Market Pulse

Sydney CBD Office Market

Cadigal Research
June 2023
Market Pulse Sydney CBD Office Market

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Market Pulse June 2023

Contents

04. Key Data at a Glance

05. In Summary

07. Supply

08. Tenant Demand

12. Tenant Enquiry

14. Vacancy

15. Sublease Availability

16. Rents

17. Outlook

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Market Pulse Sydney CBD Office Market

Key Data
at a Glance
Change last Expected change
12 months next 12 months

SUPPLY

Total Stock*
(sqm, as at Jan-23)
5,283,196 ↑ ←→

Completions*
(sqm, 6 months to Jan-23)
71,707 ↑ ↓

Net Supply*
(sqm, 6 months to Jan-23)
49,328 ↑ ↓

DEMAND

Net Absorption*
(sqm, 6 months to Jan-23)
-19,738 ↓ ↑

Tenant Enquiry
(sqm, as at Mar-23)
273,513 ←→ ↑

VACANCY

Vacancy Rate*
(%, as at Jan-23)
11.3 ↑ ←→

Sublease Availability
(sqm, as at Mar-23)
108,145 ←→ ←→

RENTS

Net (Gross) Face Rents

($/sqm average, as at Mar-23)

Premium 1,382N (1,610G) ↑ ↑

A Grade 1,090N (1,282G) ↑ ↑
B Grade 881N (1,065G) ↑ ↑
Incentives
(typical % range for whole-floor 32 - 37 ↑ ←→
tenant, as at Mar-23)

*Source: Property Council of Australia (PCA Jan-23)

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In Summary
Since dipping to 4.95mil sqm in Jan-20, total stock has
expanded continuously to 5.28mil sqm, a 6.6% increase
and the highest level the market has seen.
There is 261,324sqm of office space under construction
equating to 5% of total stock, with only 7.5% of this due
this year and the bulk (71%) due in 2024.
Net absorption continues to be weak, overall, with the
long-term annual average not having been exceeded in
the last seven years (since 2015).
Premium continued to be the clear outperformer in
2022, the only building grade to record positive net
absorption.
Tenant enquiry has been subdued for an extended
period of time, with enquiry volumes remaining
predominantly below-average since mid-2018.
There was 273,513sqm of active tenant enquiry
as at Mar-23, down 4% on three months prior and
representing a third successive quarterly fall.
After pausing briefly over the second half of 2021, the
vacancy rate returned to its upward trajectory, rising
to 11.3% over H2 2022, the highest mark in 27 years.
Available sublease space fell 3.6% over Q1 2023 to
108,145sqm, but the quantum remains elevated (c.60%
above the long-term average) and a general upward
trend still persists.
Effective rents saw growth of betwen 2.4%-6.1%
over the 12 months to Mar-23, with Premium grade
recording the strongest and A grade the weakest.
Face rental growth has been the strongest in three
years but we do not expect the rate of growth to
increase much further. Higher quality space will
continue to outperform lower quality space.
Upward pressure on incentives is nearing an end but
incentives will remain elevated at least until the end of
the year before gradually reducing, slightly faster for
prime stock compared to secondary.
These benign conditions are expected to result in
continued low-moderate growth in effective rents.
Major developments currently uner construction that have also won recent tenant pre-commitments include Parkline Place (above left), 33 Alfred
Street (above right) and 39 Martin Place (below).
Market Pulse June 2023

Supply
Since dipping to 4.95mil sqm in Jan-20, the Sydney CBD’s total stock of office space has expanded
continuously to the current 5.28mil sqm, a 6.6% increase and the highest level the market has seen.
There were no completions of major office projects over Q1 2023, and very little space is expected to
be delivered over the rest of this year. Two projects (121 Castlereagh St and 32-36 York St) totaling
19,476sqm of office space is due over 2023, a mere fraction of the 154,504sqm of supply additions averaged
over 30 years of records.

Currently, there is 261,324sqm of major office space under

construction equating to 5% of total stock, with only 7.5% of
this due this year and the bulk (71%) due in 2024.
Almost half (47.6%) of the supply under construction can be found in the dominant Core precinct, with
Midtown contributing 25.6% and the significantly smaller Southern precinct 21.4% of the total which is
comprised entirely of the Atlassian Central project.
There were no new project commencements or significant withdrawals from stock over Q1 2023.

Major Office Developments Under Construction

Project Owner / Type Office Precinct Expected Comment

Developer NLA Completion

York & Co. Milligan Group New 7,973 Midtown Q4 2023 Mixed-use redevelopment of 1886-built
32-36 York Street warehouse comprising 12 floors of office

121 Castlereagh Scentre/Cbus New 11,503 Midtown Q4 2023 Office component of mixed-use devel-
Street opment on site of former David Jones
store, 18% pre-committed.

