CapitaLand Integrated Commercial Trust - Annual Report 2021

NORTH SYDNEY NET SUPPLY, NET ABSORPTION AND VACANCY North Sydney Office Market Overview The North Sydney office market lies across the harbour of the north of Sydney CBD. The two markets are connected by the Harbour Bridge and an underground rail line. In 2024, the new Victoria Cross Station Metro rail line will provide a further connection between the two markets, with an estimated travel time of just under 6 minutes to the CBD. This enhanced connectivity between the two office markets is expected to benefit North Sydney as an agglomerated office market, supporting future rent growth and increased value. Similarly, employment in North Sydney was impacted by COVID-19. White-collar employment declined by 2.5% in 2020 and is expected to shrink by 0.5% in 2021. According to Deloitte Access Economics, North Sydney’s labour market recovery is expected to rebound strongly in 2022/2023, with white-collar employment growth estimated to grow by 3.5%. Demand and Supply As of January 2022, the North Sydney office market consists of 922,793 sq m of office stock, making it the second-largest office market in metropolitan Sydney. Nonetheless, a substantial proportion of the North Sydney office market consists of secondary grade stock, accounting for about 60% of the total stock. Significantly, of the 109 buildings currently surveyed by PCA, only about 16 existing buildings have floorplates greater than 1,000 sq m in size across all grades. The North Sydney CBD supply outlook is limited with only three projects, i.e. 2-4 Blue Street (15,000 sq m), 88 Walker Street (12,500 sq m) and Metro Victoria Cross above-station development (55,000 sq m) currently under construction. However, these projects are not due to complete until 2023/2024. Though there are approximately 430,000 sq m of mooted projects, these projects are unlikely to commence without any precommitment. With the majority of the future stock being prime grade, this will continue to narrow the spread between prime and secondary grade stock, offering a more balanced asset profile in North Sydney. The rejuvenation of office stock will also enhance the appeal of North Sydney and contribute to the evolution of tenant composition. Over the six months to July 2021, North Sydney was the only metro market in Sydney to have recorded positive net absorption of 776 sq m and the strongest net absorption of 13,070 sq m over the 12 months to July 2021. Despite 1,758 sq m of negative net absorption recorded in 2H 2021, total vacancy in North Sydney remains relatively stable, recording at 16.6% as of January 2022 compares to 16.5% in January 2021. Prime vacancy declining sharply to 14.9% from 18.3%. Conversely, secondary vacancy increased to 17.6% from 15.3% as of January 2022, supporting the ongoing flight-to-quality trend. Moreover, a limited supply pipeline over the next 12 months will help absorb the impact of COVID- 19-related vacancy, with total vacancy forecasted to trend downward closer to the long-term average of 8% by the end of 2022. Source: CBRE Australia Research, 4Q 2021 100 80 60 40 20 0 -20 -40 -60 18 16 14 12 10 8 6 4 2 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 CapitaLand Integrated Commercial Trust 120 Independent Market Review