Market Pulse North Shore, March 2018

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Market Pulse North Shore office market

Cadigal Research March 2018


Market Pulse North Shore Office Market

Market Pulse March 2018

Contents

2 | cadigal.com.au

3 | cadigal.com.au

04

Key data at a glance

06

Supply

08

Tenant demand

12

Tenant enquiry

15

Vacancy

16

Rents

18

Outlook


Market Pulse March 2018

Market Pulse North Shore Office Market

Key data at a glance

In Summary

CHANGE LAST 12 MONTHS

There are two new office developments currently under construction that, when complete, will add 12.5% of much needed supply to the North Sydney market.

EXPECTED CHANGE NEXT 12 MONTHS

SUPPLY Total Stock* (sqm, as at Jan-18)

1,410,632

North Sydney

823,982

Crows Nest/St Leonards

307,731

Chatswood

278,919

Completions* (sqm, 6 months to Jan-18) Net Supply* (sqm, 6 months to Jan-18)

3,973 -4,800

Tenant demand has been mixed on the North Shore with moderate net absorption in Chatswood offset by weakness in North Sydney and Crows Nest/St Leonards.

DEMAND Net Absorption* North Sydney Crows Nest/St Leonards Chatswood Tenant Enquiry (sqm, as at Dec-17)

11,448 -10,883

The vacancy rate on the North Shore rose from 7.9% to 8.4% over the second half of 2017, reversing a similar-sized fall in the first half.

-846 281

Current vacancy rates are well below long-term averages in North Sydney and Chatswood, but marginally higher in Crows Nest / St Leonards.

225,655

VACANCY Vacancy Rate* (%, as at Jan-18)

8.4

North Sydney

7.9

Crows Nest/St Leonards Chatswood Vacant Area (sqm, as at Jan-18)

Effective rental growth on the North Shore has been strong, across the board. The combination of solid-to-strong face rental growth together with substantial reductions in incentive levels has led to gross effective rental growth in the 13% - 25%pa range.

11.1 6.8 118,241

Looking ahead, tenant demand is expected to improve on the North Shore on the back of robust enquiry levels and boosted by the persistence of very low vacancy rates in the Sydney CBD. Higher net absorption combined with more stock withdrawals will lead to vacancy rates continuing to fall which will, in turn, result in further growth in effective rents.

RENTS Gross Face Rents ($/sqm avg, as at Dec-17) North Sydney Premium

977

A Grade

902

B Grade

753

Crows Nest/St Leonards A Grade

684

B Grade

601

Chatswood A Grade

663

B Grade

570

Incentives

18-25

* Source: Property Council of Australia (PCA)

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Market Pulse North Shore Office Market

Supply

Market Pulse March 2018

The North Shore office market totals some 1.41 million sqm of net lettable area (NLA) and includes the commercial centres of North Sydney (58% of total NLA), Crows Nest/St Leonards (22%) and Chatswood (20%). 37% of the North Shore market, by area, is Prime (Premium and A) grade, compared to the Sydney CBD where almost 60% of stock is classed as Prime. Whilst Chatswood is the smallest of the three North Shore precincts, more than half its stock (56%) is Prime. Suntec REIT’s 177 Pacific Highway, North Sydney (39,144sqm, completed Q4 2016) was the last new or fully refurbished office project to be completed on the North Shore. Over 2016-2017, 44,045sqm of stock was withdrawn from North Sydney for conversion to residential or other uses, offsetting the impact of the additional space from 177 Pacific Highway. The two new office developments currently under construction in North Sydney, 100 Mount Street (41,227sqm, due Q4 2018) and 1 Denison (60,270sqm, Q2 2020), will add a combined 12.5% to the size of the North Sydney market. Looking further ahead, Transport NSW has announced a shortlist of 3 to build the new Victoria Cross Metro station together with an office tower above incorporating a maximum gross floor area of 60,000sqm. The successful

bidder will be announced by the end of the year with the station and building due for completion by 2024. The Crows Nest/St Leonards precinct has become less significant as an office market over time with the overall size (307,731sqm) having shrunk some 17% since 2013. The Chatswood market (278,919sqm) has also contracted but a 5% reduction over a 20-year period is relatively minor. Neither Crows Nest/St Leonards nor Chatswood have any major office developments currently under construction. However, at Gore Hill Technology Park within the Crows Nest/St Leonards precinct, DA approval has been given for the construction of three buildings with total office space of 46,000sqm.

