Landlords reject Sydney ‘supply tsunami’ forecast

Landlords reject Sydney ‘supply tsunami’ forecast

Some of Australia’s biggest commercial property landlords have hotly contested a prediction that a flood of office space will eventually swamp the Sydney market, says the AFR.

The forecast was issued this month by property consultant Pepper, which said that “the hype around the strength of the Sydney market” was due more to stock withdrawal than underlying demand.

According to the Sydney-based consultancy, a “supply tsunami” between 2020 and 2025 combined with more intense use of office space could hurt landlords more than expected.

During the past 10 years, the total office space occupied in the Sydney CBD has grown by just 300,000 square metres or less than 1 per cent annually.

However, between 2020 and 2025 there will be multiple large-scale supply injections, totalling 500,000 to 1 million square metres.

“Can the market handle it?” Pepper asks.

A worst-case scenario could see Sydney’s vacancy rate, currently at 5.9 per cent, balloon to 15 per cent, they conclude.

Nevertheless, several of the country’s largest commercial property landlords were quick to water down the alarming scenario.

CEO of Dexus and an Executive Director of Dexus Funds Management Limited, Darren Steinberg, said that realistic projections of supply and demand in Sydney indicate CBD vacancies will rise to between 8 to 10 per cent in financial year 2023.

“This is considerably less than the ‘tsunami’ mooted by Pepper and not far above the long-term average of 8 per cent,” Mr Steinberg said.

Dexus forecasts that Sydney’s CBD office market is in a good position to absorb new supply, with the vacancy rate to fall to less than 4 per cent by the 2019 financial year.

“There is little new supply coming through over the next two years, and after that any increase in supply is likely to be spread over a number of years,” Mr Steinberg said.

“We anticipate that demand for office space will continue to grow, underpinned by a strong-performing NSW economy which is being fuelled by infrastructure investment and growth in the service sector.”

Pepper’s forecast was also based on the fact that many businesses are adapting to higher retails by deploying a denser use of space, says a separate AFR report.

“There is a point at which office space becomes too expensive and tenants are forced to challenge their traditional views on usage.

“Recent effective rental growth has forced many businesses to now look harder at intensifying the use of their office space and this trend should gain momentum,” Pepper said.

Unless business growth compensates for these shrinking workplaces, says Pepper, office demand will not soak up the “supply tsunami” that is approaching in the early 2020s.

This view, however, is contested by Peter Menegazzo, executive director at Investa Property Group, who said the shift toward densification had been under way for some time.

“Densification has impacted the big tenants but one of the greatest drivers of net absorption has been the small-to-medium sized businesses,” he said.

‘It’s harder for them to operate on a 70-80 per cent occupancy rate.”

Cushman Wakefield’s research chief John Sears also weighed into the debate, noting that net supply was “more or less” in line with that seen over the past decade.

“This isn’t to say more supply won’t come onstream as a result of the low vacancy and associated rental growth, but unless there is a black swan event, projections of a 15 per cent vacancy rate seems fairly unlikely by the mid-2020s.”

Meanwhile, The Australian reports that investment heavyweights are backing the city’s capacity to generate strong rental growth.

Local and offshore investors are jockeying for position on more than $2 billion worth of Sydney office towers, with deals being struck at ground-breaking benchmarks, the paper says.