Source: Property Council Australia, CBRE Australia Research, 4Q 2023 NORTH SYDNEY NET SUPPLY, NET ABSORPTION AND VACANCY Demand Drivers The tenant profile of North Sydney is dominated by the Professional, Scientific and Technical Services firms. Companies such as Coca Cola, Microsoft, Nine Entertainment, SAP, Sony, Ooh!Media and NBN Co have headquarters or major offices located in North Sydney. North Sydney is now able to boast increasing connectivity, a good variety of facilities and amenities, and high-quality developments with similar specifications as the Sydney CBD. While the characteristics of the submarket remain enticing over the long term, the submarket is facing headwinds over the short term. Flight-to-quality has meant that occupiers are migrating into the CBD. Also, the elevated vacancy rates in fringe portions of the CBD and rising incentives have resulted in effective rents in areas of the CBD (for example the Western Corridor) being on par with North Sydney. While attracting tenants to North Sydney is challenging at this time, these dynamics are expected to normalise over the coming years as vacancy rates begin to tighten in the CBD. Rental Values North Sydney prime and secondary net face rents ended 2023 at A$993 per sq m/annum and A$762 per sq m/annum, increasing by 4.6% and 5.6% respectively. Face rents in the North Sydney have primarily been driven by rental rates in newly completed premium assets and refurbished secondary stock. While face rental rates continued to increase over 2023, a significant portion of this growth has been offset by increases to incentives. Prime and secondary incentives ended 2023 at 34.9% and 39.1%, respectively. These figures marked increases of 0.4 percentage points and 4.1 percentage points over the 12-month period. Prime and secondary net effective rental rates ended 2023 at A$595 per sq m/annum and A$409 per sq m/ annum, respectively. Prime net effective rents increased by 4.0% YoY as incentives only increased marginally over the period. Conversely, secondary net effective rents declined by 2.6% in 2023 due to incentives increasing by 4.1 percentage points over the same period. Going forward, CBRE expects that the limited supply pipeline, the ongoing increase in office visitation, and a normalisation of vacancy rates in the CBD are likely to result in strong net effective rental growth in North Sydney over in the long term. 100 80 60 40 20 0 -20 -40 Net Supply/Net Absorption ('000 sq m) 2Q 2019 4Q 2019 2Q 2020 4Q 2020 2Q 2021 4Q 2021 2Q 2022 4Q 2022 2Q 2023 4Q 2023 2Q 2024F 4Q 2024F Net Supply Net Absorption Vacancy 25 20 15 10 5 0 Vacancy (%) 118 CAPITALAND INTEGRATED COMMERCIAL TRUST INDEPENDENT MARKET REVIEW
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