Sydney Metro sharpens North Sydney office market

Residential conversions and State Government acquisitions for the Sydney Metro rail project are turning the screws on North Sydney’s office market.

Colliers International agents say the withdrawal of office stock is seeing the city’s metro investment and leasing markets become even more competitive, driving vacancy rates down.

The current lack of supply is underpinned by the conversion of older offices into apartments, as well as the acquisition of more than 30 buildings in metro markets – including many in North Sydney – for the Sydney Metro rail project.

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Seventeen buildings in North Sydney and Crows Nest are expected to be knocked down to make way for the rail line, which will stretch 15km from Chatswood to Sydenham, via the CBD.

Colliers International’s director in charge of North Sydney, Dan Walker, says the timing of those external factors had made North Sydney one of the city’s tightest markets.

“North Sydney is on the forefront of this transition, with significant investment activity underscored by the implicit uplift in infrastructure and leasing conditions,” Walker says.

The North Sydney secondary market now has the tailwinds for effective rental growth

“In the last year, over 48,000 square metres was withdrawn from the market. Much of this was for residential conversion, with over 1700 units and 57,000 square meters of residential floorspace in the current pipeline.”

Five North Sydney buildings totalling 19,223sqm of office space will be bulldozed for the proposed Victoria Cross station alone, with the local B-grade office market expected to feel the full force of that withdrawal, as displaced tenants hunt for new space.

The amount of office space in North Sydney is dwindling.

Colliers director of office leasing Louise Rowe says tenants are rushing to secure space to avoid missing out.

“The North Sydney secondary market now has the tailwinds for effective rental growth,” Rowe says.

“The amount of space leased in the second half of 2015 was 74% higher than the first half of the year and 28% higher than the corresponding period in 2014.”

Development and investment activity is also on the rise, with the already fully leased 177 Pacific Highway – to be completed in the third quarter of this year – the first new North Sydney office development to hit the market in six years.

“While investment volumes were below those in 2014, they were above the high levels witnessed in 2007,” Walker says.

In the last year, over 48,000 square metres was withdrawn from the market

“The significant infrastructure development makes these metro markets more appealling for the longer-term investor.

In the first four months of 2016 North Sydney has already surpassed the $301 million of office sales in the second half of last year, courtesy of Singapore real estate firm Ascendas’ $315 million purchase of the Innovation Centre on Arthur St, on a yield of 6.2%.

“Given the comparatively higher yields on offer combined with a lower price point, metro assets will continue to lure investors,” Walker says.