SECOND HALF 2012 | OFFICERESEARCH & FORECAST REPORTSYDNEY METROPOLITAN OFFICE                                             ...
RESEARCH & FORECAST REPORT | SECOND HALF 2012 | OFFICE | SYDNEY METROPOLITAN                                Economic Updat...
RESEARCH & FORECAST REPORT | SECOND HALF 2012 | OFFICE | SYDNEY METROPOLITAN                                              ...
RESEARCH & FORECAST REPORT | SECOND HALF 2012 | OFFICE | SYDNEY METROPOLITAN                                              ...
RESEARCH & FORECAST REPORT | SECOND HALF 2012 | OFFICE | SYDNEY METROPOLITAN                                              ...
RESEARCH & FORECAST REPORT | SECOND HALF 2012 | OFFICE | SYDNEY METROPOLITAN                                              ...
RESEARCH & FORECAST REPORT | SECOND HALF 2012 | OFFICE | SYDNEY METROPOLITAN                                              ...
RESEARCH & FORECAST REPORT | SECOND HALF 2012 | OFFICE | SYDNEY METROPOLITANInfrastructure Update                         ...
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Sydney metropolitan office research forecast report second half 2012

  1. 1. SECOND HALF 2012 | OFFICERESEARCH & FORECAST REPORTSYDNEY METROPOLITAN OFFICE Quality Assets Remain in Demand High quality assets have continued to attract strong demand and enquiry from tenants and investors across Sydney’s metropolitan office markets. This has seen the vacancy rate continue to tighten, falling by 0.24 percentage points (pp) over the past six months. Positive tenant demand and a lack of vacant supply entering the market saw the total market vacancy rate decline from 8.4% in Q1 2012 to 8.2% in Q3 2012. The ongoing lack of vacant Prime Grade space has led to a number of markets experiencing face rental growth as well as a tightening of incentives. Renewal activity has continued to remain strong across the metropolitan leasing market while recent transactions have seen a number of tenants consolidate465 Victoria Avenue, Chatswood multiple offices in a single, higher quality tenancy. The lack of large contiguous space options for tenantsThis newly refurbished A Grade office building is above 3,000m² remains an issue and has forced some to consider options within Sydney’s 100% leased and is currently on the marketfor sale. Investment sales activity has continued to remain buoyant with 14 sales above $10 million, valued at circa $427 million, taking place to date in 2012. Investors remain cautious on Prime Grade assetsMARKET INDICATORS FORECAST - 6 MONTHS however, a number of opportunistic buyers have emerged looking for assets with future growth upside potential. The transactions that have occurred so far in 2012 reflect a stability of Prime Grade yields OVERALL PERFORMANCE while increased availability and funding issues associated with Secondary Grade assets has seen yields soften by as much as 50 basis points for such properties. NEW SUPPLY SYDNEY METROPOLITAN OFFICE MARKET INDICATORS TENANT DEMAND Average Net Average Average Average Average Region Grade Face Rents Outgoings Capital Values Market VACANCY Incentives ($/m² pa) ($/m² pa) ($/m²) Yield*** LOW HIGH LOW HIGH LOW HIGH LOW HIGH LOW HIGH INCENTIVES Prime $590 $730 $105 $120 11% 18% $8,100 $8,500 7.25% 7.50% FACE RENTS NORTH A $470 $590 $105 $120 16% 20% $6,500 $7,000 7.50% 8.25% SYDNEY B $350 $460 $105 $120 25% 30% $4,200 $4,600 9.50% 9.75% EFFECTIVE RENTS ST LEONARDS/ A $420 $480 $90 $100 22% 26% $5,000 $6,250 8.25% 9.00% CAPITAL VALUES CROWS NEST B $280 $340 $85 $95 25% 30% $2,300 $4,000 9.00% 10.00% A $360 $480 $90 $105 25% 33% $4,000 $5,550 8.25% 9.00% YIELDS CHATSWOOD B $280 $320 $85 $95 31% 36% $2,300 $3,500 9.00% 10.00%+ NORTH RYDE/ A $310 $325 $75 $90 24% 28%** $3,750 $4,250 7.50% 8.75% MACQUARIEKEY HIGHLIGHTS PARK B $265 $285 $75 $90 30% 35%** $2,300 $2,800 9.00% 10.00%• Overall vacancy declined to 8.16% as of Q3 New A $430 $485 $95 $105 10% 15% $4,750 $6,000 7.50% 8.00% 2012. PARRAMATTA A $340 $385 $90 $100 15% 20% $3,250 $4,750 8.00% 9.00%• A lack of supply additions has led to rental B $295 $320 $90 $100 17% 27% $2,750 $3,500 9.00% 10.50% growth and a tightening of incentives across SOP# A $340 $375 $70 $85 15% 20% $3,600 $4,950 8.00% 8.75% some markets. RHODES A $340 $385 $70 $85 15% 20% $3,800 $4,750 7.75% 8.75%• Prime Grade yields have remained stable NORWEST A $330* $340* $65 $70 25% 30% $3,500 $3,750 8.50% 9.75% while Secondary Grade yields have softened A $300 $400 $70 $90 10% 20% $3,600 $4,500 7.75% 8.75% SOUTH by as much as 50 basis points. SYDNEY B $220 $290 $40 $60 10% 20% $2,300 $3,400 9.00% 10.50% SYDNEY CBD A $420 $490 $85 $95 20% 25% $4,750 $5,800 7.75% 8.75% FRINGE B $330 $400 $75 $90 15% 25% $3,500 $4,500 9.00% 10.25% *Includes car parking costs at a ratio of 1:25 SOP# Sydney Olympic Park/ Homebush Bay Data correct as of Q3 2012 ** Incentive based on net face rent *** Equivalent Reversionary Yield Source: Colliers International
