A CUSHMAN & WAKEFIELD RESEARCH PUBLICATION SYDNEY S NORTH SHORE Office Markets DECEMBER 2017 CITIES INTO ACTION
CITIES INTO ACTION CONTENTS MARKET OVERVIEW...3 HIGHLIGHTS...4 LEASING MARKET...9 INVESTMENT ACTIVITY...11 INFRASTRUCTURE IMPROVEMENTS...12 SUMMARY... 13
A CUSHMAN & WAKEFIELD RESEARCH PUBLICATION SYDNEY S Overview Office markets in Sydney s North Shore comprise the powerhouse suburbs of North Sydney and Macquarie Park, in addition to the smaller hybrid markets of Chatswood, and Crows Nest/St Leonards. Collectively they amount to 2,289,125 sq m roughly 45% the size of the Sydney CBD. Suburb by suburb as of July 2017 the PCA (Property Council of Australia) recorded 873,693sq m in Macquarie Park, 822,496sq m in North Sydney, 314,017sq m in Crows Nest/St Leonards and 278,919sq m in Chatswood. Collectively these markets comprise of 51% Prime grade office space (Premium and A Grade) and 49% Secondary grade. (Grade B, C and D). Major changes to the North Shore urban landscape are anticipated in the years to come with 100 Mount Street (42,000sq m) due for completion in 2018 and 1 Denison Street (61,000 sq m) due in 2020. From 2024 both developments will benefit from the Sydney Metro project which will see Victoria Cross Station constructed in the heart of North Sydney. Nearby, from 2024 Crows Nest will also benefit from a new metro station. From 2019 other stations including Chatswood, North Ryde, Macquarie Park and Macquarie University will benefit from the Norwest Metro project. The sale and withdrawal of secondary grade office stock for residential conversion has been a typical theme in each of the North Shore markets, and we expect this to continue given Sydney s 20 year population forecast of an increase from 5.1 million people in 2017 to 6.7 million people in 2037. NORTH SHOREMarket Sydney s population is forecast to increase from 5.1 million to 6.7 million people by 2037 3
Tenant demand in the North Sydney office leasing market has significantly Highlights Demand $1.62 billion increased in the past 12 months sales volume due to Supply Vacancy Rents Investment Infrastructure Tenant demand in the North Sydney office leasing market has significantly increased in the past 12 months, a flow on from the tight vacancy of of Sydney s CBD. Development activity in North Sydney has gained significant momentum in the year to December 2017 with precommitments signed at both 1 Denison Street (Channel 9) and 100 Mount Street (NBN). As reported by the PCA in the year to July 2017 the North Shore vacancy rate increased 60 basis points to 7.9%. Macquarie Park vacancy increased 140bp to 8.5% over the same period, however this remains significantly below the 11.2% recorded in mid-2014. North Sydney Prime grade net face rents are circa $690 per sq m per annum with 25% gross incentives. Macquarie Park Prime grade net face rents are circa $360 per sq m per annum with net incentives of 25%. The year to October 2017 saw a significant increase in capital seeking metropolitan located assets. In Q2 and Q3 2017 there was an increase in assets being put up for sale, contributing $1.62 billion in sales volume. The Sydney Metro Northwest project is well underway with the Rouse Hill to Chatswood link to open in 2019. The $2 Billion Northern Beaches Hospital and associated road network have progressed significantly and are due for completion late 2018. increased in assets put up for sale 7.9% vacancy rate on the North Shore which has increased 60 basis points 4
A CUSHMAN & WAKEFIELD RESEARCH PUBLICATION Market Indicators as at Q4 October 2017 Market Macquarie Park/North Ryde North Sydney Crows Nest/ St Leonards Grade Size (sq m) Vacancy rate (July 2017) 12 Month net absorption (sq m) Net rent ($/sq m) Gross incentives (%) Market yield Prime 650,050 6.2% 912 $357 25% (net) 5.00%- 5.50% Secondary 223,643 15.0% -21,735 $324 30% (net) 5.50%- 6.50% Total 873,693 8.5% -20,823 Capital value ($/sq m) 7,000 7,600 5,500 6,200 Prime 260,807 6.0% 50,927 $692 25% 4.75%- 6.00% 10,500 14,000 Secondary 561,689 6.6% -18,044 $596 26% 5.00% - 6.00% Total 822,496 6.4% 32,883 Prime 102,699 14.9% -12,336 $550 23% 6.25%- 6.50% Secondary 211,318 11.5% -18,690 $320 25% 6.50%- 6.75% Total 314,017 12.6% -31,026 Chatswood Prime 157,412 6.6% -733 $505 23% 6.10%- 6.30% Secondary 121,507 7.3% -174 $380 26% 6.25%- 6.50% Total 278,919 6.9% -907 TOTAL 2,289,125 8.1% -19,873 9,500 12,000 8,100-9,200 4,400-5,200 7,600-8,800 5,500-6,300 North Shore office market vacancy rates 35% 30% 25% 20% 15% 10% 5% 0% Chatswood Crows Nest/St Leonards Macquarie Park North Sydney TOTAL Vacancy Source: PCA; Cushman & Wakefield Research 5
