1. No category

Savills Research
New South Wales
Spotlight
North Shore Office
April 2015
Highlights
 The size of the North Shore market shrank by 24,734


square metres throughout 2014, representing a
reduction of office space by 1.1%
Savills recorded approximately 64,000 square metres
of leasing activity in the last 12 months
Net absorption of 15,458 square metres was
recorded in the combined North Shore market in the
12 months to December 2014
 According to the latest PCA numbers, the overall


vacancy rate for the combined North Shore is
currently 9.7%
Sales activity in the 12 months to March 2015
totalled $1.5 billion, almost 50% higher than the
five year average
Indicative A Grade yields in North Sydney currently
range from 6.50% to 7.50%
Savills Research | North Shore Office
April 2014
Savills New South Wales Team
Research
Managing Director
Divisional Director
Simon Hemphill
+61 (0) 2 8215 8892
[email protected]
Managing Director
Simon Fenn
+61 (0) 2 8215 8830
[email protected]
Leasing
Divisional Director
Simon van Grootel
+61 (0) 2 8215 8826
[email protected]
Leasing
Associate Director
Tom Merrett
+61 (0) 2 8215 8898
[email protected]
Associate Director
Nick Lau
+61 (0) 2 8215 8818
[email protected]
Valuation & Consultancy
Divisional Director
Russell Nicolson
+61 (0) 2 8215 8987
[email protected]
Investment Sales
Divisional Director
Graeme Russell
+61 (0) 2 8215 8947
[email protected]
Corporate Real Estate
Divisional Director
John Mackenzie
+61 (0) 2 8215 8982
[email protected]
Divisional Director
Michael Brislane
+61 (0) 2 8215 8924
[email protected]
Project Management
General Manager
David Nicholas
+61 (0) 2 8913 4813
[email protected]
Savills New South Wales
Level 7, 50 Bridge Street
Sydney, NSW 2000 Australia
+61 (0) 2 8215 8888
savills.com.au
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2
Savills Research | North Shore Office
April 2014
Introduction
Sydney’s North Shore comprises four markets with a total net lettable area of 2,322,284
square metres, 47 percent of which is prime grade stock. The area of analysis commences
with the North Sydney office market, (822,190 square metres), follows the north shore train
line through Crows Nest/St Leonards, (348,369 square metres) and Chatswood (285,245
square metres). The newest addition to the North Shore market, North Ryde, is dominated
by business and office park space. North Ryde comprises a total office stock of 866,480
square metres, 71 percent of which is prime grade space.
Office Development
According to the latest Property Council of Australia (PCA) release, five projects reached
completion throughout 2014 totalling 33,348 square metres across the combined North
Shore market. There was also a further addition to stock of 6,760 square metres in North
Ryde. This totals gross supply of 40,108 square metres; however, withdrawals totalling
58,858 square metres were also made in the first half of the year, resulting in a reduction in
the overall amount of stock in the market of 18,750 square metres. There were also a
number of adjustments to the current stock list resulting in the North Shore market
shrinking by 1.1 percent (24,734 square metres) in 2014.
There are a number of large scale projects with development approval that would kick-off
the next supply cycle in the North Shore market. The most notable of these projects is 177199 Pacific Highway, North Sydney which has received a major precommitment of just over
75 percent from Leighton Holdings and has commenced construction.