  2. 2. RESEARCH & FORECAST REPORT | SECOND HALF 2012 | OFFICE | SYDNEY METROPOLITAN Economic Update GDP GROWTH REMAINS STRONG The June Quarter 2012 ABS Gross Domestic Product (GDP) data, showed robust growth for the Australian economy during the quarter. In seasonally adjusted terms, GDP increased 0.6% during Q2 2012, down from a strong 1.4% in Q1 2012, taking through-the-year GDP growth to a strong 3.7%. The main contributors to expenditure on GDP during the quarter were household final consumption, general government final consumption and net exports. RBA CUTS CASH RATE For the fifth time in the past 12 months, the Reserve Bank of Australia (RBA) decided to cut the official cash rate at its monthly board meeting. This saw the RBA reduce the cash rate by 25 basis points from 3.50% to 3.25%, as of October 2012. This latest fall, has seen the cash rate decline by 150 basis points over the past 12 months, from a high of 4.75% in October 2011. The key driver behind the board’s decision was the recent deterioration in the outlook for the Australian and global economy. AUSTRALIAN DOLLAR REMAINS STRONG Ongoing uncertainty over European sovereign debt issues combined with the slow pace of economic growth and recovery in the United States has seen the Australian Dollar remain strong over the past 18 months. After fluctuating above and below parity with the US Dollar over the first half of 2012, the recent round of quantitative easing (QE3) announced by the US Federal Reserve has seen the Australian Dollar recently trade between $US1.02 and $US1.06. UNEMPLOYMENT FALLS The August 2012 monthly ABS Labour Force data shows that the Australian employment market continues to remain tight. The latest results saw the unemployment rate decline by 0.1 percentage points (pp) from 5.2% in July to 5.1% in August 2012. This saw the number of people employed decrease by 8,800 to 11,498,100. This saw part-time employment fall by 9,300 people to 3,426,700 while full-time employment increased by 600 people to 8,071,400. Another key component behind the fall in the overall unemployment rate was a 0.2pp decline in the labour force participation rate to 65.0% in August 2012. SYDNEY METROPOLITAN OFFICE MARKETS R Hornsby Pa Norwest km cifi 20 cH d oa igh rR wa e North Ryde/ at y ttw Macquarie Park Pi Chatswood Parramatta km 10 St Leonards/ Crows Nest Rhodes Sydney Olympic Park/Homebush Bay Pa rra North Sydney m att aR oad Sydney CBD & Strathfield CBD Fringe Bondi ad l Ro ow hb nc Liverpool Pu Mascot y Botany wa i gh Kin South Western Motorway sH g e inc Ge Pr org es Ro da COLLIERS INTERNATIONAL | P. 2
  3. 3. RESEARCH & FORECAST REPORT | SECOND HALF 2012 | OFFICE | SYDNEY METROPOLITANKey Market IndicatorsWHITE COLLAR EMPLOYMENT SLOWS SYDNEY METRO WHITE COLLAR EMPLOYMENT GROWTH - BY INDUSTRY FIRST HALF 2012• The latest Deloitte Access Economics Professional, Scientific and Technical Services Employment Report showed white-collar Net Change in White Collar Employment employment growth across the Sydney Construction Statistical region continued during the first Information Media and Telecommunications Financial and Insurance Services half of 2012, increasing by 0.4% or 7,282 Health Care and Social Assistance people during the period. Rental, Hiring and Real Estate Services Industry Sector Arts and Recreation Services• In terms of growth, the Professional, Agriculture and mining Scientific and Technical Services sector Administrative and Support Services Electricity, Gas, Water and Waste Services achieved the largest growth in persons Wholesale Trade increasing by 11,562 positions or 5%. Manufacturing This was followed by the Construction Transport, Postal and Warehousing Public Administration and Safety sector increasing by 5% or 5,000 people. Other Services• Forecasts suggest that white-collar Retail Trade Accommodation and Food Services employment growth during the second Education and Training half of 2012 will continue to slow with -4,000 -2,000 0 2,000 4,000 6,000 8,000 10,000 12,000 growth of just 0.07% or 1,300 jobs. Source: Deloitte Access Economics / Colliers International Research• The largest growth in the second half of the year is forecast to be in the Construction sector increasing by 1.7%, followed by Rental, Hiring and Real Estate Services with 1.5% growth.VACANCY RATE TIGHTENS SYDNEY METROPOLITAN - STOCK & VACANCY BY REGION & GRADE• Overall, Sydney’s metropolitan office market vacancy rate tightened by 0.24pp, from Region / Grade Total Market A Grade B Grade 8.40% in Q1 2012 to 8.16% in Q3 2012. Stock (m²) Vacancy (%) Stock (m²) Vacancy (%) Stock (m²) Vacancy (%)• High quality Prime Grade space remains in demand from tenants across Sydney’s 4,894,216 8.16% TOTAL metropolitan office markets, as evident by tight A Grade vacancy rates of just 2% in NORTH SYDNEY 861,153 7.4% 186,296 2.0% 431,216 8.4% North Sydney, 2.2% in Parramatta and 4.0% ST LEONARDS/CROWS NEST 353,626 10.7% 88,599 7.5% 67,068 9.2% in North Ryde. CHATSWOOD 280,845 13.7% 157,412 16.7% 76,746 11.9%• St Leonards experienced the largest decline in vacancy falling by 2.3pp to 10.7% as of NORTH RYDE/ 820,411 6.7% 562,308 4.0% 234,812 11.6% MACQUARIE PARK July 2012, followed by North Ryde with a 1.5pp decline to 6.7%. PARRAMATTA 684,400 8.7% 229,967 2.2% 158,656 5.0%• Despite seeing a 4.6pp rise in vacancy to SYDNEY OLYMPIC PARK/ 156,141 5.1% 102,610 5.2% - - 5.1% Sydney Olympic Park continues to have HOMEBUSH BAY the tightest vacancy rate of all markets. RHODES 143,927 6.8% 139,998 6.9% - -• The completion of two new developments in NORWEST 272,474 15.1% - - - - Sydney Olympic Park and refurbished space in Chatswood saw total office stock increase SYDNEY CBD FRINGE 872,422 7.1% 140,385 5.7% - - by 59,164m² over the past six months to SOUTH SYDNEY 448,817 5.3% - - - - 4,894,216m² as of Q3 2012. Source: PCA OMR Jul 2012 / Colliers International Research COLLIERS INTERNATIONAL | P. 3
