CapitaLand Integrated Commercial Trust - Annual Report 2021

Sydney CBD Office Market Overview Demand and Supply According to the Property Council of Australia (PCA), Sydney CBD currently has approximately 5.2 million sq m of office stock. Some 398,000 sq m of net additions is expected to be completed from 2022 to 2026. However, supply over the next 24 months is expected to be muted at just 19,000 sq m in light of further significant withdrawals of about 268,000 sq m in 2022/2023 for Metro acquisition and redevelopment. In terms of new supply, the large supply pipeline is mainly contributed by Quay Quarter Tower (75,000 sq m), Salesforce Tower (55,000 sq m), and three over-station developments at Martin Place (two towers totalling 105,000 sq m) as well as Parkline Place (48,000 sq m). These developments will come onstream between 2022 and 2024. Demand Drivers In 2021, occupiers were more active in the leasing market by evolving their real estate portfolios to be ready for a post-pandemic environment. This was unlike 2020, when many occupiers without a hard deadline had paused their corporate real estate strategy as businesses reassessed their future office space requirements. Over the first six months to July 2021, Sydney CBD recorded its first period of positive net absorption of 27,269 sq m. This was after four consecutive periods of negativenet absorption since June 2019. Tenant demand continued to recover in H2 2021, recording 7,812 sq m of positive net absorption. This represents total net absorption of 33,111 sq m and the strongest since 2015. Besides the large supply pipeline, there was also an increase in supply of office stock in the sublease market in Sydney CBD due to a combination of new work from home trends and cost-cutting by businesses. As of December 2021, CBRE recorded approximately 99,000 sq m sublease availability but this amount was significantly lower than the previous peak of 170,751 sq m registered in November 2020. Sydney CBD’s sublease market is expected to decline steadily throughout 2022, supported by strong leasing activity and over 90% of the sublease spaces being within prime assets with good quality fit-out, as well as the ongoing flight-to-quality trend. CBRE forecasts total vacancy to peak in 1H 2022 before it eases closer to the long term vacancy rate of 6.7% in 2024. This will be underpinned by improving tenant demand coupled with subdued supply in 2022/2023 and about 60% of the confirmed supply completing between 2022 and 2024 being pre-committed. SYDNEY CBD NET SUPPLY, NET ABSORPTION AND TOTAL VACANCY Additionally, supporting the strong performance was the record level of 543 leasing briefs received by CBRE Leasing in 2021, whilst enquiry volumes had also reached a new high of approximately 536,000 sq m since 2014. Over a quarter of the enquiry volume originated from Business Services (29%), followed by Financial and Insurance Services (19%) and Technology & IT Services (10%). Whilst all size groups recorded a significant uptick in briefs received, particularly to the sub-3,000 sq m tenants, total briefs received had doubled over the last 12 months. The strong uptick in leasing sentiment coincides with the improved occupier sentiment towards the long-term expansion plan. As highlighted in the CBRE’s Australia and New Zealand Future of Office Survey Report May 2021, 30% of the respondents expect to increase their office space Source: CBRE Australia Research, 4Q 2021 120 100 80 60 40 20 0 -20 -40 -60 -80 -100 10 9 8 7 6 5 4 3 2 1 0 Net Supply/Net Absorption (‘000 sq m) Vacancy (%) Jun-17 Dec-17 Jun-18 Dec-18 Jun-19 Dec-19 Jun-20 Dec-20 Jun-21 Dec-21 Jun-22F Dec-22F Net Supply Net Absorption Vacancy Annual Report 2021 117 Independent Market Review