Sydney Office Market Enjoying Boost from Tech Sector

According to the latest research from Knight Frank, office space in North Sydney is in high demand from an increasingly wide range of tenants due to its strategic location, relative affordability and access to transport.

The Knight Frank North Shore Office Market Overview September 2019 found North Sydney was particularly attractive to technology and media companies with these tenants accounting for 34% of leasing activity since 2018.

"Strong demand from tech companies is expected to drive positive take-up levels over the next two years in North Sydney," said Knight Frank Partner and Head of Office Leasing North Shore  Giuseppe Ruberto.

"Microsoft, SAP, Nextgen.net, Nokia, Citrix and Zurich are a few recent examples of companies trying to scale and set up headquarters in the area.

"While tech companies are underpinning leasing demand in North Sydney, other industries are also very active, with financial and insurance services comprising 20% of take-up and professional, scientific and technical services making up 15% of leasing activity.

"Co-working and flexible office operators have also added North Sydney to their target market as more occupiers reassess the way they use office space. WeWork opened their first North Sydney office recently, leasing around 4,100 square metres in 50 Miller Street, and Victory Offices has secured space in 100 Mount Street."

Mr Ruberto said while North Sydney was already strategically located to the Sydney CBD and the other North Shore markets, the new Sydney Metro rail project and planned pipeline of new office projects in the area was providing a further uplift to demand levels and resulting in new market entrants.

"North Sydney's office rents are running at a 27% discount - on a gross basis - to the Sydney CBD, which has continued to support recent demand fundamentals," he said.

While rents in the North Sydney office market are more affordable than the CBD, they are gradually catching up, with rising tenant demand leading to rental growth rates higher than the Sydney CBD, according to the Knight Frank research.

"The year-on-year prime rental growth rate is currently running 200 basis points above Sydney on a gross basis, as at July 2019," said Knight Frank Associate Director Research Katy Dean.

"Prime and secondary markets in North Sydney recorded gross effective rental growth of 9.2% and 8.5% respectively over the past 12 months."

Ms Dean said the pipeline of new stock over the next year remained elevated, with more than 155,000sq m of new and refurbished stock currently under construction across North Sydney and Macquarie Park, which was expected to be completed by the end of 2020.

But she said demand for prime space in North Sydney was driving high commitment rates and limiting the future availability of supply, and despite ticking upwards, vacancy was still below the 10-year average of 8.6%.

Knight Frank Partner, Institutional Sales Tyler Talbot said strong tenant demand in North Sydney had led to continued investor demand for office assets in the area.

"The appetite for prime income-yielding assets in North Sydney remains elevated and this has continued to place downward pressure on yields as investors compete for core and core-plus opportunities," he said.

"As at July 2019, average prime yields are showing a 25.8 basis point tightening year-on-year to reach 5.00%, a new benchmark for North Sydney.

"Sustained investor demand for North Sydney assets has seen significant yield spread compression between prime Sydney CBD and North Sydney assets, with the gap narrowing to 45 basis points.

"This is almost half its historical trend, reflecting the strong rental growth rates seen over the last two years.

"Additional reductions to interest rates and bond yields may lead to further compression later in the year, potentially prolonging the growth cycle."

The Knight Frank North Shore Office Market Overview September 2019 found offshore capital continues to flood the North Shore markets with over 85% of the $2.5 billion in investment volumes coming from offshore groups in the 12 months to July 2019.