4 April 2019

Office vacancy rates in Sydney hit 19-year low

By Gino Soglimbene, Commercial Sales and Leasing Consultant, TGC

Commercial office vacancy rates in the Sydney CBD are now sitting at about four per cent, which is the lowest level since 2000. What’s more, due to healthy employment levels, many experts believe that these vacancy rates will fall even further in 2019, despite new stock coming onto the market.

The effect of office vacancy rates on rental rates

As you’d expect with demand being so strong, rental rates are also at record-breaking levels. 

Average CBD rental rates broke through the $1000 per square metre barrier in the second half of 2018.

And the record-smashing doesn’t stop there.

Years of capital growth in the Sydney CBD market has also seen the value of A-grade premises surge through the $20,000 per square metre barrier.

In fact, values have risen so sharply that average rental yields have dropped slightly, despite rental rates increasing. The average rental yield in the Sydney CBD is just under five per cent, which is still a healthy return.

How does the Sydney CBD market compare with the rest of Australia?

Sydney CBD office rental rates and capital values are undoubtedly the highest in Australia. Average rental rates are almost double those in Melbourne, which has the second-highest rates. And Sydney CBD capital values are more than double those in Melbourne.

On the flip side, rental yields in the Sydney CBD office market are the lowest in Australia due to capital values being so high.

Sydney is also slightly behind Melbourne CBD in terms of the lowest vacancy rates, but the rates in both markets are significantly lower than those in Australia’s other capital cities and CBDs. 

Significantly, incentive levels in Sydney CBD are currently running at about 20 per cent, which is approximately five per cent lower than Melbourne.

What’s happening in other Sydney office markets?

The strong long-term performance of the Sydney CBD office market has been mirrored (and even surpassed) in other areas of the city. 

For example, both the Parramatta and North Sydney markets experienced double-digit increases in capital growth rates over the past year and yielded just over five per cent. That’s higher than the yields you can get in the CBD.

Parramatta is arguably fast becoming Sydney’s “second CBD”, with the area continuing to redefine itself off the back of strong population growth. 

Significantly, vacancy rates in Parramatta are even lower than in Sydney CBD (sitting at around three per cent). 

It’s also much cheaper to buy A-grade premises in Parramatta with cost per square metre at around $10,000 as opposed to $20,000 in Sydney CBD.

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