Sydney leads the world for office rent growth

The Sydney CBD.
The Sydney CBD.

Rents for prime office space in Sydney are increasing faster than anywhere else in the world, with Melbourne in second place, amid stock withdrawals and limited new supply, JLL research finds. 

And rent growth looks set to stay strong after Deutsche Bank analysts increased their forecasts for the east coast capital office markets, citing constrained supply and ongoing jobs growth.

The research comes as vacancy rates have been holding at low levels for office markets in both cities as some office towers were removed from the market for transport infrastructure projects or residential conversions.

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Stronger economies in the eastern states than in the resources-affected markets are also supporting demand for office space, with Melbourne’s population growth a key factor.

A JLL report found Sydney prime office rents soared 30.1% over the 12 months to the third quarter, placing it at the top of a global ranking.

Melbourne came second with 17.3% year-on-year growth, faster than US markets such as the San Francisco peninsula (12.9%), New Jersey (12.2%) and Portland (10.4%).

Sydney has made the top 10 cities for the past five years, JLL head of office leasing for Australia Tim O’Connor says.

Sydney office rents JLL

Sydney’s office rents are rising faster than any other city in the world.

“While the Sydney story has continued on the back of centralisation, stock withdrawals and growth from the technology sector in particular, Melbourne is now following hot on its heels,” O’Connor says.

“The sharp reduction in ­vacancy that precipitated the upward pressure in Sydney and Melbourne rents has been amplified by the lack of available new supply coming on line in the short term.

“The number of options for larger space users in existing stock now means demand will be expressed through additional precommitment activity.”

Around the world, prime office rents across 125 major markets in the study rose by 2.7% over the past year, above the 10-year average of 1.6%.

JLL head of research for Australia Andrew Ballantyne says east coast effective rental growth is likely to ease back from double-digit territory next year but is likely to stay above 7%.

But Deutsche Bank analysts offer a slightly more upbeat outlook for office rents in Sydney, due to constrained supply, and Melbourne, given the city’s employment growth. The investment bank lifted its forecast for Sydney CBD gross rents to increase 8-10% next year, up from a previous forecast of 6%.

Melbourne CBD rents are set to increase 7-9% next year, up from an earlier forecast of 3%, with incentives in the city likely to fall to historical averages of 20-25%, Deutsche Bank says in a note to clients.

The office market is still Deutsche’s preferred sector, followed by industrial as companies are willing to pay a premium to be close to customers given the demand for same-day delivery.

But the analysts cut their retail rent growth assumptions and tip more store closures amid weak specialty sales, saying Amazon will be a key headwind but not a “retail apocalypse”.

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