Stunted growth in CBD
Going up … the C5 tower, part of the Barangaroo project, will not spare the city from high rents and tightening vacancies.
UNTIL the waterfront $6 billion Barangaroo project comes to fruition with its new buildings, office vacancy levels in Sydney's central business district are forecast to remain stable.
The limited amount of new office developments will cause rents to stay at the current high levels, although some rises in incentives in lease deals are tipped, according to Knight Frank's research models.
This comes as the leasing market awaits details of Lend Lease's deals with new tenants at Barangaroo.
It has been widely speculated that Westpac will lease up to 60,000 square metres as it consolidates its offices, outside of its headquarters in Kent Street.
Lend Lease and KPMG are also said to be leasing about 30,000 square metres apiece, while the internet provider Google has also included Barangaroo as a potential new location.
Other groups said to be looking for new office space in the Sydney central business district include QBE Insurance and Ernst & Young.
At present there are only two big developments in the city: the new ANZ bank tower at 161 Castlereagh Street and Mirvac/K-REIT's 8 Chifley Square. The pending takeover of Thakral Holdings by Brookfield Office Properties is expected to result in the refurbishment of Wynyard Tower in George Street. But all cranes in Sydney are being booked for the Barangaroo development.
The latest data from Knight Frank says the absence of any new developments completing this year is expected to be the dominant driver of vacancy trends and will underpin a gradual decline from the current vacancy rate of 9.6 per cent.
The Knight Frank Sydney CBD Office report shows that rents are expected to grow in line with CPI during 2012, before increasing from mid to late 2013 and into 2014 as demand conditions improve in conjunction with further tightening in the vacancy rate. Incentives are also expected to reduce from next year.
Knight Frank's NSW research manager, Nick Hoskins, said while tenant demand had been inconsistent, there were expectations of a gradual improvement.
He said by the end of 2013, tenants would find it difficult to lease space, given the next wave of development was unlikely to be completed until at least late 2014.
He said some anticipated tenancy downsizing by Macquarie Group and potentially PWC and Ernst & Young (from staff redundancies) would keep a lid on some lease deals.
But he said lower demand would be offset by the number of inquiries now in the market for new space in 2013 and 2014.
''This is forecast to see prime face rental growth in 2013 and 2014 increase to an average of 4.5 per cent per annum,'' he said.
''Prime incentives are forecast to start materially reducing from mid/late 2013 to reach 17.5 per cent on a gross basis by the end of 2014.
''Traditionally face-rent growth tends to start accelerating when incentives are below 20 per cent, which indicates rental growth will be at its strongest in 2014.''