42,000 sq m of office stock will be added at 100 Mount Street, North Sydney 61,000 sq m of office stock will be added at 1 Denison Street, North Sydney Supply and Development Activity After five years of decline, North Shore office stock levels are again on the rise. The amount of available office stock in the North Shore peaked in 2011 at 1,511,581 sq m but fell to 1,405,032 sq m by 2016. The decline was mainly driven by conversion of secondary office stock to residential as developers took advantage of Sydney s booming housing market. However, the strong CBD office market is spilling over to the North Shore, with 125,000 sq m of office stock to be added by 2020. Of this, 103,000 sq m will be in North Sydney including Dexus 100 Mount Street and Winten s 1 Denison Street. Approximately 3,000 sq m is planned at Mirvac s St Leonards Square. Nearly 19,000 sq m of new and refurbished Goodman stock was completed in 2017 at 8 Khartoum Road and 97 Waterloo Road in Macquarie Park. relying on a major anchor for a project to begin. The next substantial development in the precinct progressed in August 2017 when infrastructure and property group John Holland won the NSW Government tender to develop a new commercial precinct at 45-61 Waterloo Road, Macquarie Park. A 35,000 sq m building is soon to be constructed, and the 3.2ha plot holds the potential for an additional 82,000 sq m of stock to be developed in the medium term. The NSW Government, who sold the site for $170 million as a part of its asset recycling program, has agreed to lease back 25,000 sq m with options for up to 30,000 sq m more. The remaining 9,500 sq m of the 34,500 sq m building will represent the first large speculatively developed space in Macquarie Park for approximately a decade. In Macquarie Park development activity remains substantially pre-commitment based with commercial construction Although a large volume of stock is set to be added, a significant component has been pre-committed: Tenant Address Tenancy size Fuji Xerox 8 Khartoum Road, Macquarie Park 11,100 sq m Channel 9 1 Denison Street, North Sydney 15,500 sq m NBN 100 Mount Street, North Sydney 20,364 sq m NSW Government 45-61 Waterloo Road, Macquarie Park 25,000 sq m After five years of decline, North Shore office stock levels are again on the rise 6
A CUSHMAN & WAKEFIELD RESEARCH PUBLICATION North Shore and Macquarie Park Development Pipeline Property Precinct NLA (sq m) Type Status Completion 97-99 Waterloo Road Macquarie Park 8,146 Full Refurb Completed 2017 8 Khartoum Road Macquarie Park 10,800 New Completed 2017 100 Mount Street North Sydney 42,000 New 2018+ 472-494 Pacific Highway Crows Nest/ 3,700 New 2019+ St Leonards 1 Denison Street North Sydney 61,000 New Site Works 2019+ 19-22 Atchison Street Crows Nest/ 2,362 New DA Approved 2019+ St Leonards 500 Pacific Highway Crows Nest/ 2,825 New DA Approved 2020+ St Leonards Royal North Shore Crows Nest/ 25,000 New Mooted TBD Hospital site St Leonards 6-8 Julius Avenue North Ryde 34,194 New DA Approved TBD 219-247 Pacific Highway Crows Nest/ 46,000 New DA Approved TBD St Leonards 1 Rivett Road North Ryde 11,380 New DA Approved TBD 18-20 Atchison Street Crows Nest/ 2,300 New DA Applied TBD St Leonards 95 Waterloo Road Macquarie Park 14,874 New DA Applied TBD 11 Talavera Road Macquarie Park 32,000 New DA Applied TBD 8-12 University Avenue Macquarie Park 50,000 New DA Applied TBD 396 Lane Cove Road Macquarie Park 74,000 New Early Feasibility TBD 45-61 Waterloo Road Macquarie Park 117,000 New DA Applied TBD 39 Delhi Road (Lighthouse) North Ryde 30,000 New DA Approved TBD 88 Christie Street Crows Nest/ 26,500 New DA Approved TBD St Leonards 118 Mount Street North Sydney 21,000 New DA Approved TBD 271 Lane Cove Road Macquarie Park 34,000 New DA Approved TBD Source: PCA; Cushman & Wakefield Research 7