  4. 4. RESEARCH & FORECAST REPORT | SECOND HALF 2012 | OFFICE | SYDNEY METROPOLITAN North Sydney A GRADE VACANCY 2% • A concern for the market is that the recently strong rental growth and lack of options • A lack of new supply has seen the North is seeing more tenants consider options in Sydney office market remain tight with vacancy the CBD. increasing by 0.2pp to 7.4% as of July 2012. • Ongoing tenant demand for quality space has INVESTMENT ACTIVITY seen A Grade vacancy remain tight at just 2% • Three transactions above $10 million have or 3,700m² as of July 2012. taken place over the past six months with • The majority of vacancy continues to be in a combined value of $102 million. Secondary Grade space with the C Grade • The largest of these was 116 Miller Street vacancy rate at 10% and D Grade at 18%. which was purchased by Rifici Group and • Colliers International Research forecasts Property Bank Australia for $59,550,000 that vacancy will decline slightly over the in February 2012, reflecting an equivalent next six months, on the back of similar market reversionary yield of 8.92%. fundamentals, falling to 7.3% as of January • Despite strong market fundamentals, investor 2013 before tightening to 6.3% as of July 2013. confidence continues to hold back higher LIMITED LARGE CONTIGUOUS SPACE transaction volumes. However, opportunistic buyers have recently begun to enter the market • An issue facing the leasing market within to identify assets which can be repositioned to North Sydney is the distinct lack of large benefit from the current tight market conditions116 Miller Street, North Sydney contiguous space options for tenants, and offer future growth potential.This 11,350m2 office building sold in February currently there are only two options over2012 for $59.55 million, reflecting an equivalent 3,000m² available for lease. YIELD SPREAD WIDENSreversionary yield of 8.92%. • This lack of supply, tight vacancy and ongoing • Sale transactions, offered and withdrawn tenant demand has seen rents continue to rise properties and valuations reflect a softening for Prime Grade space. of Secondary Grade yields by at least 25 basis. • A Grade face rents increased by 3% over the • The lack of transaction activity and ongoing past six months while incentives have also positive enquiry levels has led to Prime Grade begun to tighten. yields remaining stable at 7.25% to 7.50%. St Leonards/Crows Nest VACANCY TIGHTENS RENTS AND INCENTIVES STABLE • The St Leonards/Crows Nest office market • Despite the decline in vacancy and increased saw a decline in vacancy across all grades tenant demand rents and incentives have during the first half of 2012. remained stable over the past six months. • Overall, vacancy fell from 13.0% in January • This stability has occurred due to vacancy 2012 to 10.7% in July 2012, due to a positive only just falling below the long-term average absorption of 4,638m² during the period. of 10.8%. • The A Grade market was a strong performer • A Grade face rents continue to remain due to the occupation of Cardno to its new steady, ranging from $420 to $480 per m² premises at 203 Pacific Highway. Leading per annum. to A Grade absorption of 5,665m² for the six • Incentives continue to range from 22% to months to July 2012 which saw vacancy 26% for A Grade space and 25% to 30% decline from 13.9% to 7.5%. for B Grade stock. • The B Grade market also performed well with steady tenant demand leading to INVESTOR ENQUIRY REMAINS ROBUST vacancy falling to 9.2% and absorption • Despite an increase in enquiry levels, there of 2,077 m² during the period. has been only one major sale within the market over the past six months, being NEW SUPPLY 154 Pacific Highway.The Forum • The completion of Building C at Gore Hill • This property was sold in April 2012 for203 Pacfic Highway, St Leonards Technology Park in Q 4 2012 is expected $25.5 million to Property Bank AustraliaThis quality A Grade building straddles the to see a vacancy increase during the second and Security Capital Corp. Reflecting arail corridor and has recently undergone a half of the year.major upgrade. capital value of $3,967 and an equivalent • Colliers International forecasts the total reversionary yield of 10.61%. vacancy rate to increase to 11.3% in January 2013 before falling to 10.7% by July 2013. COLLIERS INTERNATIONAL | P. 4
  5. 5. RESEARCH & FORECAST REPORT | SECOND HALF 2012 | OFFICE | SYDNEY METROPOLITAN Chatswood NEW SUPPLY INCREASES VACANCY RENTS AND INCENTIVES STABLE • The addition of 465 Victoria Avenue • Despite the rise in vacancy, positive into the market, after full refurbishment, absorption and steady tenant enquiry, rents led to an increase in vacancy across the remained stable over the first half of 2012. Chatswood office market. • A Grade net face rents continue to range • The total market vacancy rate increased by from $360 to $480/m² and B Grade from 3.0pp from 10.7% in January 2012 to 13.7% $280 to $320/m². in July 2012. • The introduction of newly refurbished supply • Incentive levels have also remained stable, saw A Grade vacancy increase from 11.5% ranging from 25% to 33% for A Grade space to 16.7%, as of July 2012. and 31% to 36% for B Grade space. • Analysis by Colliers International shows • Ongoing