Sydney office rents to rise 90 per cent over next three years: BIS ShrapnelDark clouds gathering for Sydney office tenants. Photo: Rob Homer

Sydney office rents to rise 90 per cent over next three years: BIS Shrapnel

Sydney office rents will surge 90 per cent between now and the end of 2018 as market power shifts back to landlords, according to bold new forecasts from BIS Shrapnel.

The forecasters expect net face rents to rise by about 30 per cent over the next three years, with the bulk of rental increases coming from much lower incentives offered to tenants as vacancy rates tumble and new supply dries up.

Under its modelling, BIS Shrapnel expects prime net face rents to increase from an average of $890 per square metre to $1200 per square metre by December 2018. On an effective basis, with incentives forecast to fall from 28 per cent to 10 per cent, rents will almost double from $570 to $1100 per square metre.

“Tenants have become used to receiving large leasing incentives in the Sydney CBD over the last six to seven years. But the ground is starting to shift.” said Lee Walker, senior project manager at BIS Shrapnel.

The key driver will be the vacancy rate.

BIS Shrapnel forecasts this to fall from a current seven-year low of 6.3 per cent to just 3 per cent by 2018 as new office completions slump from a high of 270,000 sq m in 2016 to around 100,000 sq m a year in 2017 and 2018, most of which will be cancelled out by office withdrawals for conversion to apartments or hotels, or to make way for the Sydney Metro.

On the demand side, the strength of the NSW economy is expected to drive business expansion and new office space requirements, with the end result being a market that is under-supplied till the end of the decade.

“The CBD office leasing market will shift dramatically from a ‘tenant’s market’ to a ‘landlord’s market’ in a relatively short space of time,” Mr Walker said.

A new Sydney office market report by Cushman & Wakefield identified similar supply-demand dynamics, concluding that fundamentals “may finally be lining up to allow landlords to ride a wave of falling vacancy and stronger rental growth over the next five years”.

But Steve Urwin, who heads up tenant rep agency Kernel Property, said there was no evidence of the market shifting in favour of landlords.

“High incentives are being maintained in premium and A-grade properties for inquiries with lease expiries even two years from now,” he said. “Landlords are not convinced that employment growth will continue at the rates experienced over the last couple of years and there is no sign of deals worsening.”

However, he conceded that there was little on offer in B-grade premises in parts of the CBD, particularly where stock withdrawals were occurring, and consequently deals had tightened in these buildings.

JLL head of NSW office leasing Daniel Kernaghan said he was starting to see face rents rise and incentives contract. “Prime gross effective rents over last 12 months have increased 11.3 per cent on our numbers,” he said.

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