Martin Place Metro Macquarie Group New 62,871 Core Q1 2024 37-storey over-station development, to
1 Elizabeth Street be owned and occupied by Macquarie.

Martin Place Metro Investa / Manulife New 29,886 Core Q3 2024 29-storey tower over-station develop-
39 Martin Place ment. Ashurst has committed to up to
10,000sqm (33%) in the lowrise.

33 Alfred Street MWOF / Dexus Full Refurb 31,759 Core Q3 2024 Full refurbishment of Sydney’s first
skyscraper. Allen & Overy has pre-
committed to 2,505sqm (8%).

333 Kent Street Addenbrooke Full Refurb 13,832 Western Q3 2024 Full refurbishment of existing 9-storey
+ New building plus addition of 7 new floors.

Parkline Place Oxford / New 47,500 Midtown Q4 2024 36-level over-station development
252 Pitt Street Mitsubishi Estate above the Pitt Street Metro Station. BDO
has pre-committed to 6,107sqm (13%).

Atlassian Central Dexus / Atlassian New c.56,000 Southern 2027 40-level tower with youth hostel at the
8-10 Lee Street base. Office space is 100% committed
to Atlassian.

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Market Pulse Sydney CBD Office Market

Tenant Demand
­Net Absorption
Although tenant demand, as measured by net absorption, in the Sydney CBD remains tepid the
market has managed to record two years of positive net absorption over 2021-2022, following two
negative years in 2019-2020. Whilst a weak -19,738sqm was tallied over the 2nd half of 2022 it did
not completely offset the strong net absorption recorded in the 1st half, resulting in a 3,702sqm total
for the year.
However, the cumulative net absorption in Australia’s largest office market over the last seven years
(2016-2022) is -60,063sqm and it has been eight years since the market recorded net absorption of at
least the long-term annual average (41,703sqm per annum) - the longest period on record.

Annual Net Absorption - Sydney CBD 1990-2022

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Market Pulse March 2019

For net absorption, the flight-

to-quality theme is evident
in both building grade and
location.
Premium grade continued to be the clear
outperformer for net absorption over 2022, driven
by the completion and inclusion of two premium
buildings (Quay Quarter Tower and Salesforce
Tower).
And, whilst the CBD recorded -19,738sqm of total
net absorption in the 6 months to Jan-23, premium
grade was the only grade to record positive net
absorption. It was a similar story over the longer
12-month period with premium the only positive
grade, disregarding D grade’s insignificant +95sqm.
Net absorption across the precincts was heavily
skewed towards the Core, where the most stock and
highest rents are found in the CBD, with the Core
and Midtown (but to a much lesser extent) being
the only precincts to record positive net absorption
across both 6- and 12-month periods.

Net Absorption by Building Grade

Buiding Grade 6 Months 12 Months
to Jan-23 to Jan-23

Premium 29,106 61,962

A Grade -3,630 -8,050

B Grade -36,101 -49,520

C Grade -7,313 -785

D Grade -1,800 95

Sydney CBD -19,738 3,702

Source: PCA Jan-23

Net Absorption by CBD Precinct

Precinct 6 Months 12 Months
to Jan-23 to Jan-23

City Core 28,249 43,213

Midtown 6,325 4,496

Western Corridor -27,821 -23,415

Walsh Bay / The Rocks -13,381 -4,358

Southern -13,110 -16,234

Sydney CBD -19,738 3,702

Source: PCA Jan-23

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 Market Pulse Sydney CBD Office Market

Tenant Demand

In addition to developments currently under construction, significant leasing activity was also recorded at 1 Shelley Street (above) and
44 Martin Place (below) over Q1 2023.

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Market Pulse June 2023
Market Pulse June 2023

Recent major leasing activity has been fueled by pre-commitments to developments

currently under construction including 39 Martin Place (10,050sqm to Ashurst), Parkline
Place (6,107sqm, BDO) and 33 Alfred Street (2,505sqm, Allen & Overy).
The transactions listed below include expanding tenants such as the White Family Group
(from 1,609sqm in 135 King St to 2,594sqm in 44 Martin Place), JHA Consulting Engineers
(from a 1,402sqm sublease in North Sydney to 1,976sqm in 2 Market St) plus a new CBD
location for flexible space operator Hub Australia (2,573sqm in 44 Martin Place).
However, the majority of the sample features tenants relocating to less space than their
current leases, notwithstanding these leases were struck a number of years ago and some of
the space has subsequently been subleased. The tenants include Ashurst (from 13,652sqm
in 5 Martin Place to 10,050sqm in 39 Martin Place), BDO (6,754sqm in 1 Margaret St to
6,107sqm at Parkline Place), Allen & Overy (4,505sqm in 85 Castlereagh St to 2,505sqm in
33 Alfred St) and Virgin Australia (2,543sqm in 7 Macquarie Pl to 1,220sqm in 420 George
St).
Just one tenant listed below (JHA Consulting Engineers) is not already located in the
Sydney CBD and the list includes a number of examples of tenants upgrading to higher grade
buildings, namely BDO, Datadog, Virgin Australia and Talent International.

