THE NORTH SHORE O F F I C E M A R K E T U P DAT E SUMMER 2018
N O R T H S H O R E R E G I O N S......................................................................... 2 W H AT S T R E N D I N G.................................................................................. 3 C U R R E N T D E V E L O P M E N T A C T I V I T Y...................................................... 3 N O R T H S Y D N E Y........................................................................................ 4 C R O W S N E S T / S T L E O N A R D S............................................................... 6 CONTENTS C H AT S W O O D............................................................................................ 7 M A C Q U A R I E P A R K / N O R T H R Y D E........................................................ 8 T E N A N T R E P R E S E N TAT I O N...................................................................... 9 RECE NT L E A S I N G T R AN SAC T I O N S... 1 0 R E C E N T S A L E S T R A N S A C T I O N S........................................................... 1 0 C I N O R T H S H O R E T E A M......................................................................... 1 1 A B O U T C I.................................................................................................. 1 2 NORTH SHORE REGIONS The Sydney North Shore is a collection of four dynamic investors and tenants seeking opportunities available through markets in proximity to the Sydney CBD. The area extends its broad and diverse markets, offering a variety of size, use from Milsons Point at the Northern end of the Sydney Harbour and growth potential. Bridge through to major northern metropolitan areas, such as When combined, these four markets provide a total Chatswood and Macquarie Park. 1,140,632sqm of commercial office space: Its dynamic central core, The North Sydney CBD, is regarded North Sydney 823,982sqm as the focal point of the North Shore office market. However, Crows Nest/St Leonards 307,731sqm in terms of total office space, it has been eclipsed by Chatswood 278,919sqm Macquarie Park, which now sits as NSW s largest office Macquarie Park (MP) 865,482sqm market outside of the Sydney CBD. The North Shore area is an active environment for developers, M ACQ U A R I E PA R K C H AT S W O O D C R O W S N E S T/ S T L E O N A R D S NORTH SYDNEY 2
WHAT S TRENDING $ Further tightening of investment yields High rents pushing tenants to review secondary locations $ Sustained growth in face rents and effective rental growth Large tenant commitments across the North Shore market Tenants renewing leases as rental growth continues as a result of low supply CURRENT DEVELOPMENT ACTIVITY NO. ADDRESS SUBURB STATUS COMPLETION NLA (SQM) 472-494 Pacific Hwy Crows Nest/St Leonards Construction Q4 2019 4,200 219-247 Pacific Hwy Crows Nest/St Leonards DA Approved Mooted 16,000 219-247 Pacific Hwy Crows Nest/St Leonards DA Approved Mooted 15,000 219-247 Pacific Hwy Crows Nest/St Leonards DA Approved Mooted 15,000 18-20 Atchison St Crows Nest/St Leonards DA Applied Mooted 2,300 1-3 Atchison St Crows Nest/St Leonards Complete Q3 2017 1,825 100 Mount St North Sydney Construction Q1 2019 42,000 1 Denison St North Sydney Site Works Q1 2020+ 45,720 100 Pacific Hwy North Sydney Complete Q4 2017 1,408 45-61 Waterloo Rd Macquarie Park Construction Q4 2019 100,000 3
NORTH SYDNEY North Sydney - Don t be fooled - B Grade is tight LEASING ACTIVITY The vacancy rate in North Sydney has increased from 6.4% to 7.9% being 12,369sqm respectively. Despite the increase in vacancy rates tenant demand remains strong with continued effective rental growth across all building grades. Strong pre-commitments have been seen with NBN securing 20,364sqm and Laing O Rourke 6,229sqm at 100 Mount Street taking the building to 60% occupancy. Other significant market transactions include: US Consulate at 50 Miller St (5,996sqm) Flight Centre at 60 Miller St (6,566sqm) Allianz Insurance at 101 Miller St (5,654sqm) The B-Grade vacancy rate is currently 8.3% being 34,803sqm. However the majority of this vacancy lies in several buildings either