March 2012 Demand set to continue for Sydney Suburban Office Key Points Buyer activity was steady in the Sydney Suburban office market, with interest directed towards prime Suburban assets. Prime yields range from 7.00% to 9.50% and are forecast to remain stable in the short term. The demand for office space in Sydney Suburban markets is strong. Sydney Suburban office recorded net absorption of 81,200 sqm during 2011, surpassing the 5 year average. As a result, total vacancy decreased to 9.2% in 2011. Vacancy is forecast to trend downwards particularly for quality prime grade stock. Supply was limited at 37,500 sqm in 2011. Quality supply is scarce in the Sydney Suburban Office markets and limited supply is forecast to come on stream from 2012 to 2014. As a result, rents are forecast to increase in these office markets. Despite rising rents, tenants and occupiers are not expected to return to the Sydney CBD. Introduction This Pulse paper will detail the fundamentals and outlook for Sydney Suburban Office markets. These markets comprise the North Shore (, Chatswood and St Leonards), Sydney South, Sydney Fringe,, Macquarie Park, Norwest and Homebush/Rhodes. The break up and size of stock within the markets is shown in Figure 1. Robust hiring of white collar workers in 2011 has led to increased demand for office space. This rise in employment is reflected in the Sydney Suburban office markets, with strong positive net absorption recorded by Jones Lang LaSalle. As a result, some of these markets have experienced above trend rental growth and tightening vacancy over the past 12 months. The total stock of the Sydney Suburban market at Q4/2011 was just under 4.3 million sqm, slightly smaller than that of the Sydney CBD office market (5.0 million sqm). The Sydney Suburban office market stock grew by 0.1% in the year to 2011. The supply outlook is low for the Sydney Suburban markets over the medium term. Purchaser activity was steady in the Sydney Suburban markets during 2011. A number of institutional investors have sold non-core suburban assets, as a strategic move to reduce portfolio weighting to non-cbd office markets. Figure 1: Size of Sydney Suburban Office Markets as at Q4/2011 Square Metres ('000s) 2000 1800 1600 1400 1200 1000 800 600 400 200 0 North Shore* Sydney Fringe Macquarie Park Norwest Homebush/RhodesSydney South *North Shore includes Chatswood,, St Leonards Transaction volumes remained steady in 2011 Total transactions in the Sydney Suburban office market have continued to increase year on year since 2008. Sixteen sales were recorded in the Sydney Suburban markets during 2011(with selected sales presented in Table 1). In contrast, 22 sales were recorded in the Sydney CBD during 2011. Sales in the Sydney Suburban market peaked during 2007, with 39 sales recorded totaling AUD 1.2 billion. The median transaction price dropped slightly from AUD 32.2 million in 2007 to AUD 31.7 million in 2011. Offshore investors were the price setters in the Sydney CBD office market, accounting for over half of Sydney office transactions in 2010 by value. Offshore investors remained dominant in the Sydney CBD office market during 2011, accounting for approximately one third of properties purchased. On the other hand, offshore purchasers have shown a lower level of interest in Sydney non-cbd office markets. During 2011 only 2 purchases made in the Sydney Suburban markets were by offshore purchasers. Offshore investors continue to be attracted towards quality assets with strong covenants, well-structured long WALEs and good tenants. Significant offshore sales within the Sydney Suburban Office markets include:
Pulse Demand set to continue for Sydney Suburban office markets March 2012 2 The Atrium, Pyrmont sold for AUD 137 million to a Swiss property trust (AFIAA Foundation for International Investments) in 2009 The Ark, for AUD 113.5 million to a US based property trust (Pramerica Real Estate Investors) in 2011 Commonwealth Bank Campus, Homebush for AUD 104.5 million to a German fund manager (Real I.S) in 2008 Chandler McLeod House, for AUD 36.5 million to a US based property trust (Heitman LLC) in 2011 Table 1: Selected Sydney Suburban Office Sales 2011 Nonetheless, by number of property sales, Australian purchasers have historically outweighed international purchasers in the Sydney Suburban office markets. Figure 2: Prime Grade Yield Range Sydney Suburban Office as at Q4/2011 10.00% 9.50% 9.00% 8.50% 8.00% 7.50% 7.00% 6.50% 6.00% Address Ark, 40 Mount Street, Gore Hill Technology Park - Building C, Artarmon 90-100 Mount Street, Chandler Macleod House, 8 Australia Avenue, Homebush 50 Berry Street, North Sydney 15 Bourke Road, Mascot Enterprise House, George Place, 80 George Street, 5.50% 12/06 6/07 12/07 6/08 12/08 6/09 12/09 6/10 12/10 6/11 12/11 Price (mill) Date Vendor Purchaser 113.5 Jul Investa 82.7 Dec 50.0 May 35.6 Jun Lindsay Bennelong Developments Delmege Property Abacus Property Group 30.2 Apr Watpac Limited 30.0 May CFS Asset Management 29.0 Mar ISPT Pty Ltd 28.3 Jun 27.0 Jun Trinity Property Trust 360 Capital Office Fund Pramerica Real Estate Investors Growthpoint Properties Australia Laing O'Rourke Heitman LLC The Centuria 8 Australia Avenue Fund Kingsmede Pty Ltd Capital Corporation Private Investor Heathley Keystone Property Fund No. 29 By number of sales, Private Companies and Investors were the dominant purchasers with 43.8% of sales in 2011. On average over the past 10 years, Private Companies and Investors account for approximately one third of all purchases in the Sydney Suburban office markets. Prime grade yields in Sydney Suburban markets range from 7.00% to 9.50% ( to Norwest - see Figure 2). Table 2 shows the current prime equivalent yield range for non-cbd office markets and the mid-point yield range as at Q4/2011. On a relative basis with the Sydney CBD, these yield levels are very attractive given the swiftly improving fundamentals in many of the non-cbd office markets Jones Lang Lasalle monitors. Table 2: Sydney Suburban Prime Grade Yields as at Q4/2011 Market Range Midpoint Spread (bp) Chatswood 8.75-9.50 9.13 75 Homebush/Rhodes 8.50-8.75 8.63 25 Macquarie Park 7.50-8.50 8.00 100 7.00-8.50 7.75 50 Norwest 8.25-9.50 8.88 125 7.75-8.75 8.25 100 St Leonards 8.00-8.50 8.25 50 Sydney Fringe 7.50-8.50 8.00 100 South Sydney 8.00-8.25 8.13 25 Strong fundamentals lead to lower vacancy Demand is improving in most precincts, with an overall decline in the vacancy rate in the last two years. Vacancy has been trending downwards, dropping 1.8 percentage points to 9.2% in 2011 (all markets combined). A stronger rate of decline in vacancy is evident in Chatswood, North Sydney, Macquarie Park and South Sydney due to the lack of uncommitted supply. Chatswood recorded the largest decline in vacancy, falling by 6.0 percentage points during 2011 to 10.4%. Vacancy declined by 4.5 percentage points in Macquarie Park to 6.0%. In both and South Sydney, vacancy dropped by 3.0 percentage points, to 7.6% and 14.3% respectively. Strong net absorption of 81,200 sqm was recorded in 2011, some 22.4% above the 5 year average. In context, Jones Lang LaSalle recorded 87,900 sqm of net absorption in the Sydney CBD during 2011, only slightly higher than the Suburban office markets. Tenants in Sydney Suburban office markets appear to have been less affected by volatile market conditions. Financial market uncertainly and potential job losses limited growth in demand by major domestic banks, brokers and global investment banks, traditionally large occupiers within the Sydney CBD. and Macquarie Park had the strongest net absorption in 2011. Expanding demand for space by tenants in the Property and Business Services industries drove much of the demand in. In Macquarie Park, demand came from a variety of industries, mainly as a result of tenants upgrading existing space.