tenant demand combined with a that this rate has now tightened to 7.5% forecast decline in vacancy is expected to see due, in part, to 465 Victoria Road now been effective rental growth begin to occur over fully leased. the second half of 2012 and into 2013. ABSORPTION REMAINS POSITIVE YIELDS AND VALUES STABLE • Due to the success of 465 Victoria Avenue, • An ongoing lack of office sale transactions absorption in the Chatswood office market has continued within the Chatswood market.465 Victoria Avenue, Chatswood recorded its largest level since July 2007. • Based on valuations and investor enquiry levelsAfter extensive refurbishment this quality A Grade • Total absorption for the first half of 2012 yields have remained stable over the past sixbuilding has received strong demand from tenantsand is now 100% leased. was 4,326m² taking absorption for the months with A Grade ranging from 8.25% to past 12 months to 5,877m². 9.00% and B Grade from 9.00% to 10%+. North Ryde/Macquarie Park STRONG POSITIVE ABSORPTION RENTS AND INCENTIVES STABLE • The North Ryde office market experienced • Softer tenant enquiry levels and transaction the largest decline in vacant space volumes, has seen rental growth remain (-10,903m²) and largest positive absorption stable over the course of the year. result (21,293m²) across all metro office • This has seen A Grade net face rents markets nationally for the first half of 2012. continue to range from $310 to $325/m² • Overall, vacancy fell by 1.5pp from 8.2% while net incentives range from 24% to 28%. in January 2012 to 6.7% in July 2012. • Colliers International forecasts that effective • The main driver behind this result was the rents will grow over the coming six to 12 ongoing strength of the A Grade market months, as incentives begin to decline as which saw vacancy decline to a record low vacancy remains tight and no new supply of 4.0% and strong positive absorption of enters the market. 17,721m², during the six month period. INVESTOR ENQUIRY LEVELS • B Grade vacancy also tightened, falling by INCREASE 0.5pp to 11.6%. • The largest sale to date in 2012 was that of 75 Talavera Road. This A Grade property LACK OF LEASING ACTIVITY sold for $40.5 million to Macquarie • Despite the strong decline in vacancy and University in March 2012. the positive absorption result, leasing activity • This sales price reflects an equivalent75 Talavera Road, Macquarie ParkThis A Grade office building sold to Macquarie softened over the first half of 2012. reversionary yield of 8.77% and a capitalUniversity for $40.5 million in March 2012. • Many lease transactions that made up the value of $3,016/m2. strong result were negotiated and signed in • Transactions, investor enquiry and demand 2011. The deals were an owner occupier levels reflects a stability of A Grade yields with taking up space, while two other tenants yields currently ranging from 7.50% to 8.75%. required warehouse space attached to their office limiting their options across the • A softening of interest for B Grade assets Sydney market. has seen yields soften by 25 basis points to 9.00% to 10%. COLLIERS INTERNATIONAL | P. 5
  6. 6. RESEARCH & FORECAST REPORT | SECOND HALF 2012 | OFFICE | SYDNEY METROPOLITAN Norwest VACANCY TIGHTENS RENTS AND INCENTIVES STABLE • The overall vacancy rate within the Norwest • Despite the recent tightening, vacancy still market has declined slightly over the past six remains above the long term average in the months, due to a number of smaller leases Norwest office market. This has seen rents transacting and no new supply entering the and incentives remain stable over the past market. six months. • This saw the vacancy rate tighten by 0.8pp • A Grade net face rents continue to range from 15.9% in January 2012 to 15.1% as of from $330 to $340/m², this includes car July 2012. parking costs at a ratio of 1:25. • The largest lease signed over the past • Average A Grade incentives currently to six months was by Caroma, who leased range from 25% to 30%. 2,378m2 at 7-9 Irvine Place. C3 SELLS TO COUNCIL • A number of leases in the Vantage building at 7-9 Irvine Place is forecast to see vacancy • In the largest office building sales within the tighten over the coming six months. Norwest market, the Hills Shire Council purchased the C3 building for $20.5 million. TIGHT VACANCY ATTRACTS TENANTS • This new A Grade building was bought • Tight vacancy rates in the surrounding office with vacant possession, with the councilC3 markets of Parramatta and Sydney Olympic intending to occupy once development of3 Columbia Court, Norwest Park, has seen tenant enquiry remain buoyant the building completes.Purchased by the Hills Shire Council for $20.5 from tenants looking to relocate to Norwest.million in June 2012. Parramatta A GRADE SPACE REMAINS TIGHT RENTAL GROWTH CONTINUES • After peaking at 10.8% in July 2010, the • The ongoing tightness of Prime Grade markets Parramatta office market has continued to and its flow on effect into the Secondary Grade experience a tightening of vacancy. space has seen growth in face rents continue. • Declining for the fourth straight six-month • New A Grade rents increased marginally and period, the total market vacancy rate fell by now ranging from $430 to $485/m² while A 0.4pp to 8.7% as of July 2012. Grade face rents remained steady from $340 • The A Grade market continues