undergoing refurbished or experiencing development related noise disruption. The remaining B-Grade buildings without these prevailing issues are actually experience strong rental growth and low vacancy. SALES/INVESTMENT ACTIVITY Brisk investment sales activity was the hallmark of 2017 in North Sydney. Nine transactions within the $50-150M range confirmed North Sydney as an attractive investment alternative to the Sydney CBD. See page 10 for details. Offshore groups feature heavily with Blackrock, Swiss RE and a host of Chinese groups committing to investment in the precinct along with local private investors. The benchmark sale was 1 Pacific Highway which sold to a Chinese investor for $114.8M reflecting a 5% initial yield and just under $15,000psm. Strong forecast effective rental growth and high investment demand have pushed capitalisation rates down to a record low range of 5.25% - 5.75%. CI expects that offshore demand for North Sydney assets will continue due to confidence in Australia s transparent market, continued benign interest rates and a reducing Australian dollar. DEVELOPMENT ACTIVITY North Sydney is a world-class CBD in transformation. The precinct has come alive with activity and an unprecedented level of development over the next five years will deliver a reborn North Sydney that will offer tenants retail amenity, transport and a cosmopolitan environment. Major developments, infrastructure and planning initiatives include: Sydney Metro City & South West The Sydney Metro will deliver a second North Sydney railway station. Victoria Cross will improve connectivity to the Sydney CBD. Expected travel time to Barangaroo and Martin Place is 3 and 5 minutes respectively with completion due in 2024. New Office Schemes Two Premium-Grade office towers, 100 Mount Street and 1 Denison Street, are under construction. Zurich Insurance are also set to commence construction of a 20,000sqm building nearby 119 Mount Street. Strata Amalgamation Several key North Sydney sites may be unlocked as owners utilise the Strata Development Act 2015 to activate a collective sale and free up valuable sites. Developers are rumoured to circling a 97 Pacific Highway amalgamation. 4
N E T North A B S Sydney O R P TNet I O Absorption N 6 M T H(6S mths) (SQM) VA C ASydney N C Y Vacancy FAC TO R (% North Factor (%)) 25.0 30,000 20,000 20.0 10,000 15.0 0-10,000 10.0-20,000 5.0-30,000 0.0-40,000 Net Absorption Prime Grade (Premium & A-Grade) Secondary Grade (B, C & D Grades) Total vacancy Crows Nest/St Leonards Vacancy Factor (%) Crows Nest/St Leonards Net Absorption (6 mths) 18.0 15,000 16.0 10,000 14.0 5,000 12.0 0-5,000-10,000 10.0 NORTH SYDNEY PROPERTIES SOLD IN Q3 & Q4 2017 8.0 6.0-15,000 4.0-20,000 2.0-25,000 0.0 8 WEST ST 56 B ERRY S T 116 MILLER ST 101 MILLER ST (behind this building) 3 2 WA L K E R S T 75 MILLER ST 3 2 WA L K E R S T 15 BLUE ST 1 PA C I F I C H W Y 5
CROWS NEST / ST LEONARDS LEASING ACTIVITY Vacancy rates in Crows Nest / St Leonards have decreased 1.5% in the last 6 months to January 2018. The majority of vacancy lies in A-Grade with 15.7% vacancy. 201 Pacific Highway was the main contributor to this vacancy which has now close to zero vacancy. Mastercard is rumoured to be securing 7,500sqm at 72 Christie Street, St Leonards easing vacancy significantly. Secondary stock vacancy rates continue to decrease, with minority buildings without a demolition clause benefiting greatly as there is strong demand by tenants. SALES/INVESTMENT ACTIVITY The precinct remains a key commercial destination. Stock withdrawal for residential development translates into strong rental growth for remaining quality commercial assets. The recent sale of 201 Pacific Highway by Abacus to Centuria for $171.8M (reflecting $10,363psm and 6.5% yield) demonstrates this sentiment. Offerings in the precinct are expected to be highly sort after, as the draft Greater Sydney Region Plan 2017 identifies St Leonards as a priority area for employment, as well as housing. Crows Nest has witnessed a significant spike in sales activity, particularly in the sub $20M market. Several sales along Alexander Street are benchmarking