Recent Major Lease Transactions

Tenant Address Precinct Level Area LCD Type
(sqm)

Ashurst 39 Martin Place Core 2-9 10,050 TBA New

WPP 1 Shelley Street Western 7-10 9,386 Apr-25 New

BDO Parkline Place Midtown 22-25 6,107 Jul-25 New

White Family Group 44 Martin Place Core 6-8 2,594 mid-23 New

Hub Australia 44 Martin Place Core 1-3 2,573 TBA New

Allen & Overy 33 Alfred Street Core 14-15 2,505 TBA New

JHA Consulting Engineers #

2 Market Street Western 20 1,976 Jan-24 New

Datadog# 300 Barangaroo Avenue Walsh Bay 3 1,675 Jun-23 New

Virgin Australia 420 George Street Midtown 22 1,220 TBA New

Talent International 2 Park Street Midtown pt.12 1,059 Jul-23 New

#
Cadigal was involved with these transactions.

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 Market Pulse Sydney CBD Office Market

Tenant
Enquiry
There was 273,513sqm of active tenant enquiry for the CBD as at Mar-
23, down 4% on three months prior and representing a third successive
quarterly fall. Total enquiry is currently made up of 141 requirements
translating into an average enquiry size of 1,940sqm. The average
enquiry size has been less than 2,000sqm since Mar-22.
Some larger enquiries to have entered the market recently include
EML (seeking 6,000-7,000sqm for Q4 2024), Tabcorp (3,500-4,500sqm
in mid-2024), Teacher’s Health (2,625-4,375sqm in Jul-25) and
Blackmores (2,500-3,000sqm in Jul-24).
Legal Services continues to contribute the most enquiry of all industry
sectors (20.4% of the total, by area), followed by Financial Services
(15.3%) and Public Admin & Safety (14.6%) with the top three sectors
accounting for just over half (50.3%) of all enquiry. Info Media and
Telecomms (10.3%) remains in the top four industry sectors despite no
longer contributing 20%+ as it did in 2019.

Current Tenant Enquiry by Size

(enquiries over 500sqm)
Enquiry Size Area (sqm) Number

3,000sqm+ 159,750 23

1,000-2,999sqm 77,225 46

500-999sqm 36,538 72

Total 273,513 141

Data as at Mar-23 Source: Cadigal

EML, Tabcorp, Teachers Health and Blackmores have

all recently come to market to consider options in the
Sydney CBD.

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 Market Pulse June 2023

Known Tenant Enquiry (over 500sqm)

Info Media,
Telecomms &
Undisclosed Related Services
5.4% Other Professional,
Legal 10.3% Scientific & Technical
Services
Services
3.0%
20.4%

Current Public Administration

Tenant Enquiry & Safety
Architectural,
Engineering &
by Industry Sector 14.6%

Technical
Services
(ENQUIRIES OVER 500SQM)
5.8% Total =
273,513sqm
Transport, Postal
& Warehousing Source: Cadigal
2.9% Financial Services
15.3%

Education
Other Services & Training
10.4% 2.8%
Insurance Services Accounting
6.5% Services
2.7%

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 Market Pulse Sydney CBD Office Market

Vacancy
After pausing briefly over the second half of 2021, the vacancy
rate in the Sydney CBD returned to its upward trajectory, rising
again in H2 2022 to 11.3%.
This is the market’s highest vacancy rate in 27 years (since Jan-96), with the latest rise partly driven by the recently
completed Salesforce Tower and Poly Centre being added to stock partially filled.
Vacancy rates range from 8.1% to 14.4% across the precincts with Walsh Bay / The Rocks remaining the tightest
whilst Southern continues to have the highest vacancy rate. Over the six months to Jan-23, vacancy rates rose in
all precincts except Midtown (11.3% to 10.8%) as a result of recording modest net absorption without additions to
stock.
There is currently less variation in vacancy rates across the building grades (8.2-12.6%) with B grade highest at
12.6% but A grade not far behind (11.8%). Premium vacancy (10.1%) reached double-digits for the first time since
Jan-17 with the latter two grades (Premium and A grade) both negatively impacted by recent completions.