Residential Projects Pipeline Address Project Suburb Units Status Completion 9 Albany Street Metropolitan St Leonards 125 Completed 2017 Apartments 88 Alfred Street 88 Alfred Street North Sydney 123 Under 2017 150 Pacific Highway Polaris North Sydney 232 Under 2018 321 Pacific Highway East Lane North Sydney 36 Under 2018 31-33 Albany Street The Hume Crows Nest 35 DA Approved 2018 1 Delhi Road Centrale North Ryde 380 Under 2018 5 Whiteside Street Macquarie Green Macquarie Park 164 Under 2018 120 Herring Road One Twenty Macquarie Macquarie Park 196 Under 2018 Cnr Herring, Epping Roads 472-486 Pacific Highway Macquarie Park Village Macquarie Park N/A Under St Leonards Square St Leonards 526 Under 221 Miller Street The Miller North Sydney 269 Under 2019 1 Marshall Avenue Embassy Tower St Leonards 269 Under 2019 61 Lavender Street Blue at Lavender Bay Milsons Point TBD Mooted TBD 30 Alfred Street Aqualand Milsons Point TBD Mooted TBD 229 Miller Street Vantage Residences North Sydney 91 DA Approved TBD Epping Road Ryde Garden North Ryde 830 Under TBD 25 Epping Road Lachlan s Line North Ryde 885 Site Works TBD 80 Waterloo Road Park One Macquarie Park 412 DA Applied TBD 2018 2019 Source: Cushman & Wakefield Research Uptake of stock in North Sydney significantly increased in the 12 months to July 2017 8
A CUSHMAN & WAKEFIELD RESEARCH PUBLICATION Leasing Market North Sydney 50,927 sq m of prime grade net absorption 6.4% overall vacancy rate in North Sydney Chatswood overall vacancy 6.9% (up 30 basis points) As reported by the PCA, uptake of stock in North Sydney significantly increased in the 12 months to July 2017. In fact, 50,927 sq m of prime grade net absorption was recorded, vastly above the long term average of 1,810 sq m. The majority of this was driven by the completion of North Sydney s 177 Pacific Highway (39,000 sq m). The Prime grade market benefited from the strength of the nearby Sydney CBD office market, where a combination of tight vacancy, tenant demand, stock withdrawal and a strong state economy fuelled rental growth. These factors combined to make North Sydney and the broader North Shore attractive alternatives for expiring and prospective tenants. In July 2016 the North Shore s overall vacancy rate reached a 15 year low of 7.3% after a 2.5 year downward trend. However the downward trend did not continue over the 2016-17 financial year, with a 60 basis point uptick to 7.9% driven by a 10,000 sq m net supply addition and 28,000 sq m of negative net absorption. Despite the slight upturn in vacancy, the continued withdrawal of underutilised secondary grade stock has assisted the vacancy rate to remain below the historical average. In the year to July 2017, occupier demand was strongest in North Sydney where (as anticipated), proximity to the Sydney CBD and its tight vacancy rate positively impacted overall net absorption and overall vacancy, which declined 60 basis points over the year to 6.4%. The Chatswood office leasing market remained mostly stable over the year, with net absorption (-907 sq m) only marginally in negative territory yearon-year and overall vacancy up 30 basis points to 6.9%. In Crows Nest/St Leonards, over the 12 months to July 2017, 31,000 sq m of negative net absorption pushed the vacancy rate 410 basis Chatswood office leasing market remained mostly stable over the year, with net absorption... only marginally in negative territory points higher to 12.6%. Residential conversion of office stock catalysed this result, and has confronted the market with somewhat of an identity crisis as a broader trend of secondary grade stock erosion continues. Complicating the outlook is the recent rejuvenation of North Sydney which is a nearby competitor to Crows Nest/St Leonards. Macquarie Park witnessed a decline in tenant demand over the year to July 2017, and significant residential Net Supply (sq m) Market Net Absorption (sq m) Vacancy North Sydney 32,883 6.4% (down 60bp) 30,014 Macquarie Park -20,823 8.5% (up 140pb) -9,674-31,026 12.6% (up 410bp) -19,614 Crows Nest & St Leonards Chatswood -907 6.9% (up 30bp) 0 9
