5% off the face growth rates.
Average incentives for whole floors currently range For A grade, weaker growth in face rents and further
between 31-36% (on gross). In the year to Sep-22, softening of incentives resulted in 12-month effective
overall Premium incentives remained static, B grade rental growth of only about 2%, or 1.0-1.5% less
incentives edged up marginally whilst the increase in growth than A grade face rents.
A grade was slightly more.
PREMIUM A GRADE B GRADE

Average Average Average

12 month 6 month 12 month 6 month 12 month 6 month
Rent Rate Rate Rate
change change change change change change
(psqm) (psqm) (psqm)

Net Face $1,346 4.3% 3.2% $1,068 3.5% 2.8% $856 3.8% 1.6%

Gross Face $1,571 3.9% 2.9% $1,255 3.1% 2.5% $1,036 3.6% 1.3%

Net Effective $791 5.5% 3.8% $621 2.1% 1.6% $500 3.2% 1.0%

Gross Effective $1,016 4.7% 3.1% $809 1.9% 1.3% $681 3.0% 0.8%

Data as at Sep-22

Net Effective Rent

Source: Cadigal

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Market Pulse November 2022

Outlook

There is currently 277,688sqm of major office space Vacancy rates rose again over H1 2022, after
under construction, equivalent to 5.3% of total stock, remaining static in H2 2021. Vacancy rates are
with very little (7%) due in 2023 and the bulk (67%) expected to be contained over the near term, ahead of
expected to arrive in 2024. the next significant tranche of new supply arriving in
2024.
The supply outlook for 2027 and beyond is buoyant,
but dependant on approvals and pre-commitment, Whilst face rents have returned to growth, they will
with a number of proposed projects including 55 Pitt, remain subdued in the near term. Growth will be
Chifley South, Lighthouse and Central Place. higher for higher quality space, in line with the flight-
to-quality theme.
The mild recovery in tenant demand from two years of
negative net absorption is not expected to be reversed Incentives are expected to remain static in the near
over the short term, supported by the modest upward term, before gradually reducing over the medium
trend witnessed in enquiry levels. term. These benign conditions are expected to result
in continued mild growth in effective rents.

Lok So
Research Director
+61 421 283 865
+61 2 8188 5561
lok.so@cadigal.com.au

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