Sydney CBD office market records highest prime incentive levels since 2015

Prime incentives reached 31.1% in the Sydney CBD in Q1.

According to JLL, small tenant demand improved in the Sydney CBD over 1Q21, however this was offset by consolidation activity by larger corporates resulting in negative net absorption (-7,000 sqm). This was mainly driven by large financial institutions (-9,900 sqm) and flexible space operators (-9,000 sqm) handing back space.

Net absorption improved in 1Q21 when compared to 4Q20 in six out of ten of Sydney’s office markets, says JLL. Larger positive take-up included CoreLogic leasing 3,800 sqm at 388 George Street, Sydney CBD and Red Hat expanding to 1 Denison Street, North Sydney (2,000 sqm). However, this was offset by large sublease offerings, in particular NAB subleasing 14,500 sqm at 3 Parramatta Square.

Here’s more from JLL:

Significant completions recorded across metropolitan Sydney

Four projects added 43,000 sqm to stock in 1Q21. 32 Smith Street, Parramatta (26,500 sqm; 56% pre-leased to QBE and Coleman & Greig Lawyers) was the largest. Two projects completed in Norwest (12,100 sqm) – Century Estate 50 Norwest Business Park (7,500 sqm; 100% pre-leased to Greenstone Financial) and Esplanade (4,600 sqm; 100% vacant upon completion) – the first Norwest additions since 2Q12.

We recorded four building withdrawals (3,800 sqm) over 1Q21, all located in Parramatta. 140 Macquarie Street (200 sqm) was withdrawn for other use and 114-116 Macquarie Street (1,500 sqm) was withdrawn for residential conversion. 74 Macquarie Street (900 sqm) was acquired for demolition to make way for the metro station and 72 Macquarie Street (1,100 sqm) was also withdrawn.

Incentives continue to rise in Sydney CBD and North Shore markets

Sydney CBD, North Sydney and St Leonards were the only three markets to record a decline in prime net effective rents across the 10 tracked Sydney office markets. This was mainly driven by an uptick in incentives. Prime incentives increased to 31.1% in the Sydney CBD which is the highest level since 2Q15.

The prime yield range remained stable over 1Q21 across all of Sydney’s office market with the exception of Norwest. Norwest prime yields compressed 25 bps on both ends to range between 5.50% – 6.50%.

Outlook: Subdued demand expected over 2021

Small tenant leasing activity has picked up off a low base and we have been observing larger tenants (> 1,000 sqm) release briefs to the market which should support leasing activity across the CBD and metropolitan office markets. However, larger corporations continue to reassess their office space requirements and it is expected that sublease vacancy will continue to fluctuate over the short term.

We are projecting a further correction in net effective rents in Sydney CBD and metropolitan markets office markets over 2021, although not to the magnitude observed last year. The correction will be driven by an increase in incentives as landlords compete for tenants to fill the vacant space in their assets on the back of the elevated vacancy level in these markets.

Note: Sydney Office refers to Sydney's CBD office market (all grades).