New investments and higher lease deal volumes in 2021 indicate a strong recovery in Sydney’s CBD office market, according to a new report from Knight Frank Australia.

With annual investment volumes in office assets doubling from the preceding year to $4.5 billion in 2021, including over $2.2 billion in Q4 alone, Sydney’s CBD office segment is experiencing a strong surge. In addition to the rush of investment activity, lease deal volumes were significantly higher year-on-year in 2021 at over 300,000sqm in 2021 compared to 90,000sqm in 2020, indicating a return to pre-COVID levels.

The improving economic conditions combined with a more resilient jobs market, pick-up in wage growth and return-to-office programs have translated into positive demand levels for office space across the CBD, with the upsurge driven primarily by the tech and financial services sectors, which accounted for almost 60% of all lease deals.

Ben Burston, chief economist at Knight Frank Australia, said: “The Sydney CBD office market has rebounded alongside business confidence. This has prompted a surge in leasing activity and the strongest net absorption since 2015, in clear contrast to the prevailing narrative, which would suggest that many businesses are downsizing.”

“It will take time for business to adapt their workplace strategies and the ultimate impact on space needs will vary widely, but a recurring theme from occupiers is a heightened focus on quality, amenity and wellbeing. This is driving the remodelling of office workplace environments, with demand clearly weighted towards new buildings and higher-graded existing stock.”

Data from the report reveals that the pipeline of new development stock due for completion this year totals 160,000sqm – the highest since 2016 – with a commitment rate of over 75% across all schemes.

“A new wave of premium grade stock entering the market is set to reset the benchmark for office buildings across the CBD, with the pipeline of new development stock due for completion in 2022 already boasting a commitment rate of over 75%. This reflects the strong tenant demand for higher grade assets and will extend the flight to quality that we saw in 2021,” said Burston.

Rental growth remained subdued during 2020-22 with the Omicron outbreak leading to minimal movement in face rents. On a 12-month basis to January 2022, average prime net face rents have remained steady at $1,196/sqm with secondary market rents averaging $875/sqm. The current rental discount between prime and secondary rents is 26%, widening from 24% over the last few years. Incentives have stabilised and average 32% as of January 2022.

The negative trend in rents and incentives over the last two years has likely ceased with sentiment and demand improving on the back of strong economic growth and renewed momentum in the leasing market.

“Investors remain confident in the long-term outlook for CBD offices, with strong appetite for core assets driving the recovery of deal activity during 2021 regardless of lockdowns. During 2022 we expect a further acceleration in activity as investors look to position themselves ahead of the anticipated return to rental growth,” said Burston.

Image: Supplied

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