Focus on North Sydney Office Market
The North Sydney Office Market has seen a strong level of investment over the past 2 years with $1.7B of assets being traded (see table below). The increase in activity is being driven by an improved outlook for the tenant market which is expected to see strong rental growth over the coming years.
Office Supply & Absorption
The market has seen the strongest level of supply in over 10 years with the completion of 177 Pacific Highway which delivered 39,419m² of new prime office space late 2016 together with 5,713m² of refurbished space at 101 Miller Street. This strong supply was offset by 15,118m² of stock withdrawal over the past six months. Of this amount, 13,710m² was withdrawn permanently for the construction of Sydney Metro and for residential redevelopment.
The market has easily absorbed this space with the vacancy rate increasing by only 10Bps to 7.1% with tenants relocating from St Leonards and Chatswood. According to Knight Frank, as at April 2017, average prime gross face rents increased by 7.3% YoY to $852/m² ($721/ m² net face) whilst average prime incentives declined to 24.3% from 25.8% a year ago, resulting in gross effective rental growth of 9.4% YoY.
New developments coming to fruition over the next five years will include 100 Mount Street (40,600m²) by Dexus and 1 Denison Street (65,021m²) by Winton. Additionally, a DA for the redevelopment of 118 Mount Street (22,982m²) has been submitted, but timing is unconfirmed. These new projects have limited pre-commitments and the market may take 2 years to absorb the excess supply. A flight to quality will likely see tenants move from nearby markets and older style buildings.
100 Mount Street 1 Dension Street 118 Mount Street
The investment markets have benefited from the improving tenant market, low interest rates and the increase in amount of capital in the market.
The largest deal last year was made by Singapore’s Ascendas REIT purchasing 100 Arthur Street for $315 million on a core market yield of 6.2% and a 3.7 year WALE. The most acquisitive investor in the market has been Chinese developer Aqualand with the acquisitions of;
61 Lavendar Street, Milson Point for $140 million,
132 Arthur Street for $70 million (8,886/m²)
146 Arthur Street for $78 million (9,546/m²)
15 Blue Street and $168 million (10,580/m²)
Core market yields have sharpened to 5.0% - 6.0% with secondary yields currently about 50Bps softer. The market will continue to test investment appetite with the following assets current available for sale.
1 Pacific Highway
165 Walker Street
32 Walker Street
The North Sydney office market continues to be an affordable option for tenants migrating either to avoid the high cost of the CBD or to be close to the CBD without being in a metropolitan market. With short-term supply being limited, North Sydney’s overall vacancy rate is estimated by Knight Frank to trend down to 4.0% over the next 2 years before rising back to 7.5% in early 2019 upon the completion of 100 Mount Street. The secondary market is more likely to suffer post 2019 as tenants pursue more modern office space.