Sydney’s office sector records -35,000sqm net absorption in Q2

Find out which firms drove this negative absorption. 

In Sydney’s office property market, net absorption of about -35,000 sqm was recorded over the second quarter of 2023. 

JLL said in a report that this was mainly driven by the Commonwealth Bank of Australia handing back space in the entirety of Darling Square (27,083 sqm) as well as some tech groups offering sublease space to the market, such as Atlassian in Westpac Sydney House (5,584 sqm) and NTT in Darling Park Tower 3, 201 Sussex Street (6,000 sqm).

Here’s more from JLL:

Positive net absorption was recorded in 4 out of 10 of Sydney’s office markets. The largest positive result was recorded in Parramatta (10,737 sqm), driven by the relocation of a government tenant to 1-3 Fitzwilliam Street. Sydney CBD recorded the largest negative result (-35,025 sqm), driven by consolidation activity and sublease space being offered to the market by large tenants.

Office supply remains unchanged over the quarter

JLL recorded no completions and withdrawals in the Sydney CBD over the quarter. As a result, total stock remained at 5.2 million sqm. Currently, about 212,100 sqm of stock is under construction in the Sydney CBD, with completion dates between 2023–2024. The largest project under construction in the Sydney CBD is the Martin Place Over Station Development – North, 1 Elizabeth Street (65,000 sqm). 

We recorded three office completions across Sydney’s metro markets over the quarter. These developments were Macquarie Exchange 4, 396 Lane Cove Road, Macquarie Park (17,000 sqm), The Bond, 8 Elizabeth Macarthur Drive, Norwest (9,178 sqm), and One Chalmers, 1-5 Chalmers Crescent, South Sydney (8,251 sqm). There was one recorded withdrawal—The Village Roadshow Centre, Sydney Fringe (12,800 sqm). 

Prime rents lift as tenants compete for quality office space

The Sydney CBD recorded net effective rental growth of 1.8% over Q2 2023, mainly driven by an uplift in face rents. Average prime incentives decreased by a very minor amount to 34.5%. Prime net face rents recorded growth of 1.4% over the quarter, as occupier demand remained strong in high quality stock, particularly Premium assets with good views.

Prime yields softened across all Sydney office markets, with the Sydney CBD prime yield range expanding 13 bps on the upper end and 25 bps on the lower end to 4.63%–6.00%. This softening is a reflection of market sentiment in light of an elevated cost of debt environment as well as global economic headwinds, which are impacting pricing levels. 

Outlook: Softer demand expected for poorer-quality stock

A lull in development activity is expected in the Sydney CBD over 2023, with 11,500 sqm of stock projected to complete. This will be the year with the lowest level of development activity in the market since 2012. In the Sydney metro market, an elevated vacancy rate is forecast to remain for the foreseeable future due to substantial consolidation activity recorded in some markets in recent years.

Yields are expected to soften further over the back half of 2023. The flight-to-quality theme will likely widen the spread between prime and secondary grade assets as tenants continue moving into quality stock, which will increase the vacancy rate in older-style assets. A number of large office sales are expected to transact over the end of 2023, which will provide clarity into asset pricing.

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