Current North Shore Office Development Activity
Property
Precinct
NLA (sq m) Type
Status
Completion Major Tenant(s)
1 Thomas Holt Dr
North Ryde
11,400
New
Construction
2015
Metcash
52-54 Waterloo Rd
North Ryde
10,000
New
Construction
2015
Novartis
99 Walker St
North Sydney
5,600
Refurb
Construction
2015
177-199 Pacific Hwy
North Sydney
39,383
New
Construction
2016
1 Denison
North Sydney
45,720
New
DA Approved
2017+
100 Mount St
North Sydney
40,100
New
DA Approved
2017+
63-71 Waterloo Rd
North Ryde
40,030
New
DA Approved
Mooted
Lot 8 Julius Ave
North Ryde
34,194
New
DA Approved
Mooted
88 Christie St
Crows Nest/St Leonards
26,500
New
DA Approved
Mooted
Bldg D1, 219-247 Pacific Hwy
Crows Nest/St Leonards
16,000
New
DA Approved
Mooted
Bldg D2, 219-247 Pacific Hwy
Crows Nest/St Leonards
15,000
New
DA Approved
Mooted
Bldg D3, 219-247 Pacific Hwy
Crows Nest/St Leonards
15,000
New
DA Approved
Mooted
1 Rivett Road (Stage 2)
North Ryde
11,380
New
DA Approved
Mooted
31-35 Epping Rd
North Ryde
14,477
New
DA Applied
Mooted
18-20 Atchison St
Crows Nest/St Leonards
2,300
New
DA Applied
Mooted
Leighton Holdings
Source: PCA / Savills Research
The largest completion of the throughout 2014 was the 12,975 square metre development
at 5 Talavera Road, Macquarie Park. The Goodman owned development was fully
precommitted by Canon. Also of note was the completion of 118 Talavera Road, Macquarie
Park. The 12,000 square metre building, also owned by Goodman, was fully leased by
Fujitsu prior to completion.
With more than 260,000 square metres of mooted supply in the pipeline without any tenant
commitment, the majority of this supply is considered as future planning. Indeed, as has
been the trend elsewhere in the Sydney office markets, the North Shore is currently
experiencing stock withdrawals for conversion to residential or hotel uses.
savills.com.au/research
3
Savills Research | North Shore Office
April 2014
Sydney Office
Forecast Gross Office Supply by Type (sq m)
2015 to 2017+
200,000
180,000
160,000
140,000
120,000
100,000
80,000
60,000
40,000
20,000
0
2015
2016
New
Full Refurb
2017+
Mooted
Partial Refurb
Source: PCA / Savills Research
There has been a reduction in the amount of stock in the supply pipeline for North Ryde
over the last 12-18 months. There is now just over 100,000 square metres of new stock in
the supply pipeline, as a number of projects have been removed and they are now
proceeding as residential developments. Most of the commercial developments are still
awaiting precommitment prior to commencing construction, and as such most of this future
supply is considered long-term planning.
Leasing Activity
In the 12 months to March 2015, Savills identified 64,052 square metres of leasing activity
in the North Shore market. This is down -46 percent on the 12 months prior, and down on
the five year average (85,983 square metres). The majority of these leases, approximately
60 percent of space reported leased was in the North Ryde precinct. Similarly, the largest
number of deals occurred in North Ryde (13).
Select North Shore Office Leases to December 2014
Date
Property
NLA (sq m)
Rent ($/sq m)
Jun-14
821 Pacific Hwy, Chatswood
4,646
480 N
Gov’t Property – Healthcare
Jun-14
821 Pacific Hwy, Chatswood
2,116
440 N
Gov’t Property – Transport
Aug-14
219-247 Pacific Hwy, Artarmon
2,778
440 N
Chief Entertainment / Telstra
Sep-14
2 Richardson Pl, North Ryde
6,208
290 N
Ricoh
Oct-14
2 Lyon Park Rd, North Ryde
1,423
350 N
Syngenta Australia
Nov-14
118 Talavera Rd, Macquarie Park
2,000
360 N
Attache Software
Dec-14
85 Waterloo Rd, Macquarie Park
1,170
295 N
Isagenix International
Dec-14
60-62 Hotham Pde, Artarmon
1,100
150 N
Displays 2 Go
Jan-15
12-38 Talavera Rd, Macquarie Park
1,926
330 N
Rural Co
Jan-15
68 Waterloo Rd, Macquarie Park
1,300
295 N
Relationships Australia
Source: Savills Research
Tenant
na = not currently available *Sublease **Renewal ***Assignment
In North Ryde, new tenants to the area such as Ricoh, Attaché Software and Steinhoff have
helped push net absorption to over 10,000 square metres for the six months to December
2014. Savills anticipates that this trend will continue through 2015 albeit the depth of
demand is relatively shallow.
savills.com.au/research
4
Savills Research | North Shore Office
April 2014
Net absorption of 15,458 square metres was recorded across the combined North Shore
market in the 12 months to December 2014. This represents 0.7 percent of the entire
market and is the first time that positive absorption has been recorded in the market since
December 2012.