Major Office Developments Under Construction/Recently Completed Project

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Owner / Developer

Type

Office NLA

Precinct

Expected Completion

Comment

100 Mount Street

Dexus

New

41,227

North Sydney

Q4 2018

15% committed to Laing O'Rourke, who is also the builder for the project

1 Denison

Winten Property Group

New

60,270

North Sydney

Q2 2020

27% committed to the Nine Network

118 Mount St

Zurich

New

17,972

North Sydney

proposed

DA Approved

1 Pacific Highway

Zone Q

New

19,156

North Sydney

mooted

Subject to DA

Building D1 219 Pacific Highway

Lindsay Bennelong Development

New

16,000

St Leonards

proposed

DA Approved

Building 02 219 Pacific Highway

Lindsay Bennelong Development

New

15,000

St Leonards

proposed

DA Approved

Building 03 1 Pacific Highway

Lindsay Bennelong Development

New

15,000

St Leonards

proposed

DA Approved

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Market Pulse March 2018

Market Pulse North Shore Office Market

Tenant Demand Tenant demand on the North Shore, as measured by net absorption, has been modest on a long-term average basis (just 3,367sqm pa) yet volatile from year-to-year (see graph below). 2017 saw net absorption of –10,208sqm recorded, and –81,613sqm over the last 5 years, with three out of the five being negative. Chatswood led the North Shore market for net absorption (over both 6 and 12 month periods), despite recording a modest 2,684sqm over the

12 months to Jan-18. The performance of Crows Nest/St Leonards was heavily impacted by stock movement, with the –7,811sqm of net supply over the 12 months to Jan-18 a key factor in the precinct recording substantial negative net absorption.

Performance was mixed, from a tenant demand perspective, across the building grades with the positive net absorption in Premium and B-grade being outweighed by negative net absorption in A, C and D grades.

Net absorption by precinct Annual Net Absorption Precinct 120,000

North Sydney Crows Nest/St Leonards

100,000

Chatswood 80,000

Sydney North Shore

6 Months To Jan-18

12 Months To Jan-18

-10,883

-3,898

-846

-8,994

281

2,684

-11,448

-10,208

60,000

Net absorption by building grade

40,000

Buiding Grade

2016

2015

2014

2013

2012

2011

2010

2009

2008

2007

2006

-10,208 2005

2004

2003

2001

2000

1999

1998

1997

1996

1995

1994

1993

1992

1991

1990

0

2002

Annual Average (1990-2017) 3,367s qm

Premium

2017

20,000

-20,000

-40,000

12 Months To Jan-18 0

2,832

A Grade

-5,588

-7,25

B Grade

1,412

3,058

C Grade

-6,721

-8,548

D Grade -60,000

6 Months To Jan-18

Sydney North Shore

-551

-325

-11448

-10,208

-80,000

Source: PCA Jan -18 -100,000

-120,000

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Market Pulse North Shore Office Market

Market Pulse March 2018

Mastercard’s 7,200sqm lease at 72 Christie Street was the largest transaction recorded in the Crows Nest/ St Leonards market in 2017. The company consolidated into St Leonards from 100 Arthur Street, North Sydney plus suburban locations.

Tenant Demand

Flight Centre relocated its Sydney corporate office from 33 Berry Street, North Sydney to the Dexus-owned 60 Miller Street, nearby. The move was driven by the owner of 33 Berry Street, Australian Catholic University, taking the space back for its own uses. Almost all of the recent, large lease transactions recorded on the North Shore have been moves within the market with the notable exception of Allianz, who relocated one of it’s departments from the CBD into 101 Miller Street, North Sydney.

Recent major lease transactions Tenant

Address

Precinct

LCD

Type

Flight Centre

60 Miller Street

North Sydney

pt.3,4-5,9

6,562

Q1 2018

New

Allianz Insurance

101 Miller Street

North Sydney

12-14

5,641

Q3 2018

New

Broadspectrum#

80 Pacific Highway

North Sydney

8-10

3,017

May-18

New

Mastercard#

72 Christie Street

Crows Nest / St Leonards

2-6

7,227

May-18

New

201 Pacific Highway

Crows Nest / St Leonards

7-8

2,882

Jul-18

New

Medfin (NAB)#

201 Pacific Highway

Crows Nest / St Leonards

9

1,247

Aug-17

Renewal

Aarnet

Citadel Towers, Tower A

Chatswood

7

1,140

Q3 2018

New

NCR

Citadel Towers, Tower A

Chatswood

9

1,115

Q1 2018

New

The Benevolent Society

Citadel Towers, Tower B

Chatswood

16

1,105

Q4 2017

New

QuintilesIMS

#

#

Cadigal was involved in these transactions.