to remain to $385/m². tight with a vacancy rate of just 2.2% or • B Grade rents also rose, as the tight A Grade 5,171m². market pushed tenants to compete for • Tenant demand continued to remain robust Secondary Grade space, to now range from over the first half of the year with 2,726m² of $295 to $320/m². absorption being recorded. YIELDS AND VALUES STABILISE • However, the majority of tenants are • An increase in investor enquiry and renewing their leases and staying put due to demand has seen two major sales take the lack of supply options within the current place in Parramatta to date in 2012. tight market. • The largest and most recent being 132 NEW SUPPLY ENTERS MARKET Marsden Street which sold for $25.42556 Station Street, ParramattaThis building is set to undergo a major million in August 2012. • The PCA vacancy figures are yet to reflectrefurbishment due to the relocation of QBE. the completion of 60 Station Street in Q3 • The sale of this B Grade building reflects an 2012. This 19 level A Grade office building equivalent reversionary yield of 11.64% and was pre-committed to Deloitte, Landcom and provides evidence of a slight softening of QBE with only 3,900m² currently available Secondary Grade yields across Parramatta. for lease. • B Grade yields now range from 9.00% to • The move of QBE and Deloitte into their new 10.50% while A Grade yields have remained premises, is expected to see vacancy rate stable at 7.50% to 8.00% for new A Grade increase, however it provides an opportunity and 8.00% to 9.00% for A Grade. for tenants to find large, existing, space which currently does not exist in the tight market. COLLIERS INTERNATIONAL | P. 6
  7. 7. RESEARCH & FORECAST REPORT | SECOND HALF 2012 | OFFICE | SYDNEY METROPOLITAN Sydney Olympic Park/Homebush Bay VACANCY RISES RENTS STABLE WHILE INCENTIVES • The Sydney Olympic Park/Homebush office SOFTEN market experienced an increase in vacancy • The rise in vacancy has seen face rents over the past six months, on the back of new remains stable while incentives have supply entering the market and the relocation softened by 5% on average as landlords of tenants due to lease expiry. try to attract tenants. • This saw the vacancy rate increase by 4.6pp • Average net face rents continue to range from 0.5% in January 2012 to 5.1% in July 2012. from $340 to $375/m². • Colliers International forecasts vacancy to • Incentives continue to remain tight, despite begin to tighten over the course of the next increasing, to now range from 15% to 20%. six months. This is due to the absorption of existing vacant stock from current tenant SALE REFLECTS TIGHTENING OF enquiry and no new developments currently YIELDS under construction. • The sale of 7 Murray Rose reflects a tightening of yields for A Grade assets within NEW SUPPLY ENTERS THE MARKET the Sydney Olympic Park office market. • Two new office buildings completed construction over the past six months. • This 6,000m² newly built A Grade office building sold in July 2012 for $29.25 million,7 Murray Rose Avenue, Sydney Olympic Park • The first was GPT’s 5 Murray Rose reflecting an equivalent reversionary yield ofThis newly built A Grade building sold in July 2012 development which saw 12,200m² of A 8.00% and a capital value of $5,973/m².for $29.25 million reflecting a yield of 8.00%. Grade office space enter the market during Q2 2012. This building was 100% leased • This sale, along with the valuations of other to the Lion Group on completion. assets in the market, reflects a tightening of • The second was 7 Murray Rose which saw yields by as much as 25 basis points over 6,000m² of A Grade space enter the market the past six months. To now range from in Q3 2012. 8.00% to 8.75%. Rhodes SUB LEASE SPACE INCREASES RENTS STABLE AS INCENTIVES • The amount of direct and sub-lease space INCREASE on the market for lease within the Rhodes • Face rents within Rhodes have remained office market has increased over the past stable, despite an increase in vacancy, due six months. to the below average incentive levels being • This saw the vacancy rate increase by 1.6pp offered by landlords. from 5.2% in Q1 2012 to 6.8% in Q3 2012. • Net face A Grade rents continue to range • This rise in vacancy was primarily caused from $340 and $385/m². by an increase in sub-lease space due to • Incentives have shown signs of softening the merger of two tenants and therefore due to the increase in vacancy. Despite consolidation of space into one office. increasing to 15% to 20% incentives still Direct vacancy also rose on the back of remain below average levels. lease expires. LACK OF INVESTMENT ACTIVITY NEW SUPPLY TO ENTER MARKET • The Rhodes office market continues to be • Australand’s Building F is set to bring tightly held by owners with no assets on 17,773m² into the market in Q4 2012, the market for sale or being sold off market leading to a further increase in vacancy. over the past six months. However, this will be short lived as this • A Grade yields remain stable at 7.75%Rhodes Corporate Park, Building FThis new A Grade office building is due for development represents the last commercial to 8.75%.completion in Q4 2012 and has recently seen site within Rhodes, therefore restricting6,000m2 pre-leased to Hewlett Packard. future supply. COLLIERS INTERNATIONAL | P. 7