Major Leases Date Address Suburb Company SQ M Oct 2017 100 Mount Street North Sydney NBN Co 20,364 Oct 2017 11 Help Street Chatswood AFEA 636 Oct 2017 60 Miller Street North Sydney Ardent Leisure 1,200 Oct 2017 60 Miller Street North Sydney Flight Centre 6,566 Oct 2017 1 Rivett Road North Ryde 3M 8,080 Sept 2017 124 Walker Street North Sydney Holocentric 600 Aug 2017 45-61 Waterloo Road Macquarie Park NSW 25,000 Government Aug 2017 799 Pacific Highway Chatswood Retriever 563 Communications Jun 2017 140 Arthur Street North Sydney NSW Business 4,086 Chamber May 2017 465 Victoria Avenue Chatswood Carnival 3,500 Australia Mar 2017 1 Denison Street North Sydney Channel 9 15,500 Feb 2017 80 Pacific Highway North Sydney Arthur J Gallagher 2,026 Source: Cushman & Wakefield Research conversion withdrawals at 101-107 Waterloo Road and 16 Byfield Street removed nearly 20,000 sq m of stock. Negative net supply and belowaverage net absorption resulted in a reduction in occupied stock, and a 140 basis point increase in the vacancy rate, which was recorded at 8.5%. This is still significantly below the 11.2% recorded in mid-2014. Rents Strong rental growth and low vacancy within Sydney s CBD has led to flow on rental growth in North Sydney in particular, and rejuvenated it as a alternative CBD. In North Sydney, current Prime grade net face rents are circa $690 per sq m, with gross incentives circa 25%. The Crows Nest/St Leonards precinct is slightly more expensive at $550 per sq m compared to Chatswood s $505 per sq m. Both have average gross incentives of circa 23%. In Macquarie Park, Prime grade net face rents are circa $360 per sq m, with net incentives circa 25%. Strong rental growth and low vacancy within Sydney s CBD has led to flow on rental growth in North Sydney 10
A CUSHMAN & WAKEFIELD RESEARCH PUBLICATION Investment Activity 19 transactions in the North Shore and Macquarie Park office markets $190 million recorded over 7 transactions in suburban markets purchase of Roche Products Australia site for $55 million The twelve months to September 2017 saw a significant increase in capital seeking metropolitan based assets, whether small or large in value, and with an increased risk profile. Evidence emerged throughout 2017 of an increase in assets being listed for sale and in Macquarie Park, residents have banded together to sell their adjacent properties to developers. Across the North Shore office markets, strong demand from residential developers has played a role in the contraction of yield spreads between prime and secondary stock. While yields in North Sydney have contracted over the year, they are still approximately 100 basis points softer than those of the Sydney CBD. In the twelve months to September 2017 Cushman & Wakefield recorded 19 transactions in the North Shore and Macquarie Park office markets, Notable sales totalling $1.43 billion. Another $190 million of investment was recorded over 7 transactions in the less prominent suburban markets. At Cromer on the Northern Beaches Cushman & Wakefield negotiated EG s purchase of a 7.5ha site from Roche Products Australia for $55m. Also negotiated by Cushman & Wakefield was the $32.5 million sale of 2-6 and 8 Rodborough Road and 357-373 Warringah Road Frenchs Forrest to Charter Hall, on behalf of Home Consortium. We anticipate Sydney Metropolitan sales volumes to remain strong over the next 12 months. Yield tightening will continue, although the recently announced Chinese capital controls may slow growth rates. Despite this, there is strong demand from domestic and other foreign investors, all operating in a long-term low interest rate environment. Address Market Price Purchaser 15 Blue Street North Sydney $168m Aqualand 116 Miller Street and 173 Pacific Highway North Sydney $135m Maville Group 82 Waterloo Road Macquarie Park $120m Romeciti 123 Epping Road Macquarie Park $118m Shimao/B1 1-5 Railway Street Chatswood $115m Lotus/iProsperity 1 Pacific Highway North Sydney $114.5m Private Investor 8 Khartoum Road Macquarie Park $95.3m Private Investor 2 Elizabeth Plaza North Sydney $81m BlackRock 146 Arthur Street North Sydney $78m Aqualand Projects 72 Christie Street St Leonards $76m Proprium Capital 132 Arthur Street North Sydney $70m Shanghai Shenglong 100 South Creek Road Cromer $55m EG Sales by submarket Locale Volume Count North Sydney $796.5m 10 Macquarie Park and North Ryde $333.3m 3 Crows Nest/St Leonards $98m 2 Chatswood $204.6m 4 OTHER $190.32m 7 TOTAL $1,622.72m 26 Source: Cushman & Wakefield Research 11
