More than one million sqm could be required to satisfy white collar employment growth
Sydney, June 14, 2018 – The Sydney CBD is facing a potential shortage of office supply at the end of the current development cycle, according to Colliers International forecasts.
“At a macro level, Australia has the highest forecast population growth of all major developed countries, with 8% growth expected over the next five years,” Adam Woodward, Colliers International National Director of Capital Markets, said. “The next best is Switzerland at 6%, whilst Hong Kong is below 4%, the United States is 3.14% and Germany is 0.11%. (See Graph 1, below).
“If white collar employment continues to grow at the forecast rates, we could realistically see longer term vacany rates fall back to historically low levels as the supply of new office space tapers off after the current pipline is delivered.
“New South Wales’ infrastructure boom has transformed the Sydney CBD into a vibrant and connected city. It’s now a vibrant and active city, almost unrecognisable from five years ago.
“The NSW Government has initiated more than 40 infrastructure projects, with major developments such as the Sydney Light Rail and Sydney Metro train project set to catapult Sydney to a world class status.”
Colliers International research has found more than one million square metres of office space could be required in the Sydney CBD to satisfy white collar employment growth over the next 25 years. (See Graph 2).
“Counter-balancing the delivery of new office buildings between now and 2025, several existing office buildings will be withdrawn from the market and not returned as office towers in the next cycle, particularly in the precinct around Hyde Park where there will be a significant amount of conversion to hotel and residential use,” Mr Woodward said.
Based upon this information, Colliers International forecasts the Sydney CBD vacancy rate may peak at only 6.7% in January 2025. (See Graph 3)
“There is limited new supply mooted for 2025 and beyond, and history has demonstrated that it can take 10-plus years to amalgamate significant land holdings, obtain the required planning consents and then tenant precommitment levels that feasibly allow a new development to commence,” Mr Woodward said. (See Graph 4).
“The developments at 200 George Street and 161 Castlereagh Street took over a decade to move from conception to delivery, and current projects such as Wynyard Place, Quay Quarter Tower and Circular Quay Tower are further examples of the long lead times to deliver new buildings.
“Our top tier institutional asset managers and developers are acutely aware of this longer term situation and are preparing now for the future.
“For example, Lendlease has amalgamated a ‘mega site’ on Spring and O’Connell Streets, adjoining 1 O’Connell Street. Many other developers and asset managers are seeking similar income-producing land banks to position themselves for the future.
“As a result of these conditions, and despite the fact the Sydney CBD has already reached record low yields and capital value peaks, purchasers are are still investing with a high conviction that the market will deliver strong returns moving forward.
“We have never witnessed such a deep and diverse pool of global investors competing with our domestic fund managers and pension funds. Sydney is genuine global gateway city, and is the number one investment destination for international fund giants, sovereign wealth and pension funds and private investors alike, who all see long term value in the Sydney CBD office sector.”
Cameron Williams, Colliers International National Director of Office Leasing, said Sydney’s infrastructure boom had the potential to create a new future hot spot in the CBD office market as supply tightened in traditional precincts.
“Currently, development is concentrated in the northern/core precinct but given the Sydney CBD commercial market is constrained along its eastern and western borders – and that vacancy is expected to remain low for the foreseeable future,” Mr Williams said. “The southern CBD corridor – south of Goulburn Street, to Central Station and beyond – is the likely next geographic location that can supply the CBD of Sydney with a significant amount of office space in the next 10 years.
“With infrastructure projects such as Sydney Metro and Sydney Light Rail currently underway, those locations will become more connected and much more acceptable from a productivity perspective, not to mention easy to access for commuting staff.
“We see the potential for Central Station to become the next Barangaroo, to potentially to supply hundreds of thousands of square metres of office space to the market in 10 years or so.
“The southern precinct of the Sydney CBD is likely to be the next office hot spot from 2025 and beyond, with the potential to deliver more affordable space and provide an alternative location for organisations perhaps considering decentralisation to western Sydney.”