pricing reflecting capitalisation rates of an average 4% as investors competitively pursue opportunities with future development potential within walking distance of the Crows Nest Metro Station. CI Australia has recently sold 83 Alexander Street and 79-81 Alexander Street for $14.515M and $5M respectively reflecting yields of 5.1% and 4.2%. DEVELOPMENT ACTIVITY St Leonards is buzzing with high-rise residential development. Over 2,000 apartments are clustered around St. Leonards railway station and the Crows Nest Metro. The landmark St Leonards Square and 88 Christie Street are skyscraper residential towers set to redefine the social and cultural hubs. Similarly, the draft St Leonards Master Plan considers a higher density zoning for the precinct between Canberra Avenue, River Road and Park Road where approximately 2,400 new dwellings are envisaged. The Pacific Highway corridor, where a concentration of B-Grade offices are located, is proposed to be an activated high density area with a key focus on employment. Elsewhere, Lane Cove council has proposed a 5,000sqm plaza over the railway line, connecting the eastern and southern precincts of St Leonards. 15,000 10,000 5,000 0-5,000-10,000-15,000-20,000-25,000 NET ABSORPTION 6MTHS (SQM) 18.0 16.0 14.0 12.0 10.0 8.0 6.0 4.0 2.0 0.0 VACANCY FACTOR (%) Net Absorption Prime Grade (Premium & A-Grade) Secondary Grade (B, C & D Grades) Total vacancy 6
CHATSWOOD LEASING ACTIVITY The vacancy rate in Chatswood is currently 6.8% as at January 2018. Activity in B-Grade stock produced a positive result with a decline in vacancy of 2.1%. A lack of quality B-Grade suites below 350sqm resulted in landlords splitting whole floors to fill the gap in the market corresponding to in a reduced letting up time and slight rent premium being achieved. CI expects a demand to increase in Chatswood s secondary market as completion of the Sydney Metro North West line in 2019 gets closer. As rents rise in the North Sydney CBD we should see a further shift in tenants looking at secondary markets. Carnival Shipping is one example, moving from 60 Miller Street, North Sydney to 3,500sqm in 465 Victoria Street, Chatswood. SALES/INVESTMENT ACTIVITY The sale by Railcorp (one of CI s largest managed portfolio) of the freehold of 1-5 Railway Street, Chatswood is the most significant recent transaction in Chatswood. The property was purchased by Barana Pty Ltd for $38M. DEVELOPMENT ACTIVITY A development application for a new 16-storey commercial tower located at 67 Albert Avenue has been lodged by the owners. In 2017, Willoughby Council issued a draft study produced by Architectus entitled Chatswood CBD Planning and Urban Design Study. Within this document, Architectus estimates that Chatswood will require approximately 207,500sqm of additonal office gross floor area. The availability of options above 3,000sqm are limited, therefore larger tenants must remain at their existing premises. An example of this is Huawei Technologies renewing their lease over 5,048sqm in 799 Pacific Highway, Chatswood. NET ABSORPTION 6MTHS (SQM) VACANCY FACTOR (%) 20,000 15,000 10,000 5,000 0-5,000-10,000-15,000-20,000-25,000-30,000 40.0 35.0 30.0 25.0 20.0 15.0 10.0 5.0 0.0 Net Absorption Prime Grade (Premium & A-Grade) Secondary Grade (B, C & D Grades) Total vacancy 7
MACQUARIE PARK / NORTH RYDE A Bold Vision for Technology Park LEASING ACTIVITY Stockland has announced a state of the art tech hub plan have been lodged for 16,500sqm of office, retail, learning and co-working space across 10 storeys. The project will form part of a five building precinct of over 55,000sqm. Vacancy rates in Macquarie Park decreased 2.4% to 6% due to 13,594sqm being withdrawn and 13,318sqm of net absorption in the last 6 months to January 2018. CI anticipates the decrease in vacancy to continue. Macquarie Park will attract occupiers from outlying suburbs due to its competitive price point and large floor plates making it favourable to larger tenants. As tenants in peripheral suburbs are displaced through residential development, Macquarie Park will continue to experience an influx of new occupiers and a