Pulse Demand set to continue for Sydney Suburban office markets March 2012 3 According to Deloitte Access Economics, employment in the Information, Media and Telecommunications industry (within the Sydney metropolitan, excluding the Sydney CBD) increased by 1,100 employees or 2.4% in 2011. Major leasing activity was strongest in this industry during 2011 and included deals by: 3M Australia Pty Ltd at 1 Rivett Road, Macquarie Park (taking up 8,100 sqm), National Broadband Network taking up a total of 3,900 sqm in 100 Arthur Street, and Google leasing 2,400 sqm at Wharf 7 Pirrama Road, Pyrmont. Historically, leasing demand within the Sydney Suburban markets has been driven by manufacturing tenants, accounting for 24.8% of demand in 2010 and 20.2% of demand in 2009. Since 2002 about 1 in 5 tenant moves in the Sydney Suburbs have been manufacturing industry tenants. Interestingly Deloitte Access Economics shows a decline in white collar employment in the manufacturing sector in metropolitan Sydney (excluding Sydney CBD employees) decreasing by 2.7% (or 2,700 people) on average from 2008 to 2011. Lack of quality supply Figure 4: Sydney Suburban Supply Outlook the suburbs, particularly, where the A-grade vacancy rate is only 0.9% (see Figure 5). Although 26.3% of vacant space in Norwest is A-grade, only seven buildings have the capacity to accommodate tenants with floor space requirements of 2,000 sqm or more. Tenants looking for large A grade space in South Sydney have even more limited options, with only one building able to accommodate tenants requiring 2,000 sqm or more. Figure 5: Vacant A Grade Space as Proportion of Total Stock Norwest Sydney South Macquarie Park Chatswood Sydney Fringe St Leonards Homebush/Rhodes 0% 5% 10% 15% 20% 25% Square Metres ('000s) 300 250 200 150 100 50 5 year average Developers will be looking to take advantage of the lack of supply with a number of projects under construction and in the planning stages. Projects due to complete include the 14,400 sqm refurbishment of 461-471 Victoria Street, Chatswood (39% precommitted) and 17,800 sqm at 105 Delhi Road, Julius Avenue, North Ryde which is 100% pre-committed by the Department of Innovation, Industry, Science and Research (DIISR) (see Table 3). 0 2007 2008 2009 2010 2011 2012* 2013* 2014* *as at Q4/2011 Completed Under Construction (PA + PS) 5 year average The development pipeline within the Sydney Suburban office markets has been relatively subdued post the global financial crisis as can be seen in Figure 4. Only 2% of new or refurbished supply entered the Sydney Suburban market during 2010. Less than 1% entered the Sydney Suburban market during 2011. Supply to complete in 2011 was at a 5 year low at 37,500 sqm as can be seen in Figure 4. This was composed of 5 projects completed within Norwest, Sydney South, Sydney Fringe and Chatswood. A huge supply gap is evident for the Sydney Suburban markets from 2012 to 2014, with only 130,200 sqm of space under construction in the Sydney Suburban markets. Of the total stock under construction, approximately 39% has been pre-committed. There are limited options for larger users looking to relocate into non-cbd locations and tenants looking for A-grade space. A-grade vacancy as a percentage of overall stock is much lower for some of Table 3: Selected Proposed A Grade Construction Projects in Sydney Suburban Office 2012 Address Area % (sqm) Absorbed Eclipse, 60 Station Street, 25,700 80 Rhodes Corporate Park - Building F, 1 Homebush Bay Drive, Rhodes 17,750 0 461-471 Victoria Avenue, Chatswood 14,400 39 5 Murray Rose Avenue, Homebush Bay 13,227 0 Precinct Corporate Park - Buildings 3 & 4, 105 Delhi Road, Julius Avenue, North Ryde 10,270 100 Limited supply and tightening vacancy is supporting rental growth Prime gross effective rents increased across most markets in the year to 2011. was the best performing office market with 7.0% growth during the period. Prime gross effective rents averaged AUD 435 psm p.a. as at Q4/2011. The decreasing vacancy in Suburban markets, particularly in prime grade properties, and the low levels of supply has put upward pressure on rents. Incentives have tightened in a number of markets
Pulse Demand set to continue for Sydney Suburban office markets March 2012 4 such as Macquarie Park, which has further lifted gross effective rents (see Figure 6). Figure 6: Prime & Secondary Gross Effective Rents Rental Growth in the Year to Q4/2011 on rents. Homebush/Rhodes has approximately 36,600 sqm of space under construction with no pre-commitments. A further 54,400 sqm is in the planning stages from 2012 to 2014. These projects are unlikely to go ahead unless a significant precommitment is secured or the previous speculative supply is largely absorbed. Macquarie Park St Leonards Sydney Fringe Chatswood Homebush/Rhodes South Sydney Norwest -1% 0% 1% 2% 3% 4% 5% 6% 7% 8% secondary prime Prime gross effective rental growth was strong for Macquarie Park during 2011, growing by 6.3% to average AUD 278 psm p.a. Rents in Macquarie Park were driven by strong tenant demand, with vacancy now at