Tenant demand in the North Sydney office leasing market has significantly increased in the past 12 months Infrastructure Improvements Major transport and health infrastructure projects are in progress across the entire North Shore and Northern Beaches totalling $27 billion and are expected to drive economic activity in the coming decade. On the rail front, the $8.3 billion Sydney Metro Northwest (North West Rail Link) is underway which will initially link the North West (Rouse Hill) to Chatswood. On completion in 2019 this will add eight new stations: Cudgegong Road Rouse Hill Kellyville Bella Vista Norwest Showground Castle Hill Cherrybrook To allow for the new generation metro rail an upgrade of the train line between Epping and Chatswood is required, and from late 2018 buses will replace trains for around seven months on this section of the line. When completed the Sydney Metro Northwest will provide customers with new generation, fully automated metro trains every four minutes in the peak. On the North Shore line from Chatswood towards the city, there will be a train every three minutes. Stage 2 of the Sydney Metro (Chatswood to Sydenham, $11.5b to $12.5b) comprises seven new stations including one at Crows Nest and Victoria Cross in North Sydney. will involve new railway tunnels from Chatswood, under the harbour to Sydenham, and is projected to be completed in 2024. Victoria Cross Metro Station will be constructed adjacent to Winten s 1 Denison Street, and less than a block from Dexus 100 Mount Street. The public transport accessibility improvements are expected to benefit the North Sydney office market over the coming decades. Improved public transport access to a large portion of Sydney s population is expected to make North Sydney a more attractive option for prospective tenants, and this may form the catalyst for additional office development within the precinct. On the roads, the NorthConnex project worth $3 billion moves forward and involves twin 9km tunnels linking the M1 Pacific Highway Motorway to the Hills M2 motorway. Opening is forecast for 2019. Elsewhere, the Northern Beaches is in the midst of significant change. The new $2 billion Northern Beaches Hospital, with 488 beds over nine levels and parking for 1,400 vehicles, is well underway and will open in late 2018. A $500 million road upgrade is taking place around the 12
A CUSHMAN & WAKEFIELD RESEARCH PUBLICATION Summary $3 billion NorthConnex project is moving forward $2 billion Northern Beaches Hospital with over 488 beds is well underway 2,000 weekly links between the CBD and Northern Beaches with the NSW Government s B-Line Rapid Bus Transit hospital, including a new four lane tunnel under the Warringah Road / Wakehurst Parkway junction. In August the Northern Beaches Council published its final Hospital Precinct Structure Plan, outlining rezoning to allow for over 5,000 homes and a mixed-use town centre adjacent to the hospital. The existing high school will be relocated next to the Warringah Aquatic Centre. In addition, the proposed Northern Beaches Link tunnel will connect to the Warringah Freeway, crossing under Middle Harbour and connecting with the Burnt Bridge Creek Deviation at Balgowlah. The Wakehurst Parkway will be upgraded to two lanes in both directions between Seaforth and Frenchs Forest. So far preliminary planning and concept design have been completed, and a State Significant Infrastructure Application has been lodged with the Department of Planning and Environment. The next steps in the project timeline include detailed design completion, environmental assessment, and gaining planning approval. The NSW Government s B-Line Rapid Bus Transit opened in November 2017, adding over 2,000 weekly links between the CBD and Northern Beaches. Upon completion, six new commuter car parks providing around 900 spaces will encourage commuters to park and ride. All construction will be completed by 2019. The year to December 2017 was characterised by Sydney s strong CBD leasing market spilling over to the North Shore. A precinct rejuvenation is underway in