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Strong enquiry and limited new supply will keep Sydney vacancies low

The report found that there are currently 30 serious enquiries for office space across Sydney's metropolitan markets, which totalled 80,000 sqm of office space.

Robert Gishen, National Director of Office Leasing, said despite an increase in the overall vacancy rate for Sydney's suburban office markets, from a low 7.8 percent in September 2008 to 9.4 percent as at March 2009, the fundamentals remain strong.

"The high levels of demand for Sydney's suburban office markets reflect the increasing focus for tenants to achieve greater operational efficiency," said Mr Gishen.

"In the current economic climate, tenants are becoming increasingly focused on cost and the bottom line. By moving into a newer building and taking up less space over larger floor plates, tenants will save on rent while achieving the benefits of improved building services and extra amenities."

The report found that the key drivers for tenants to relocate include:

  • Operational efficiency
  • Impact on profit and loss statements
  • Consolidation and growth
  • Accessibility
  • Amenities for staff.

Felice Spark, Director of Commercial Research at Colliers International, said Sydney's metropolitan markets faced a tough six months as the impact of the global economic crisis worsened.

"With the worsening of the global financial and economic crisis, Australia recorded its first quarter of negative growth in the December quarter of 2008," Ms Spark said.

"And in the first quarter of 2009, a slowdown in the economy was evident with negative growth of employment in New South Wales."

Ms Spark said that for the first time in several years, employer sentiment actually moved into the negative in New South Wales according to the Hudson Employment Expectations Survey, reflecting a greater percentage of employers expecting to decrease staffing levels as opposed to increasing them.

"A greater number of organisations are now looking to contract their office space requirements, which has resulted in an increase in vacancy as well as an increase in sub-lease vacancy across most markets," she said.

The Colliers International report found that there was strong demand for Chatswood and North Ryde, which was aided by the new Chatswood to Epping Rail Link, as well as business parks in Sydney Olympic Park and Rhodes.

"Not all industries have been negatively impacted by the economic crisis, in fact a number are forecasting employment growth this year including IT and health care/pharmaceuticals," said Ms Spark.

"For example, Geoff Hunt, Director of Industrial at Colliers International, recently negotiated the biggest lease deal on the North Shore for this year, when health care manufacturer St Jude Medical signed a 2500 sqm deal for 10 years at17-19 Orion Road, Lane Cove."

However, all Sydney metropolitan office markets saw an increase in vacancy over the past six months, except for North Sydney, which recorded a decrease from 8.6 percent to 8.3 percent, according to the report.

"North Sydney's excellent result was due to strong levels of positive absorption of 21,909 sqm, largely by the re-introduction of 101 Miller Street onto the market after a major refurbishment was completed," said Mr Gishen.

"Colliers International began a leasing campaign for the 35-storey tower, which is now 96 percent occupied."

Sales volumes of Sydney metropolitan office property were considerably reduced in 2008 and have been almost non-existent to date. The report found that recent sales activity this year has reflected yields of 9.25-9.5 percent for secondary-grade stock. Private Investors remain the dominant purchasers.

Ms Spark said the report found that Parramatta's development pipeline was particularly impacted by the economic crisis, as no new available supply is scheduled for completion over 2009-2011.

"A number of developments across Sydney's metropolitan office markets have had their construction dates deferred or been put ‘on hold' indefinitely in the current economic climate. As a result there is actually a lack of new supply scheduled to come on-line in a number of markets over the coming 2-3 years," said Ms Spark.

"This will help to keep vacancy rates contained and will limit options for larger tenants looking to relocate in some markets. Therefore we do not expect rents to come off substantially.

"Nonetheless, the trend for consolidation of space by tenants resulting in an increase in sublease vacancy will cause some further softening in rents and rising incentives. Incentives have increased by up to 10 percent in a number of markets over the past six months, and now range from 30 to 40 percent in North Ryde," she said.