Total Vacancy Rate (Jan 1990 - Jan 2023)

Building Grade As at As at Precinct As at As at

Jan-23 Jul-22 Jan-23 Jul-22

Premium 10.1% 8.6% City Core 12.2% 10.5%

A Grade 11.8% 11.6% Midtown 10.8% 11.3%

B Grade 12.6% 10.6% Western Corridor 10.3% 8.7%

C Grade 10.3% 8.6% ThreeWalsh

industry
Baysectors – Public8.1%
/ The Rocks Administration
4.5%(25.8%), Finance & Insurance
(18.9%) and Information Media & Telecommunications (10.9%) - are currently
D Grade 8.2% 7.2% Southern
providing 14.4% accounting
the bulk of tenant enquiry, 14.0%for at least 56% of the total.

Sydney CBD 11.3% 10.1% Sydney CBD 11.3% 10.1%

Source: PCA Jan-23

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Market Pulse June 2023

Sublease
Availability
Whilst sublease fell 3.6% over Q1 2023 to 108,145sqm, the quantum remains elevated and the general upward trend
persists. The current amount of available sublease space remains well above (c.60% above) the long-term average of
67,330sqm.
The largest tranche of available sublease can be found at Darling Square in the Southern precinct (20,742sqm, from
CBA) as well as sizeable parcels at International Towers (8,398sqm from Westpac in Tower 2 and 6,765sqm from
Lendlease in Tower 3). These large sub-lease tranches are offered on substantial lease terms of between 5-7 years.

Sublease Availability

Source: Cadigal

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Market Pulse Sydney CBD Office Market

Rents
Face rental growth across the CBD is gathering
momentum, with rents rising 4.1%-5.9% over the
12 months to Mar-23. These are the highest growth
rates since Mar-20. Across the building grades,
strongest growth was seen in Premium, followed by
A grade and then B grade.
Average incentives for whole floors currently range
between 32-37% (on gross) across the CBD. Over the
12 months to Mar-23, incentives rose by 0.3%-1.4%
with B grade at the bottom of the range, A grade at
the top and Premium in between. Whilst Premium
incentives in the Core precinct have, in fact, tightened
this has been offset by softening Premium incentives
across the other CBD precincts.
The slight softening in incentives has tempered the
growth in face rents resulting in slower effective
rental growth of 2.4%-6.1%, over the 12 months
to Mar-23. Strongest growth was again seen in
Premium grade, but a larger increase in incentives
resulted in A grade recording the weakest effective
rental growth across the grades.

PREMIUM A GRADE B GRADE

Average Average Average

12 month 6 month 12 month 6 month 12 month 6 month
Rent Rate Rate Rate
change change change change change change
(psqm) (psqm) (psqm)

Net Face $1,382 5.9% 2.7% $1,090 5.0% 2.1% $881 4.5% 2.9%

Gross Face $1,610 5.5% 2.5% $1,282 4.7% 2.1% $1,065 4.1% 2.7%

Net Effective $808 6.1% 2.2% $626 2.4% 0.9% $516 4.2% 3.1%

Gross Effective $1,036 5.2% 2.0% $818 2.5% 1.1% $700 3.6% 2.8%

Data as at Mar-23

Net Effective Rent

Source: Cadigal

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Market Pulse June 2023

Outlook

There is currently 261,324sqm of major office space
under construction, equivalent to 4.9% of total stock,
the bulk of which (71%) is expected to be delivered in
2024.
The outlook for supply in 2027 and beyond is
buoyant, with a number of proposed projects including
55 Pitt, Chifley South, Lighthouse and Central
Place. However, with most new developments reliant
on pre-commitments to proceed, and with tenant
demand and enquiry remaining muted, we expect
some projects to be delayed.
Three successive quarterly falls in tenant enquiry
points to tenant demand remaining subdued in
2023. But demand is expected to pick up from 2024,
as market uncertainty recedes and leasing activity is
spurred by the substantial new stock completions.
After remaining static in H2 2021, vacancy rates
rose again over 2022. Vacancy rates are expected
to be contained in 2023 ahead of the next significant
tranche of new supply arriving in 2024, placing
upward pressure on vacancy once again.
While face rental growth is the highest in three
years, we do not expect the rate of growth to increase
much further. Higher quality space will continue to
outperform lower quality space.
The upward pressure on incentives is nearing an end
yet we expect incentives to remain elevated, at least
until the end of the year before gradually reducing,
slightly faster for prime stock compared to secondary.
These benign conditions are expected to result in
continued low-moderate growth in effective rents.

Lok So
Research Director
+61 421 283 865
lok.so@cadigal.com.au

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