its lowest level since Q1/2008. Macquarie Park continues to remain an attractive market due to the relatively low overall occupancy costs. The limited supply pipeline and solid demand could see a number of projects in Macquarie Park move from the planning stage to the construction stage in the next two years. In the interim, Macquarie Park is likely to continue to experience tightening vacancy and a moderate rise in market rents as a result. The cheapest market in the Sydney Suburbs remains Norwest with average gross effective rents at AUD 241 psm pa during Q4/2011. As can be seen in Figure 5, Norwest was the only market to experience a fall in prime gross effective rents in the year to 2011 (-0.4%). This was as a result of weaker tenant demand, particularly by large space users and the high availability of prime vacant space in the Norwest. Due to the high level of unabsorbed supply which completed in the past year, rents are forecast to decline moderately, until demand meets supply. Vacancy could decline sharply With increased demand and lack of supply, the combined Sydney Suburban market should record a further decline in vacancy during 2012. Norwest is the only Sydney Suburban office market which is the exception to the rule. Norwest has had a large amount of development, particularly speculative development, since the start of the GFC. has two projects under construction. Eclipse, an A-grade development at 60 Station Street with 25,700 sqm of space is due to complete in 2012 with 80% pre-commitments. Further, the B1 Tower at 114-124 Church Street, is due to bring 2,300 sqm of vacant space to the market in 2014. A further 44,800 sqm is in the planning phase in. Due in 2014, The Cumberland Media Centre at 142 154 Macquarie Street is likely to move into the construction phase, being full pre-committed to Cumberland Newspapers (10,600 sqm). Currently only 0.9% of total stock is vacant A grade space in (Figure 5). Despite the lack of pre-commitments, some further speculative development in the Sydney Suburban office markets is possible in the medium term to meet the demands of tenants seeking more sustainable, high quality space or larger floor plate buildings. Outlook Partly on account of subdued economic sentiment and the availability of finance, the supply outlook for Sydney Suburban office markets is subdued. New development is constrained due to lender and investor caution. Vacancy is forecast to remain low across most markets due to the lack of supply. The Sydney Suburban markets should see an increase in rents in the medium term due to the lack of space, particularly A-grade vacancy. A number of projects in the planning phase are predicted to move into the construction phase in 2012 and 2013. Markets such as Macquarie Park, and South Sydney will likely see more projects move out of the planning stages and into the construction stage. This will likely result in slightly higher vacancy and ease the pressure on rental rates as a result. Dasha Kruchkoff Strategic Analyst, NSW Jones Lang LaSalle tel: +61 2 9220 8724 dasha.kruchkoff@ap.jll.com www.joneslanglasalle.com.au Homebush/Rhodes has the largest active supply pipeline in the medium term. Total vacancy, however, remains very low at 2.4%, because no new supply has come to market since 2008. Rents currently average AUD 315 psm p.a. and rose 1.6% during 2011. A moderate increase in vacancy is not forecast to have a major impact
Adelaide Liverpool Perth Level 22, Grenfell Centre Level 5, 33 Moore Street Level 29, Central Park 25 Grenfell Street Liverpool NSW 2170 152-158 St George s Terrace Adelaide SA 5000 tel +61 2 8777 5533 Perth WA 6000 tel +61 8 8233 8888 tel +61 8 9322 5111 Mascot Brisbane Level 3, Sydney Airport Centre Sydney Level 33, Central Plaza One 15 Bourke Road Level 25, 420 George Street 345 Queen Street Mascot, NSW, 2020 Sydney NSW 2000 Brisbane QLD 4000 tel +61 2 9693 9800 tel +61 2 9220 8500 tel +61 7 3231 1311 Melbourne Brookvale Level 21, Bourke Place 1 Dale Street 600 Bourke Street Brookvale NSW 2100 Melbourne VIC 3000 tel +61 2 9938 3122 tel +61 3 9672 6666 Canberra Level 7, 121 Marcus Clark Street Level 27, North Point Canberra, ACT, 2601 100 Miller Street tel +61 2 6274 9888 NSW 2060 tel +61 2 9936 5888 Glen Waverley Building 2 540 Springvale Road Level 8, 79 George Street Glen Waverley VIC 3150 NSW 2150 tel +61 3 9565 6666 tel +61 2 9806 2800 Demand set to continue for Sydney Suburban office markets - March 2012 Pulse reports from Jones Lang LaSalle are frequent updates on real estate market dynamics. www.joneslanglasalle.com COPYRIGHT JONES LANG LASALLE IP, INC. 2012. All rights reserved. No part of this publication may be reproduced or transmitted in any form or by any means without prior written consent of Jones Lang LaSalle. It is based on material that we believe to be reliable. Whilst every effort has been made to ensure its accuracy, we cannot offer any warranty that it contains no factual errors. We would like to be told of any such errors in order to correct them. Printing information: paper, inks, printing process, recycle directive.