Positive net absorption was recorded Chatswood (18,918 square metres), North Ryde
(6,882 square metres) and Crows Nest/St Leonards (1,691 square metres), which was
somewhat offset by negative absorption of 12,033 square metres in North Sydney.
Sydney Office
North Shore Net Absorption (sq m)
Dec-04 to Dec-14
500,000
400,000
300,000
200,000
100,000
0
-100,000
Total Absorption (sq m)
Linear (Total Absorption (sq m))
Source: PCA / Savills Research
NOTE: North Ryde was added to the overall figures in 2004 causing the spike in absorption.
Despite the increase in stock availability, larger good quality opportunities for tenants over
5,000 square metres remain slim, with very limited uncommitted new supply expected to
complete during the next two years.
As with the current trend in the Sydney CBD, there will be continued withdrawal of stock for
residential conversion which in turn will help fill some of the vacancies in the North Sydney
market. More than 28,000 square metres of stock was removed from the North Shore
market in the past 12 months alone for a change of use or demolition, with further sites
already earmarked for withdrawal in the short to medium-term.
Unlike in the Sydney CBD where the considerable amount of stock earmarked for potential
residential conversion is outweighed by future supply under construction, the North Shore,
particularly North Sydney to Chatswood, does not have the pipeline of new office towers to
grow the market. With the exception of Leightons North Sydney development, which has
only circa 10,000 square metres of uncommitted space, the lack of options for larger
tenants who have leases expiring in the next two years will leave little option for them but to
either negotiate to ‘stay put’ or look across the bridge to the Sydney CBD.
savills.com.au/research
5
Savills Research | North Shore Office
April 2014
Of the 64,052 square metres leased across the combined North Shore market in the last 12
months, 'Mining & Utilities & Industry' was the dominant sector, accounting for 32 percent
of the stock, or 20,544 square metres. Similarly, the largest number of transactions was
through the 'Mining & Utilities & Industry' sector (11 transactions).
Leasing activity in the North Shore office market over the last 12 months has been
dominated by activity in North Ryde, with almost half of the recorded deals taking place in
that market.
Undisclosed
0%
Finance and
Insurance
0%
Sydney Office
Total Reported Leased in North Shore (%)
12 months to Mar-15
W'Sale, Retail
19%
IT &
Communication
23%
Property &
Business Services
3%
Govt & Community
22%
Mining & Utilities &
Industry
32%
Source: Savills Research
Recreational
Services
1%
Net face rents in North Sydney as at March 2015 typically range from $550 to $710 per
square metre per annum for A Grade buildings, and between $380 and $480 per square
metre per annum for secondary grade buildings. The average A Grade face rent is $630 per
square metre per annum, a 1 percent increase over the last 12 months.
A Grade net face rents in North Sydney have continued to grow despite soft conditions in
the leasing market as a result of diminished tenant demand. Over the last five years average
A Grade net face rents have increased by almost 33 percent, whilst incentives actually
decreased by 9.5 percentage points. Indeed, North Sydney is one of the only office markets
nationally to record a drop in incentives over this timeframe. This has been driven mainly by
a lack of large amounts of contiguous, quality space in the market.
Net face rents in North Ryde as at March 2015 typically range between $310 and $345 per
square metre per annum for A Grade buildings. The average A Grade face rent in North
Ryde $328 per square metre per annum, there has been no change recorded over the last
12 months.
savills.com.au/research
6
Savills Research | North Shore Office
April 2014
Vacancy
The North Shore has historically recorded some of the highest vacancy levels in Australia.
The latest PCA vacancy numbers show a decrease in the overall vacancy rate for the
combined North Shore market from 11 percent to 9.7 percent in the last 12 months.
The table below highlights the vacancy profile of the combined North Shore by sub-market.
