The total supply of office space in the Sydney CBD fell over the 6 months to Jan-18, to 5.024 mil sqm, the lowest level in 2½ years.
The decline was driven by stock withdrawals with no new or full refurbishment projects completed since Q3 2017. Tenant demand, as measured by net absorption, continues to be subdued in the Sydney CBD. The six months to Jan-18 yielded just 345sqm of net absorption. The volume of tenant enquiry looking to locate in the CBD continues to build, with 371,100sqm recorded as at Mar-18. The combination of very little new supply, continued stock withdrawals and slightly positive net take-up has resulted in further contraction of the already-low vacancy rates.
The current rate of 4.6% is the fourth lowest in 28 years and 450 basis points below the long-term average. Despite a slight rise over Q1 2018, the amount of available sub-lease space in the CBD is relatively low, consistent with the overall vacancy rate in the market. Solid effective rental growth continues to be recorded across the CBD with all major building grades seeing rising face rents topped up by further reductions in tenant incentives.
Following a very strong run in effective rental growth, the pace of growth has eased and we see further moderating as the contraction of incentives eventually ends. Whilst the improved enquiry is positive, the very low vacancy rates will limit the amount of net absorption that can occur. The next supply cycle is expected to deliver more substantial amounts of uncommitted space over 2021- 2022, and incentives are set to become more generous again during this period.