North Sydney, led by the development of new office towers at 1 Denison Street and 100 Mount Street, both of which are well positioned to benefit from the addition of Victoria Cross Station and the Sydney Metro in 2024. Over the long term this transport infrastructure is expected to make the North Shore both more accessible and more attractive to prospective tenants. However despite this, the withdrawal of secondary grade stock continued as residential developers looked to take advantage of Sydney s booming housing market. On one hand, the smaller hybrid markets of Chatswood and Crows Nest/ St Leonards now face somewhat of an identity crisis with an increased residential presence. However on the other hand, the quality of office stock, particularly in North Sydney, is improving rapidly. On the investment front, the North Shore markets attracted strong activity with numerous assets exchanging over the year. Yield spreads between Prime and Secondary grade stock compressed over the year as residential developers made plays to acquire sites with development upside. We anticipate Sydney Metropolitan sales volumes remaining strong over the next 12 months and for yield compression to continue, albeit at a slower rate. We expect strong demand from domestic and other foreign investors, all operating in a long-term low interest rate environment. 13
1 Denison Street, North Sydney 8 Khartoum Road, Macquarie Park 45-61 Waterloo Road, Macquarie Pa 14
rk A CUSHMAN & WAKEFIELD RESEARCH PUBLICATION 100 Mount Street, North Sydney 15
CITIES INTO ACTION WILL JACKSON Negotiator +61 450 525 305 will.jackson@cushwake.com MARK MARTIN Senior Director, Agency +61 412 699 662 mark.martin@ap.cushwake.com Authors: RHYS BYRNE Research Analyst +61 406 388 362 rhys.byrne@cushwake.com To see a full list of all our publications please go to cushmanwakefield.com or download the Research App About Cushman & Wakefield Cushman & Wakefield is a leading global real estate services firm that helps clients transform the way people work, shop, and live. Our 45,000 employees in more than 70 countries help occupiers and investors optimize the value of their real estate by combining our global perspective and deep local knowledge with an impressive platform of real estate solutions. Cushman & Wakefield is among the largest commercial real estate services firms with revenue of $6 billion across core services of agency leasing, asset services, capital markets, facility services (C&W Services), global occupier services, investment & asset management (DTZ Investors), project & development services, tenant representation, and valuation & advisory. 2017 marks the 100-year anniversary of the Cushman & Wakefield brand. 100 years of taking our clients ideas and putting them into action. To learn more, visit www. cushwakecentennial.com, www.cushmanwakefield.com or follow @CushWake on Twitter. Sydney Office Level 22, 1 O Connell Street Sydney NSW 2000 Australia Phone +61 (2) 8243 9999 Disclaimer: The information in this material is general in nature and has been created by Cushman & Wakefield for information purposes only. It is not intended to be a complete description of the markets or developments to which it refers. The material uses information obtained from a variety of sources which Cushman & Wakefield believe to be reliable however, it has not verified all or any information and does not represent, warrant or guarantee its accuracy, adequacy or completeness. Any forecasts or other forward looking statements contained in this material may involve significant elements of subjective judgment and assumptions as to future events which may or may not be correct and are beyond the control of Cushman & Wakefield. Cushman & Wakefield is not responsible for any loss suffered as a result of or in relation to the use of this material. To the extent permitted by law, Cushman & Wakefield excludes any liability, including any liability for negligence, for any loss, including indirect or consequential damages arising from or in relation to the use of this material. All expressions of opinion included in this material are subject to change. 2017 Cushman & Wakefield. All rights reserved. 2017 Cushman & Wakefield, Inc. All rights reserved.