Sydney CBD Commercial Market To Grow Due To Shortages

Supply has not kept pace up with demand and, as a result, the metropolitan vacancy rate has fallen to its lowest rate since 2000. However, the market tightness is not broadly based—a ‘two tiered' market has emerged. The CBD vacancy rate is at a low 3.7 per cent (at December 2007) and expected to fall to 3.4 per cent by December 2008, whilst the non-CBD vacancy rate has risen (to an estimated 9 per cent). Even so, the Sydney office market is lagging other capital city markets in the upswing, with employment growth and demand for office space held back by an underperforming NSW economy.

Click to enlarge

We expect the situation will reverse over the next five years, during which the NSW economy is expected to outperform the national average. It looks like the Sydney office market will miss the ‘boom-bust' excesses expected in most major Australian office markets at the end of this decade and this will create opportunities—for investment, leasing and developmen based on the forecasts within BIS Shrapnel's Sydney Commercial Property Prospects 2008 to 2022 study, Sydney will be the only commercial property market still strong in five years time. Other cities are at various stages of building momentum to a commercial property boom followed by bust, i.e., a classic cycle. Sydney won't have a chance to oversupply before the end of the decade, so the cycle will last longer with the main upswing delayed until next decade.

In Sydney's CBD, relatively little construction is under way. That will limit completions over the next two to three years. High site costs mean rents have not yet reached replacement costs. Furthermore, the credit crisis has made speculative projects harder to finance and more expensive. As a result, most new development is constrained by the need to secure pre-commitment. The dearth of completions means the CBD vacancy rate will remain under 4 per cent for the rest of this decade, driving solid rises in rents.