Occupier Demand Continues to Strengthen

Demand for office space started improving 2 years ago and has been steadily
improving since.

For the year to July our leasing teams in North Sydney and Chatswood have leased more than 1 1,000 sqm of offices a level that is 32% up on last year and 97% higher than 2 years ago. Increased tenant demand takes time to feed through to lower vacancy rates. We noted 2 years ago that demand was starting to rise and saw this in both the amount of space being leased and a steady increase in the number of “Active
Tenants” looking for space.

Our data on Active Tenants started rising in April 2013 to around 5,600 sqm and has increased to a current level of around 9,000 sqm. This indicates that tenant demand will remain strong for at least the next 12 months. In addition to increased demand for small to medium sized offices there has been a surge in the number major requirements being circulated.

As a result of 2 years of rising demand we are now seeing vacancy rates fall to levels where owners are able to increase rents. For tenants the change in supply levels will come as a surprise after so many years where they have been in the driving seat.

It is notable that enquiry is now dominated by companies that are expanding whereas 2 to 3 years ago many where contracting or moving into similar sized space. Redevelopment for residential is also a common reason for moving and has the double effect of increasing take up and at the same time reducing future supply.

We have mentioned in previous Newsletters that in St Leonards and Crows Nest the amount of commercial space that is destined to go residential represents around 15% of the total stock. More importantly this represents around 20% of the mid-grade market where the majority of tenants are.

“After 2 years of rising demand vacancy rates in some areas are now at levels where owners are able to increase rents.”

North Sydney

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While North Sydney has experienced a reduction in the vacancy rate to around 8% it is also the only North Shore market that has any significant supply coming on stream with Leighton’s development at 177 Pacific Highway due for completion in 2016.

North Sydney is also the closest North Shore market to the CBD where there are a number of developments underway including the massive Barangaroo complex. As a result North Sydney may experience an increase in vacancy rates if tenants are lured to the CBD. This has been seen in previous cycles and is more likely to affect the Premium / A Grade market for larger tenants.

In the mid-market where small to medium businesses dominate there is likely to be a continued shortage of good quality space as the number of buildings suitable for refurbishment are limited.

North Sydney has a high proportion of strata where ownership is fragmented and therefore coordinated refurbishment is more difficult. As a result we expect rents for good quality B Grade offices will continue to increase from their current levels of around $600 psm gross.

In response to the market’s demand for flexible, refurbished offices our client, Denison Funds Management is planning a refurbishment of 80 Mount Street which will result in two new floors being of
fered for lease later this year.

In the sales market North Sydney like most areas has seen a jump in capital prices as investors lower their yield criteria in order to secure limited stock. Increased prices have persuaded a number of long term owners to take advantage of the market and sell on.The recent sale of 140 Arthur Street achieved a rate of almost $7,000 psm having sold 3 years earlier at less than $5,000 psm.

The recent jump in prices is already making purchases that were made 12 / 18 months ago look very attractive.

St Leonards

Screen Shot 2015-09-25 at 9.39.52 pmWith so much of St Leonards destined to go residential this is really a case of a shrinking market. A large number of the commercial buildings on Chandos Street, Atchison Street and the Pacific Highway will all make way for mainly residential towers in the next few years.

This will lead to a number of office tenants, who are mostly paying modest rents, having to relocate in the next two years. For these tenants, the timing of their moves is likely to coincide with a market that has less space available and owners that are seeking higher rents.

The latest Property Council research recorded St Leonards vacancy rate at 11.2%. This is likely to fall
sharply as deals have been announced on large lettings at The Forum where Primary Health is taking around 4,500 sqm and at 601 Pacific Highway where space vacated by IBM has been filled up. As a result of these deals and the number of buildings that are going residential leasing options in St Leonards are already looking thin. This should allow commercial owners to continue to push rents upwards.

At 1 Chandos Street, our client La Salle Funds Management is just completing a refurbishment and will be looking to build on recent deals with new space now being marketed at rents of up to $475 psm gross.

Crows Nest

Screen Shot 2015-09-25 at 9.42.52 pmPermitted height limits for development are generally lower in Crows Nest than they are in St Leonardsas North Sydney Council has tried to maintain the village feel of Crows Nest. As a result there are pockets of residential development taking place but not to the same scale as is occurring closer to St Leonards Station.

There is a view however that Crows Nest will inevitably see higher height limits in future years and this is attracting investors that take a longer terms view.

There is also speculation as to where the “Crows Nest” Station will be located that will serve the new Sydney Metro line that will run from Chatswood under the Harbour to the City and out to Bankstown. Where ever the Station emerges it is likely to add to pressure for council to allow higher height limits for future development.

Like most commercial areas Crows Nest is experiencing stronger office demand and rents are now moving up to $400 psm or higher.

Demand from investors and owner occupation is strong and sale prices are now generally running at over $5,000 psm.

We have featured on other pages our recent sale of 12 Hayberry Street which sold for $2.9M and buildings that we are currently selling at 497 Pacific Highway and in Hume Street.

Our leasing team has just agreed to lease part of 65 Hume Street at a rent of $425 psm.

Chatswood

Screen Shot 2015-09-25 at 9.43.25 pmChatswood has seen one of the sharpest changes to its market with the vacancy rate tumbling in the last 6 months from 8.25 to 6.8%.

Our leasing agents in Chatswood have seen at first hand the increase in activity which has resulted in major buildings such as the twin towers at 1-5 Railway Street having a record low vacancy level.

In total we have leased more than 3,500 sqm in the first half of 2015.

Leasing Team Continues to Grow

Following the opening of our second office at 1-5 Railway Street, Chatswood, we have an expanded leasing team covering the entire North Shore. This has helped us to achieve a record level of leasing and maintain a high level of active enquiry.

Our leasing team comprises:
Chris Hartigan – Director
Adam Ray – Associate Director
Nicole King – Associate Director
Kim Huynh
Bianca Engmann
Drew Divers
Rupert Lore