North Shore Vacancy Rates – December 2014
Grade
Stock (sq m)
Vacancy (sq m)
Vac % Dec-14
Vac % Dec-13
North Sydney
Premium
36,500
-
0.0
1.6
A Grade
186,296
10,941
5.9
5.7
B Grade
425,616
46,240
10.9
11.5
C Grade
160,026
16,008
10.0
14.8
D Grade
13,752
1,366
9.9
10.4
822,190
74,555
9.1
10.5
North Sydney
Crows Nest / St Leonards
A Grade
102,699
11,381
11.1
16.6
B Grade
66,775
6,068
9.1
8.0
C Grade
165,249
20,587
12.5
15.5
D Grade
13,646
2,229
16.3
12.9
348,369
40,265
11.6
14.3
Crows Nest / St Leonards
Chatswood
A Grade
157,412
13,673
8.7
15.6
B Grade
81,146
6,963
8.6
11.7
C Grade
46,233
2,700
5.8
9.4
D Grade
454
-
0.0
0.0
285,245
23,336
8.2
13.5
Chatswood
North Ryde
A Grade
615,716
49,503
8.0
8.1
B Grade
228,026
35,763
15.7
12.1
C Grade
20,017
1,025
5.1
19.1
D Grade
2,721
-
0.0
0.0
866,480
86,291
10.0
9.5
North Ryde
Total North Shore
Premium
36,500
-
0.0
1.6
A Grade
1,062,123
85,498
8.0
9.7
B Grade
801,563
95,034
11.9
11.4
C Grade
391,525
40,320
10.3
14.7
D Grade
30,573
3,595
11.8
10.4
2,322,284
224,447
9.7
11.0
Total North Shore
Source: PCA / Savills Research
savills.com.au/research
7
Savills Research | North Shore Office
April 2014
Vacancy rates across the North Shore, with the exception of North Ryde, decreased
noticeably over the last 12 months. Chatswood recorded the biggest drop in vacancy,
according to the latest PCA numbers, from 13.5 percent to 8.2 percent. This was followed
by Crows Nest/St Leonards, falling from 14.3 percent to 11.6 percent and finally North
Sydney, down to 9.1 percent from 10.5 percent 12 months prior.
Sydney Office
North Shore Vacancy by Grade (%)
Dec-04 to Dec-14
16%
14%
12%
10%
8%
6%
4%
2%
0%
Secondary Vacancy
Prime Vacancy
Total Vacancy
Source: PCA / Savills Research
North Ryde was the only sub market in the North Shore to record an increase in vacancy,
albeit by a total of just over 5,000 square metres resulting in an increase from 9.5 percent in
December 2013 to 10 percent as at December 2014. Despite the increase over the last 12
months, the overall vacancy rate in North Ryde has actually decreased from a cyclical high
of 11.2 percent over the last six months.
Sales Activity
Savills recorded approximately $1.5 billion worth of office transactions in the 12 months to
March 2015 across the combined North Shore market. This is down 32 percent from $2.3
billion in the previous year, and up on the five year average of $1.1 billion. During the same
period 28 properties were sold, down from the previous year of 39, and up on the five year
average of 22.
Select North Shore Office Sales to March 2015
Date
Property
Price ($m)
NLA
(sq m)
Price
$/sq m
Yield (%)
Apr-14
29-57 Christie St, Crows Nest
96.40
14,424
6,683
8.50*
Jun-14
105 Delhi Rd, North Ryde
68.00
10,390
6,545
6.50
Sep-14
14 Julius Ave, North Ryde
170.00
41,652
4,081
na
Oct-14
101 Miller St, North Sydney (50%)
302.60
36,662
16,508^
6.50
Oct-14
12 Langston Pl, Epping
85.00
8,944
9,504
4.20
Oct-14
33 Herbert St, St Leonards
38.00
6,065
6,265
na
Nov-14
2 Elizabeth Pl, North Sydney
47.50
7,840
6,059
8.00
Nov-14
132 Arthur St, North Sydney
36.80
7,829
4,700
8.70
Jan-15
73 Miller St, North Sydney
116.50
14,672
7,940
7.80
Mar-15
6 & 7 Eden Park Dr, Macquarie Park
81.80
18,131
4,512
9.00*
Source: Savills Research
* equated yield
na = not currently available
Rate per sq m represents 100% sale of the building
#
savills.com.au/research
8
Savills Research | North Shore Office
April 2014
Sydney Office
North Shore Office Sales ($m and number)
(>$5m) Mar-05 to Mar-15
$2,500
45
40
$2,000
35
30
$1,500
25
20
$1,000
15
10
$500
5
$0
0
Source: Savills Research
Sales > $5m (LHS)
Sales No (RHS)
In excess of $538 million of commercial buildings have been purchased across the
combined North Shore markets over the last 12 months with the intention of conversion to
residential. This trend has also been reflected throughout the Sydney CBD market over the
last 12 months. The majority of these North Shore purchases have been made by overseas
developers looking to capitalise on high demand for residential in Sydney by purchasing
commercial buildings at the end of their current life cycle.
