The Sydney office market is facing at least three more years of low vacancies: Lee Walker

EXPERT OBSERVATION

There is no relief for tenants looking to move over the short to medium term or for those facing lease renewals.

Over the last 12 months, Sydney’s metropolitan office vacancy rate has fallen below 5%.

The last time that happened was during the late 1980’s boom.

Moreover, the period of low vacancies has only just begun, with BIS Oxford Economics forecasting a sub-5% vacancy rate for at least three more years.

That is not good news for tenants with a short to medium term lease expiry – they will face much higher rents and limited relocation options.

Conversely, the balance of power in lease negotiations has shifted back towards building owners and will stay there for some time yet.

Sydney’s office vacancies have fallen significantly over the last two years, as moderate net absorption (underpinned by a solid NSW economic and employment growth) was met by below average completions and close to zero net additions to stock.

By the end of 2018, it is estimated the Sydney metropolitan vacancy rate will fall to 4.6%.

Sydney’s problem is on the supply side, not the demand side.

With almost nothing added to stock over the last two years, demand is starting to be constrained by a shortage of available space.

With vacancy rates a primary driver of rents, CBD prime average net stated rents have risen by over 20% since December 2016 with effective rents (taking into account leasing incentives) up by one third.

Indeed, since the post GFC cycle trough in 2009 face rentals have risen by close to 70% and around 125% in effective rent terms.

The bad news for tenants facing upcoming lease expiries is there is no relief from rising rents in sight for at least three years.

The current round of office projects underway – focused on the CBD, North Sydney, Parramatta and Eveleigh – will be easily absorbed by the market, keeping the metropolitan vacancy rate below 5% until at least 2021, with the CBD even tighter.

Low metro-wide vacancies mean there will be limited options available for CBD tenants seeking to move out of the City to avoid rising rents in the medium term.

Rents will be rising strongly in the suburban markets as well.

Building owners’ time has come within the Sydney office market and it looks set to stay that way for some time to come.

LEE WALKER is the responsible for BIS Oxford Economics's Sydney and Perth commercial forecasting studies