  8. 8. RESEARCH & FORECAST REPORT | SECOND HALF 2012 | OFFICE | SYDNEY METROPOLITAN South Sydney LEASE ACTIVITY CONTINUES DECISION TO DECIDE MARKET • Lease transaction and enquiry activity has DIRECTION increased within the South Sydney market • The upcoming lease expiry of Qantas and over the past three month and combined their decision to either stay put or consolidate with a lack of supply additions has seen into one building is set to decide the direction vacancy tighten. of the South Sydney leasing market. • This saw vacancy decline by 0.3pp from • A move to new premises could see vacancy 5.9% in Q1 2012 to 5.3% as of Q3 2012. rise and circa 20,000m² of backfill space • The majority of vacancy remains in the B and enter the market. C Grade markets with quality A Grade space continuing to experience low vacancy levels. YIELDS AND VALUES REMAIN STEADY • There has been a lack of major sales RENTS AND INCENTIVES STABILISE transactions in the South Sydney market • Despite this increase in leasing activity, face over the past six months. rents have remained stable over the past six • A Grade assets continue to range from months. 7.75% to 8.75%. • A Grade net face rents continue to average • Secondary Grade assets that have been15 Bourke Road, Mascot $350/m², ranging from $300 to $400/m². marketed withdrawn from sale show the • B Grade rents also stabilised, ranging from disconnect between vendor and buyer price $220 to $290/m² as of Q1 2012. expectations and in turn a slight softening of Secondary Grade yields with B Grade yields now ranging from 9.00% to 10.50%. Sydney CBD Fringe DEMAND FOR QUALITY SPACE REMAINS YIELDS AND VALUES REMAIN STABLE • The lack of new supply and ongoing demand • Ongoing demand for quality assets has seen for quality space within the CBD Fringe A Grade yields remain stable, ranging from market has seen a slight contraction in 7.75% to 8.75%. vacant space over the past six months. • Secondary Grade yields have softened as • This saw vacancy within the CBD Fringe investors remain risk averse. These investors office market decline by 0.2pp from 7.3% in are finding it hard to get funding for these Q1 2012 to 7.1% in Q3 2012. assets and are not willing to commit to the • A Grade vacancy also declined due to an capital expenditure cash flow required to increase in lease activity, tightening from upgrade these properties. 6.0% in Q1 2012 to 5.7% in Q3 2012. • This has seen B Grade yields soften by as much as 50 basis points to now range from RENTS REMAIN STABLE 9.00% to 10.25%. • Robust tenant demand and enquiry for high quality space in the CBD Fringe has INVESTOR ENQUIRY REMAINS SOFT continued over the past six months. • Competition from assets on the market in the • Average A Grade net rents within the CBD CBD and North Sydney has seen investor Fringe continue to range from $420 to $490/m². enquiry levels remain soft for SecondaryWharf 10 Grade assets across the CBD Fringe market. • B Grade rents have remained stable at $33050-52 Pirrama Road, Pyrmont to $400/m², due the ongoing availability ofThis five level office building was sold in July 2012 • The largest sale to transact was Wharf 10 at space in the market. 50-52 Pirrama Road, Pyrmont. This propertyby Charter Hall for $31.3 million. • Incentive levels have stabilised to remain at sold in July 2012 to a joint venture between 20% to 25% for A Grade assets and 15% to Heitman and Abacus for $31.3 million and 25% for B Grade space. represented a yield of 8.78%. COLLIERS INTERNATIONAL | P. 8
  9. 9. RESEARCH & FORECAST REPORT | SECOND HALF 2012 | OFFICE | SYDNEY METROPOLITANNew Supply PipelineDEVELOPMENT UPDATE Office Address Suburb Status Completion Project Type Comment NLA (m²)Sydney North UnderGore Hill - Building C Artarmon 14,137 Q4 2012 New Development Currently 50% pre-committed. Construction Gore Hill - Building D Artarmon 33,375 DA Approved Awaiting Pre-lease New Development New commercial office building New retail arcade and refurbishment465 Victoria Avenue Chatswood 15,000 Complete Q2 2012 Refurbishment of office space. New commercial/ retail building with100 Mount Street North Sydney 40,980 DA Approved 2015 New Development public domain improvements 32 storey mixed use commercial177-199 Pacific Highway North Sydney 44,760 (GFA) Part 3A Approved 2016 New Development development. Subject to pre-lease. Construction of office building and77-81 Berry Street North Sydney 45,000 Part 3A Approved 2016 New Development hotel. Subject to pre-lease. Pre-leased to National Measurement105 Delhi Road North Ryde 10,270 Complete Q2 2012 New Development Institute.Australian Hearing Hub Under North Ryde 19,687 Q4 2012 New Development Approximately 75% pre-committed16 University Avenue Construction 56,000 Stage 1 DA Stage 1 consists of an 11,000m²63-71 Waterloo Road Macquarie Park 2014/15 New Development (over 4 stages) Approved office building. Construction of new office building.88 Christie Street St Leonards 29,000 DA Approved 2015 New Development Subject to pre-lease.Sydney West New 19 level office development.Eclipse Tower Parramatta 25,660 Complete Q3 2012 New Development Pre-committed by QBE, Landcom &60 Station Street Deloitte. 