Capital values in North Sydney as at March 2015 typically range between $7,333 and
$10,923 per square metre for A Grade buildings, and between $4,222 and $6,000 per
square metre for secondary grade buildings. Average A Grade capital values are currently
$9,000 per square metre, a 6 percent increase over the last 12 months.
Market yields in North Sydney as at March 2015 typically range from 6.50% to 7.50% for A
Grade buildings, and between 8.00% and 9.00% for secondary grade buildings. The
average A Grade yield is currently 7.00%, a 37.5 basis point firming over the last 12
months.
Government
0%
Sydney Office
North Shore Office Sales Buyer Profile (%)
12 months to Mar-15
Owner Occupier
0%
Mortgagee
0%
Undisclosed
0%
Foreign Investor
57%
Syndicate
6%
Trust
1%
Fund
22%
Developer
5%
Source: Savills Research
Private Investor
9%
The 'Foreign Investor' purchaser category was the most active in the investment market in
the 12 months to March 2015, purchasing 57 percent of the stock sold (or $882 million
worth of North Shore transactions). Similarly, the Foreign Investor category had the most
transactions (11).
savills.com.au/research
9
Savills Research | North Shore Office
April 2014
Key Market Indicators – March 2015
North Sydney
A Grade
North Sydney
B Grade
North Ryde
A Grade
Low
High
Low
High
Low
High
Rental - Gross Face ($/sq m)
670
840
490
600
390
445
Rental - Net Face ($/sq m)
550
710
380
480
310
345
Rental - Net Effective ($/sq m)
399
497
266
304
225
224
Outgoings - operating ($/sq m)
90
95
80
85
40
50
Outgoings - statutory ($/sq m)
30
35
30
35
40
50
Outgoings - total ($/sq m)
120
130
110
120
80
100
7
10
3
7
5
8
Yield - Market (% Net Face Rental)
6.50
7.50
8.00
9.00
7.25
7.75
IRR (%)
8.50
9.00
9.00
9.25
8.75
9.25
Cars Permanent Reserved ($/pcm)
460
535
410
485
200
250
Cars Permanent ($/pcm)
410
510
385
460
na
na
7,333
10,923
4,222
6,000
4,000
4,759
Typical Lease Term
Office Capital Values ($/sq m)
Source: Savills Research
Rental rates reflect single, whole floor, net effective and mid-rise rental rates unless
specifically otherwise stated. Discounts and premiums exist for low and high rise space and
for significant occupiers.
Outlook
Future supply for the North Shore office market remains somewhat constrained, with
current market conditions making it highly unlikely that any projects will proceed without
substantial precommitments. Recent strong growth in A Grade rents in North Sydney
highlights the limited number of options currently in the market.
The North Shore market has continued to benefit from the double pronged effect of an
extended period of limited new development coupled with stock withdrawals. This has
helped drive down vacancies across all the precincts with Chatswood in particular
recording the lowest vacancy rate since June 2007.
Given the recent flurry of purchases by overseas developers of commercial buildings for
conversion to residential or hotel use, Savills expects the overall amount of stock in the
North Shore market to shrink over the short to medium-term. This will in turn place pressure
on the existing stock in the market and could reasonably cause downward pressure on the
vacancy rate.
There is strong investor interest in the North Sydney market, with the second highest level
of sales over the last decade being recorded in the last 12 months. Savills note that part of
this interest is from local and overseas funds and developers seeking commercial assets
with residential or hotel upside.
The greater Sydney economy grew by 4.3 percent during FY 2013/14, this is the fastest rate
in well over a decade, with output reaching $353 billion; almost a quarter of Australia’s
GDP. The majority if this growth was directly attributable to the finance and insurance
sector, with healthy contributions from professional services, manufacturing, real estate
services and construction. Given that the tenancy profile of the North Shore is dominated
by a number of these sectors; it necessarily follows that growth in these sectors can be
expected to translate into increased leasing activity over the short to medium-term.
savills.com.au/research
10
Savills Research | North Shore Office
April 2014
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