Sydney CBD office: flood of supply, then drought

Prior to the impact of the COVID-19 downturn in Q4 2019, the Sydney CBD vacancy rate was 5%, below the 20-year long-term average of 7.9%. The low vacancy rate prompted an office supply response by developers, with several high-profile projects under construction, such as Salesforce Tower, 180 George Street (57,965 sqm) and Quay Quarter Tower, 50 Bridge Street (88,000 sqm), which were scheduled to be completed in 2022. In Q1 2020, Sydney CBD office completions were projected to average approximately 98,800 sqm per annum over the 10-year outlook to 2029. This forecast supply pipeline was reasonably uniform, with the bulk of completions scheduled to be completed in the first five years (2020 to 2024).

The onset of the pandemic resulted in a large amount of consolidation activity, with the Sydney CBD vacancy rate increasing to 14.5% as of Q3 2023. The spike in the vacancy rate, coupled with disruptions to the global supply chain and increasing costs of raw materials such as steel and cement, caused developers to reassess their planned office developments. The elevated cost of materials meant the economic rent for future developments had risen, making many developments (based on dated materials costs) unfeasible. Due to these factors, our Sydney CBD development pipeline has been adjusted accordingly. When comparing our Q1 2020 and Q3 2023 forecasts over the same period (2020 to 2029), we adjusted completions down to 88,700 sqm per annum, which was 11% lower on an annual basis compared to our Q1 2020 projections.

With these adjustments to supply, the medium-term outlook is of particular interest. Our medium-term (2023 to 2026) office supply outlook forecast has reduced by approximately 150,000 sqm (compared to Q3 2023 and Q1 2020 forecasts). On top of this, the current supply outlook is patchy, as is shown in Figure 1. Minimal completions are projected for 2023 (11,500 sqm), followed by a spike in 2024 (170,638 sqm). Over-station developments are driving the spike in development activity as part of the Sydney Metro infrastructure project.

We then head into a situation where we project no new or refurbished office stock to complete in 2025 and 2026. This is a unique situation as JLL has time series data of annual completions for the Sydney CBD from 1970. There has never been a period where we have recorded two consecutive years of no completions in the Sydney CBD office market.

Figure 1: Sydney CBD office development forecast, 1Q20 vs 3Q23

Source: JLL Research Q3 2023

Whilst there is a possibility that delays could cause some of the 2024 office developments to drift into 2025, other groups are looking to fill this supply gap by repositioning their assets, such as Quintessential, which has proposed to refurbish and extend the podium floors (levels 1-5) of 1 Margaret Street (20,400 + 3,625 sqm). Larger tenants with a lease expiry in 2025 and 2026 will have few new office choices and may have to wait until the next development cycle that will commence in 2027 if they wish to relocate into new office stock.