3,900m² remaining. Construction of 13 storey office105 Phillip Street Parramatta 20,388 DA Approved 2013/14 New Development tower with retail space.89 George Street Parramatta 12,000 DA Approved 2015+ New Development New office building Refurbishment of former QBE56 Station Street Parramatta 4,000 DA Approved Q2 2013 Refurbishment tenancy.169 Macquarie Street Parramatta 22,000 Pre-DA 2015 New Development Design competition completed. New A Grade commercial building. UnderRhodes Corporate Park, Building F Rhodes 17,736 Q4 2012 New Development Targeting 5 Green Star and 5 Construction NABERS (Energy) ratings New 5 storey office building. MurrayMurray Rose, Sydney Olympic Rose development will eventually 12,306 Complete Q2 2012 New Development5 Murray Rose Avenue Park include three commercial and two residential buildings. Sydney Olympic7 Murray Rose Avenue 6,000 Complete Q3 2012 New Development New A Grade office building. Park Sydney Olympic New A Grade office and retail,Prime, Site 4B Herb Elliott Avenue 24,000 DA Approved 2013/14 New Development Park development.Sydney CBD Fringe New commercial, retail andCentral Park Chippendale 68,000 DA Approved 2014/15 New Development residential development. COLLIERS INTERNATIONAL | P. 9
  10. 10. RESEARCH & FORECAST REPORT | SECOND HALF 2012 | OFFICE | SYDNEY METROPOLITANRecent Market Transaction Activity LEASING ACTIVITY Address Suburb Grade Start Date Area (m²) Tenant Sydney North 465 Victoria Avenue Chatswood A May-12 2,900 Lend Lease 465 Victoria Avenue Chatswood A May-12 4,800 Real Insurance 465 Victoria Avenue Chatswood A May-12 983 Tech Mahindra 9 Help Street Chatswood A Apr-12 585 CH2M Hill 9 Help Street Chatswood A Feb-12 655 Hall Consulting 67 Epping Road North Ryde A May-12 1,012 Avnet 113 Wicks Road North Ryde B May-12 2,062 Mine Site Technologies 68 Waterloo Road North Ryde A Mar-12 2,937 Hamlon Pty Ltd 40 Miller Street North Sydney A Aug-12 983 United Group Limited 101 Miller Street North Sydney Premium Aug-12 989 Armstrong Dawson 15 Blue Street North Sydney A Apr-12 582 Standford Brown 40 Mount Street North Sydney A Feb-12 583 Sheldon 170 Pacfic Highway St Leonards B Aug-12 1,100 Customers 1-1 170 Pacific Highway St Leonards B Jun-12 1,022 Mainbrace Constructions 95 Nicholson Street St Leonards B Jun-12 1,898 Hothouse Interactive 657 Pacific Highway St Leonards B May-12 1,368 Genesis Fitness Sydney West 17 George Street Homebush B Apr-12 557 Leaseplan Australia Limited 32 Phillip Street Parramatta A Jun-12 6,759 GE Capital Finance Australasia 17-21 Macquarie Street Parramatta B May-12 835 Countrywide 100 George Street Parramatta B Mar-12 732 NSW Business Chamber NSW Department of Education 2 Wentworth Street Parramatta A Jan-12 1,189 and Training 5 Murray Rose Avenue Sydney Olympic Park A Mar-12 12,300 Lion Group Sydney South 90 Bourke Road Alexandria A Sep-12 708 Confidential 247 King Street Mascot B Sep-12 873 Peek Pty Ltd 247 King Street Mascot B Mar-12 1,260 Gate Gourmet Australia 5-13 Rosebery Avenue Rosebery B Sep-12 930 Tabcorp Online Sydney CBD Fringe 235 Pyrmont Street Pyrmont B Apr-12 1,677 Think Education Services Pty Limited 26-32 Pirrama Road Pyrmont Mar-12 1,202 Veolia Australia Pty Ltd 50-52 Pirrama Road Pyrmont A Jan-12 680 Activision Blizzard Pty Limited 219-241 Cleveland Street Strawberry Hills B Jun-12 1,780 Australia Post 79 Commonwealth Street Surry Hills May-12 675 The Leading Edge Pty Limited 251-253 Riley Street Surry Hills C Jan-12 485 Reach Foundation 7 Kelly Street Ultimo B May-12 1,800 Buchan Group 100 William Street Woolloomooloo B May-12 896 Bunori Pty Ltd 100 William Street Woolloomooloo B Apr-12 896 Henning Harders Pty Ltd 166 William Street Woolloomooloo B Mar-12 5,353 British American TobaccoSource: Colliers International Research COLLIERS INTERNATIONAL | P. 10
  11. 11. RESEARCH & FORECAST REPORT | SECOND HALF 2012 | OFFICE | SYDNEY METROPOLITANRecent Market Transaction Activity INVESTMENT SALES ACTIVITY Capital Value Address Suburb Grade Sale Date* Sale Price Yield** Vendor Purchaser ($/m²) Sydney North Oakland Property 10 Help Street Chatswood B Jan-12 $23,000,000 N/A N/A Private Holdings 240-244 Beecroft Road Epping B Jun-12 $48,500,000 N/A N/A Abacus Property Group Transport for NSW Investa Funds 12 Waterloo Road Macquarie Park B Apr-12 $9,100,000 $2,266 10.63% Private Management Limited Challenger Listed 75 Talavera Road Macquarie Park A Mar-12 $40,500,000 $3,016 8.77% Macquarie University Investments Limited Property Bank Australia 51 Berry Street North Sydney B Apr-12 $15,600,000 $4,406 9.79% Private & Security Capital Corp 116 Miller Street & 173 Rifici Group & Property North Sydney A Feb-12 $59,550,000 $5245 8.92% AMP Capital Investors Pacific Highway Bank Australia Australian Institute of Crown International 211-223 Pacific Highway North Sydney Jan-12 $27,000,000 N/A N/A Management NSW Holdings Charter Hall Direct Property Bank Australia 154 Pacific Highway St Leonards B Apr-12 $25,500,000 $3,967 10.61% Property Fund & Security Capital Corp 53 Chandos Street St Leonards Mar-12 $4,700,000 N/A N/A Private Private Sydney West C3 Ernst & Young Baulkham Hills A Jun-12 $20,500,000 $1,358 VP Hills Shire Council 3 Columbia Court (Receivers) Motor Traders 214 Parramatta Road Burwood B May-12 $5,350,000 $3,427 N/A Private Association 2-4 Old Castle Hill Road Castle Hill B Feb-12 $5,950,000 $3,267 N/A Private Transport For NSW Australian Property 7 King Street Concord West May-12 $52,000,000 $3,136 8.31% AMP Capital Investors Growth Fund Chandru Property 16-18 Wentworth Street Parramatta B Jun-12 $18,000,000 $2,685 10.40% LaSalle