Sydney small businesses’ average lease term fell 23% over the past 5 years

Businesses occupying under 2,000 sqm sign lease terms of just 3.9 years.

Over recent years, JLL says small businesses (occupying below 2,000 sqm) have shifted towards shorter office lease terms. This trend reflects the need for greater flexibility and the rapid expansion of coworking operators across the Sydney CBD.

Figure 1 below from JLL shows that between 2015 to 2020, the average lease term for transactions under 2,000 square metres in the Sydney CBD has fallen 23%, to 3.9 years. Yet, the median lease size has been relatively stable, ranging from 250 to 300 square metres. This trend suggests that smaller tenants are seeking greater flexibility in their leases, partly because they are unsure of their growth trajectory and face the risk of outgrowing their space too quickly.

Data for 2021 suggests small businesses have opted for longer lease terms despite the economic uncertainty caused by COVID-19. This could be due to the attractive financial metrics on offer, encouraging businesses to sign longer leases to make the most of a tenant-favourable market.

Figure 1: Shifts in average lease term and median size of transactions under 2,000 sqm in the Sydney CBD

Source: JLL Leasing, 1Q21

Here’s more from JLL:

Small businesses have a large presence in Sydney’s CBD. A business employing 5-19 employees is defined as a small business, based on the Australian Bureau of Statistics (ABS) data. These businesses would typically occupy space between 60 and 230 square metres, using a market average of 1:12 employee-workspace ratio assumption.

There are an estimated 3,500 small businesses (excluding food and retail) in the Sydney CBD. The number of small businesses has grown the most in absolute terms between 2015 and 2020, with an additional 660 firms over this period, reflecting 23% growth. The professional, scientific and technical services industry is the main driver of growth, growing by an additional 307 firms over five years to 1,370 firms (+29% growth).

This industry sector is expected to continue growing over the medium term as the computing/software industry grows with the expansion of the digital economy. Going forward, this provides support for further employment growth, as well as increased leasing activity in the sub-1,000-sqm cohort of the market.

Government policies supported small businesses over the lockdown period

The Australian government announced over $200 billion in support for businesses throughout COVID-19 in 2020. As a result, NSW businesses entering administration are at the lowest in 10 years (Figure 2). Major initiatives included the JobKeeper payment, which provided $81 billion in wage subsidies, the National Code of Conduct which introduced a moratorium on commercial tenancy evictions and temporary safe harbour provisions allowed struggling businesses time to get back on track. As these policies have concluded, the Federal Budget 2020-21 has announced that additional support is underway. For example, the JobMaker Hiring Credit is providing an incentive for businesses to employ young job seekers and temporary tax incentives for business investments.

The Australian economy has recovered faster than expected, returning confidence to businesses as the nation recovers from the recession. Small businesses are leading this recovery, with increased leasing activity in the sub-1,000-sqm cohort of the market in 1Q21.

Figure 2: Number of businesses entering external administration in NSW, 2000 – 2020

Source: ASIC 2020, Insolvency statistics Series 1