decrease in vacancy rate. SALES/INVESTMENT ACTIVITY North Ryde/Macquarie Park recorded several major transactions over 2017 outlined in the table below. DEVELOPMENT ACTIVITY The sale of a 3.2ha development site at 45-61 Waterloo Road, Macquarie Park by the NSW government for $170M to Chinese owned John Holland Group is a significant transaction for the precinct. Capable of delivering 117,000sqm of office accommodation, the NSW Government will lease back 25,000sqm with the option to take a further 10,000 to 30,000sqm. The $1billion plus project is expected to be completed in late 2019 and may also potentially link to Macquarie Park Railway Station. Goodman Group has purchased 58 Waterloo Road for $40.5M. The 1.13ha site was sold by Swiss pharmaceutical company Novartis, who previously occupied the building. Elsewhere, owners at key sites eagerly await the draft land use and Infrastructure Implementation Plan being prepared by the NSW Department of Planning, City of Ryde Council and international planner ARUP. NO. ADDRESS PRICE ($) VENDOR PURCHASER YIELD (%) $/SQM 123 Epping Rd 118,000,000 Charter Hall B1/Shimao 6.5 7,302 8 Khartoum Rd 93,500,000 Goodman Ogen Nominees Pty Ltd 5.0 8,750 2 Richardson Pl 85,000,000 Blackstone Investec 7.0 5,650 NET ABSORPTION 6MTHS (SQM) VACANCY FACTOR (%) 120,000 100,000 80,000 60,000 40,000 20,000 0-20,000 20.0 18.0 16.0 14.0 12.0 10.0 8.0 6.0 4.0 2.0 0.0 Net Absorption Prime Grade (Premium & A-Grade) Secondary Grade (B, C & D Grades) Total vacancy 8
T E N A N T R E P R E S E N TAT I O N Whilst vacancy has risen slightly in the six months from July Though the North Shore market is not anticipated to 2017 to January 2018 the North Shore market remains tight. significantly change, the delivery of the new developments This is due to various factors, including the market tightening at 100 Mount St (42,000sqm), 1 Denison St (61,000sqm), of the Sydney CBD over the next couple of years due to a solid refurbishment of 100 Miller St and completion of Brett Whitely state economy, little to no vacancy, strong tenant demand Square will add greatly to the surrounding amenity and and the withdrawal of stock for other projects such as the reposition North Sydney as more of an extension of the Sydney Sydney Light Rail. Another factor is the sale and withdrawal CBD. As the completion of the Sydney Metro project (due of B and C Grade office stock for conversion to residential in 2024) will reduce commuter times and greatly improve towers (approximately 1,700 apartments planned or under connectivity. We anticipate North Sydney and the broader construction) in each of the 4 markets which is expected to North Shore market will become even more attractive to continue due to Sydney s forecast population growth. prospective tenants. CURRENT ENQUIRIES TENANT SUBURB AREA (SQM) O C C U P AT I O N Sophos North Sydney 1,300-1,400 Q3 2019 WPP AUNZ (GroupM) North Sydney, Sydney CBD & City Fringe 10,000-12,000 Q4 2018 Q1 2019 Mortgage Choice North Sydney & Sydney CBD 1,200-1,500 Q2 2019 Micro Focus North Sydney & St Leonards 1,500-1,700 Q2 2018 NCR North Sydney, Chatswood & St Leonards 1,000 Q1 2018 Penguin Random House Sydney CBD, North Sydney, Pyrmont & Ultimo 1,600-1,750 Q2 2019 9
RECENT LEASING TRANSACTIONS ADDRESS SUBURB GLA APPROX. (SQM) DATE R E N T ($/SQM) TENANT Level 6, 141 Walker St North Sydney 942 Jan 18 690 (N) AT & T 111 Pacific Hwy North Sydney 160.7 Jan 18 730 Digital Realty Levels 5-10, 50 Miller St North Sydney 5,966 Nov 17 630 US General Consulate Suite 4.02, 1 James Pl North Sydney 257 Nov 17 500 Prime Partners Pty Ltd Level 2, 67 Albert Ave Chatswood 738 Nov 17 535 CMC Markets Level 14, 799 Pacific Hwy Chatswood 900 Sep 17 465 Kumon Australia Tower 1, Suite 11.01, 475 Victoria Ave Tower 1, Suite 11.03, 67 Albert Ave Suite 1.02 + 1.03, 156 Pacific Hwy Chatswood 518.4 Sep 17 500 Filtered Media Chatswood 101.5 Sep 17 520 Pronovate St Leonards 386 Sep 17 440 Jackson Financial RECENT SALES TRANSACTIONS NO. ADDRESS SUBURB NLA APPROX. (SQM) DATE PRICE ($) CAP RATE (%) 75 Miller St North Sydney 5,024 Nov-17 52,000,000.00 5.6% 32 Walker St North Sydney 6,619 Oct-17 