Major recent North Shore leasing transactions took place in 60 & 101 Miller Street, North Sydney (top), as well as at 72 Christie Street in St Leonards (bottom). 10 | cadigal.com.au

11 | cadigal.com.au

Level

Area (Sqm)


Market Pulse North Shore Office Market

Market Pulse March 2018

Tenant enquiry Large enquiries currently considering the North Shore include Microsoft, First Data and MLC Life.

Current Tenant Enquiry by Size

Cadigal recorded a total of 225,655sqm of tenant enquiry (of all sizes) considering the North Shore, as at Dec-17.

3,000sqm+

159,950

21

1,000-2,999sqm

39,450

25

15,825

23

10,430

32

225,655

101

0-499sqm Total

A breakdown of total enquiry, by industry group, is shown below. Information Media, Telecommunications & Related Services (IMT) was the largest group, contributing 31% of enquiry, with Advertising Services next on 17% and followed by Public Administration & Safety with 14.3%. All other industry groups each accounted for less than 6% of the total enquiry. The diversity of current tenant enquiry (outside of IMT) is also a reflection of the diverse tenant base found in the North Shore office market. The North Shore has received increasing levels of enquiry from large tenants (2,000sqm+) on the back of positive sentiment regarding the future of North Sydney. Large enquiries currently evaluating the market include Microsoft (seeking 8,000-10,000sqm), First Data (8,000sqm) and MLC Life (5,000sqm).

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NUMBER

500-999sqm

This represents a fall from the prior period (253,525sqm as at Jun-17), reflecting the conclusion of a number of large enquiries including Mastercard (relocating from North Sydney to St Leonards) Pfizer (from West Ryde to the CBD) and Equifax (renewed in North Sydney). The total enquiry was tallied across 101 separate requirements, translating into an average enquiry size of 2,234sqm.

As for the Sydney CBD, co-working is a strong theme on the North Shore with groups including WeWork, Naked Hub and Work Club Global all actively seeking sites in the market.

AREA

ENQUIRY SIZE

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Across the North Shore office markets, vacancy rates rose in North Sydney (to 7.9%) and fell in Crows Nest/St Leonards (to 11.1%), with each precinct reversing the movements of the prior 6 months. The vacancy rate in Chatswood (6.8%) remained effectively unchanged over the second half of 2017.

Market Pulse March 2018

Market Pulse North Shore Office Market

Vacancy

Tenant enquiry INFORMATION MEDIA, TELECOMMUNICATIONS & RELATED SERVICES

31% RETAIL & WHOLESALE TRADE

OTHER SERVICES

ADVERTISING SERVICES

17%

2.1%

Total vacancy rate (Jan 1990 - Jan 2018)

2.4% PUBLIC ADMIN & SAFETY

2.5%

ADMIN & SUPPORT SERVICES

The current vacancy rates are well below long-term averages in North Sydney (7.9% vs 9.9%) and Chatswood (6.8% vs 11.5%) but slightly higher in Crows Nest/St Leonards (11.1% vs 10.9%). Of the precincts, Chatswood has the lowest vacancy rate and Crows Nest/St Leonards the highest. But, in terms of area, Crows Nest/St Leonards (34,214sqm) only has just over half North Sydney the amount of vacant space as North Sydney (65,103sqm).

32%

14.3%

Crows Nest / St Leonards

Chatswood By building grade, Premium has the highest vacancy rate (17.4%) whilst the other grades sit within a relatively narrow band of 6.3% 8.8%. The high vacancy rate in Premium is a result of several floors at 101 Miller Street, North Sydney (currently the only Premium grade asset on the North Shore) being available to lease. However, most of this space has now been let although the new tenants are yet to take occupation.

