Sydney CBD office yields plummet to historic lows

Office yields in Sydney’s CBD have hit lows not seen since the Global Financial Crisis – and they might not be finished falling yet.

A new CBRE report shows Sydney CBD core prime office yields dropped to a nine-year low of 5.2% in the third quarter of 2016, after almost four consecutive years of sustained yield compression.

According to the report, secondary yields have also sharpened considerably and now sit just 0.2% off their pre-GFC low of 5.9%.

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CBRE senior director of Sydney CBD office, valuation and advisory services, Michael Pasano, says that there is scope for further yield compression, with low interest rates driving the market, rather than rental growth.

“Capping off an impressive run in yield compression over the past three and a half years, Sydney CBD office yields have reached pre-GFC lows – without the same level of market rental growth to stimulate pricing when compared to the market in 2007,” Pasano says.

Importantly this rent growth is following, not leading, the yield compression, which is in stark contrast to the performance of the office market after the GFC

“Evidencing this, the drivers of the current market are vastly different when compared to the previous cycle, which further suggests a greater degree of sustainability.”

CBRE head of research Stephen McNabb says that while low interest rates have sparked the current yield compression, shrinking supply and a subsequent increase in demand will sustain it.

Vacant space dipped to 5.6% in the second quarter of 2016, down from 6.3% in the first quarter, with some forecasts tipping vacancy to hit 4.5% in the second half of next year.

“A long period of lower interest rates has been the key stimulus to the current cycle, however the next phase will be supported by lower vacancy rates and forecast rental growth,” McNabb says.

“The other difference between now and the pre-GFC peak is that the fundamental outlook for the Sydney office market is looking solid. Vacancy – currently 5.6% – is expected to fall to 3.3% by 2018 and prime effective rent growth is running at a 23% annual rate in Q3 2016.”

“Importantly this rent growth is following, not leading, the yield compression, which is in stark contrast to the performance of the office market after the GFC.”