Investments Investments No2 132 Marsden Street Parramatta B Aug-12 $25,425,000 $2,597 11.64% Centuria Sandran Sydney Olympic 7 Murray Rose A Jul-12 $29,250,000 $5,973 8.00% Private Developer Folkestone Park Sydney South 96-98 Taren Point Road Caringbah B Jan-12 $7,800,000 N/A 9.01% Private Private 234 Coward Street Mascot Feb-12 $2,000,000 N/A N/A Private Private Hurstville 27 Hurstville Road Aug 12 $2,410,000 N/A 8.4% Private Private Grove 64 Stanley Street Peakhurst Apr-12 $2,091,000 Health Administration Private N/A N/A Corporation Sydney CBD Fringe 51-63 O’Connor Street Chippendale Jan-12 $7,975,000 N/A N/A Private Private 72-84 Foveaux Street Surry Hills Jun-12 $7,950,000 N/A N/A Private Private 70-72 Commonwealth Street Surry Hills May-12 $11,300,000 N/A N/A Transgrid Private Independent Education 485 Wattle Street Ultimo C Mar-12 $6,300,000 $3,428 8.83% Private Developer Union Wharf 10 Heitman & Abacus Pyrmont A Jul-12 $31,300,000 $7,201 8.78% Private 50-52 Pirrama Road Property Group* Sale Date is exchange date**Yields quoted are equivalent reversionary yieldsSource: Colliers International Research COLLIERS INTERNATIONAL | P. 11
  12. 12. RESEARCH & FORECAST REPORT | SECOND HALF 2012 | OFFICE | SYDNEY METROPOLITANInfrastructure Update 512 offices in MAJOR INFRASTRUCTURE PROJECTS 61 countries on Project Location Status Completion Comments 6 continents Date United States: 135 Road Canada: 36 Norwest to Under Widening existing motorway and Latin America: 18 M2 Upgrade 2012 Lane Cove Construction add four new access ramps. Asia Pacific: 194 EMEA: 117 Widening Raby Road and Narellan F5 Freeway South West Under • $1.5 billion in annual revenue 2012 Road to three lanes in each (Hume Highway) Sydney Construction direction. • 978.6 billion square feet under management Under Upgrade and expansion of the Road Network Upgrade Sydney wide Ongoing • Over 12,500 professionals Construction M5, M7 and F3 roads Rail The Concept Plan includes a 6 North West Concept Plan Approximately North West Rail Link station, 23km line between Rouse COLLIERS INTERNATIONAL Sydney Approved 8-10 years Hill and Epping. Level 12, Grosvenor Place 11km twin track rail line 225 George Street South West Under South West Rail Link 2016 connecting Glenfield to Leppington Sydney, NSW, 2000 Sydney Construction via Edmondson Park. TEL 02 9257 0222 Extending the light rail network FAX 02 9347 0710 by 10km so passengers can travel Light Rail extension Inner City Approved From 2013 directly between Dulwich Hill, the Inner West and through the Sydney CBD. RESEARCHERSource: NSW Government / Colliers International Research Mathew Tiller Manager/Research TEL 02 9257 0348Outlook FAX 02 9347 0848Development activity will hold the key for the direction of Sydney’s metropolitan office markets Colliers International does not give any warranty inover the short to medium term. Currently there are only three developments under construction relation to the accuracy of the information contained in this report. If you intend to rely upon the informationbringing a total of 51,560m² of new space into the market over the next six months, of which contained herein, you must take note that the42% is currently committed. These developments comprise Gore Hill Building C which is 50% information, figures and projections have been providedpre-committed, 16 University Avenue in North Ryde which is 75% pre-committed and Rhodes by various sources and have not been verified by us. We have no belief one way or the other in relation to theCorporate Park Building F. After these projects there are no developments that have the accuracy of such information, figures and projections.required pre-commitments to start construction to ensure completion over the course of the Colliers International will not be liable for any loss or2013 calendar year ensuring a lack of new supply continues to remain an issue for metropolitan damage resulting from any statement, figure, calculation oroffice markets. any other information that you rely upon that is contained in the material. Copyright Colliers International 2012.Ongoing tenant demand and this lack of supply is forecast to see vacancy rates slowly declineover the second half of 2012, before experiencing larger falls over the course of 2013. This isexpected, in turn to lead to growth in A Grade face and effective rents, with the majority oftenant demand continuing to focus on high quality space. The lack of new supply and tightvacancy is also expected to see tenants continue to consider and move into suitable optionswithin the Sydney CBD market. This provides an opportunity for landlordswith Secondary Grade assets to consider upgrading their stock to capture the current tenantdemand in the tight A Grade markets.Positive market fundamentals are expected to see investment activity remain buoyant over thenext six to 12 months. Transaction volumes are forecast to increase as confidence returns andopportunistic buyers move to take advantage of positive market fundamentals. This is expectedto see Secondary Grade capital values and yields begin to stabilise over the coming 12 months,however those assets with large capital expenditure requirements and short WALEs maycontinue to see a softening. A Grade yields and values are expected to remain stable with Corebuyers remaining active across all of Sydney office markets. Accelerating