28%

FINANCE

3%

24%

(ENQUIRIES OVER 500SQM)

225,655sqm

UNDISCLSOED

5.7%

3.1%

20%

Vacancy Rate

HEALTHCARE & SOCIAL ASSISTANCE

Current Tenant Enquiry By Industry Sector

16%

12% 11.1%*

5.5%

6.8%* 4%

* as at Jan 2018

Vacancy Rate by Precinct

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Vacancy Rate by Building Grade

Precinct

As At Jan-18

As At Jul-17

Buiding Grade

6 Months To Jan-18

12 Months To Jan-18

North Sydney

7.9%

6.4%

Premium

17.4%

17.4%

Crows Nest/St Leonards

11.1%

12.6%

A Grade

8.6%

7.2%

Chatswood

6.8%

6.9%

B Grade

8.5%

8.8%

Sydney North Shore

8.4%

7.9%

C Grade

6.8%

6.3%

D Grade

8.1%

8.5%

Sydney North Shore

8.4%

7.9%

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Jan-17

Jan-16

Jan-15

Jan-14

Jan-13

Jan-12

Jan-11

Jan-10

Jan-09

Jan-08

Jan-07

Jan-06

Jan-05

Jan-04

Jan-03

Jan-02

Jan-01

Jan-00

Jan-99

Jan-98

Jan-97

Jan-96

Jan-95

0% Jan-90

Data as at Dec-17

Jan-94

4.8%

Jan-93

4.3%

PROPERTY & REALESTATE SERVICES

Jan-92

INSURANCE

7.9%*

8%

Jan-18

4.2%

MANUFACTURING

Jan-91

OTHER PROFESSIONAL SCIENTIFIC & TECHNICAL


Market Pulse North Shore Office Market

Market Pulse March 2018

A GRADE

PREMIUM

B GRADE

Average Rate

12 month change

6 month change

Average Rate

12 month change

6 month change

Gross Face Rent

$977

4.1%

2.3%

$902

6.7%

2.9%

$753

5.3%

1.2%

Gross Effective Rent

$821

24.9%

13.1%

$726

22.5%

7.5%

$595

14.0%

2.5%

Gross Face Rent

-

-

-

$684

8.4%

4.4%

$601

7.8%

3.0%

Gross Effective Rent

-

-

-

$531

19.2%

10.8%

$451

13.1%

4.3%

Average Rate

12 month change

6 month change

North Sydney

Crows Nest / St Leonards

Chatswood

Rents

Driven by the persistence of belowaverage vacancy rates, and boosted by rising rents in the CBD, effective rental growth on the North Shore has also been strong.

Gross Face Rent

-

-

-

$663

9.2%

5.4%

$570

10.8%

7.6%

Gross Effective Rent

-

-

-

$503

16.0%

7.8%

$439

18.5%

12.2%

North Shore Gross Face Rent

$977

4.1%

2.3%

$762

7.8%

4.0%

$641

7.7%

3.6%

Gross Effective Rent

$821

24.9%

13.1%

$597

19.9%

8.5%

$495

15.0%

5.8%

Over the year 2017, gross face rents rose by between 4.1% and 10.8%, led by Chatswood (A grade, followed by B grade). Average incentives (on full floors) currently range between 18% and 25% on gross, having fallen by 5-10 percentage points over the year. The combination of solid-to-strong face rental growth together with substantial reductions in incentive levels has led to very strong effective rental growth on the North Shore, with 12-month growth in gross effective rents in the 13% - 25% range. Growth in North Sydney was marginally ahead of Crows Nest/St Leonards and Chatswood whilst, across the grades, Prime space slightly outperformed Secondary stock.

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Market Pulse North Shore Office Market

Market Pulse March 2018

Outlook

Tenant demand, specifically in terms of net absorption, has been mixed on the North Shore with a moderate take-up in Chatswood and negative net absorption in North Sydney and Crows Nest/ St Leonards. However, given the recent major transactions that have occurred in all North Shore markets, we expect this will be reversed in the next period. Looking further ahead the staged delivery of new office space, new retail and transport infrastructure plus continued streetscape upgrades will see stronger demand continue until at least 2020.

There are two new office projects currently under construction in North Sydney that will deliver to the precinct much-needed new Premium and A Grade space. This will create an increase in size by approximately 12.5% over the next three years. Outside of these two developments, there is minimal new supply proposed for the North Shore over the short term. Longer term, the proposed office development above the Victoria Cross Metro station provides an opportunity for further growth improving the quality of the market.

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The higher net absorption, combined with further (albeit slowing) stock withdrawals, will lead to a resumption of falling

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vacancy rates. Larger tenants looking for 2,000sqm+ will face difficulties in finding suitable options until 2019/2020 when the new development projects in North Sydney complete, adding a significant amount of supply to the market at the same time that a number of large lease expiries potentially deliver some sizeable parcels of space to the leasing market. Over the next 12 months, the combination of further reductions in supply, improved demand and the return of falling vacancies will lead to effective rents improving further. This growth will be delivered via further (albeit smaller) contractions in incentives combined with continued increases in face rents.