74,750,000.00 5.7% 56 Berry St North Sydney 4,978 Oct-17 62,000,000.00 N/A 101 Miller St North Sydney 36,661 Sep-17 684,000,000.00 N/A 1 Pacific Hwy North Sydney 7,642 Sep-17 114,440,000.00 4.8% 8 West St North Sydney 6,420 Sep-17 58,880,000.00 5.43% 165 Walker St North Sydney 5,221 Jul-17 60,000,000.00 5.4% 116 Miller St North Sydney 11,352 Jul-17 134,000,000.00 5.3% 15 Blue St North Sydney 15,880 Jul-17 169,000,000.00 5.8% 201 Pacific Hwy St Leonards 16,577 Dec-17 172,000,000.00 6.5% 29-57 Christie St Crows Nest 18,081 Nov-17 160,000,000.00 N/A 425-429 Pacific Hwy Crows Nest 850 Oct-17 8,900,000.00 N/A 35 Chandos St St Leonards 2,183 Sep-17 22,000,000.00 4.7% 657 Pacific Hwy St Leonards 3,645 Aug-17 22,150,000.00 5.7% 83 Alexander St Crows Nest 1,902 Jul-17 14,515,000.00 N/A 33 Chandos St St Leonards 3,526 Jul-17 48,100,000.00 N/A 56-58 Waterloo Rd Macquarie Park 5,394 Oct-17 40,500,000.00 N/A 10
INVESTMENT SALES BEVAN KENNY CHRIS VEITCH NICK LOWRY Managing Director, North Sydney +61 411 223 213 bkenny@ciaustralia.com.au Director, North Sydney Sales +61 434 566 355 cveitch@ciaustralia.com.au Assoc. Director, Capital Transactions +61 408 891 376 nlowry@ciaustralia.com.au COMMERCIAL LEASING ANTHONY MERRETT Director, Commercial Leasing M: +61 405 719 566 E: amerrett@ciaustralia.com.au JARED HILLS Commercial Leasing Executive M: +61 423 218 283 E: jhills@ciaustralia.com.au TOBY ANDERSON Commercial Leasing Executive M: +61 409 906 580 E: tanderson@ciaustralia.com.au TENANT REPRESENTATION ASIA DESK BEAU STEWART Director, Tenant Rep. Services M: +61 400 505 545 E: bstewart@ciaustralia.com.au TALIA BACOT-KEATING Tenant Representative M: +61 432 853 534 E: tbk@ciaustralia.com.au RIKKI WU Asia Desk & Development Advisor M: +61 432 017 873 E: rwu@ciaustralia.com.au CI NORTH SHORE TEAM Connect with us on WeChat The Sydney North Shore Team at CI comprises of professional individuals, devoted to ensuring all client needs are met with precision and efficiency. Please contact our office to discuss the potential of your assets and we will endeavour to make sure your key drivers are achieved. 11
ABOUT CI CI Australia is widely regarded as a market leader within the CI RECENT RESEARCH PUBLICATION property and real estate industry, specialising in the areas of: Commercial Leasing Tenant Representation Services Investment Sales Asset Management Engineering & Facilities Management Valuations & Advisory Marketing & Research MARTIN PLACE SYDNEY CENTRAL TRANSFORMED January 2018 The CI Research department benefits from a vast network of industry connections and the inherent resource of property knowledge that accompanies. The teams at CI Martin Place Research Report - January 2018 are dedicated in providing their personal knowledge and market opinions in the construction of this report, and work closely with our research teams to ensure an accurate market overview is achieved. Disclaimer: This report has been prepared by CI Australia Pty Limited ( CI ) concerning information on the North Shore Market Overview. This report is given for information purposes only. CI does not give any warranty of reliability, accuracy, currency or completeness of any of the information supplied nor does it accept any responsibility arising in any way (including by reason of negligence) for any errors or omissions in the information provided. The information in this report is CI AUSTRALIA PTY LIMITED Level 7, 2 Elizabeth Plaza North Sydney, 2060 www.ciaustralia.com.au subject to change without notice and may include certain statements, estimates and projections with respect to anticipated future performance. No representations or warranties are made as to the validity of those assumptions or the accuracy of those statements, estimates or projections. Any interested party should form its own views as to what information is relevant to any decisions it makes and make its own independent investigations and obtain its own independent advice. This report does not form part of or constitute an offer or contract. The information in this report must not be copied, reproduced or distributed without the prior written approval of CI.