Expansion plans … tenants are willing to pay more for premium-grade space in the Sydney CBD. Photo: Bellinda Kontominas
TENANTS and landlords are locked in a battle for space and rental growth across Sydney, as the supply of prime locations and six-star buildings tightens.
This is despite the rise in Sydney's central business district office vacancy rate, which stands at 9.6 per cent, latest data from the Property Council of Australia reveal.
Leasing agents said that while secondary-grade offices were available, tenants wanted to upgrade to more sustainable properties and were willing to pay extra.
But they warned that company directors would stop at paying too high a rent, while landlords were not willing to drop prices just to fill the space.
The other cloud hanging over the office market is the parlous state of the financial sector, thanks to the turmoil in the economy due to the concerns about the longer-term impact of Europe's troubles.
This has made companies cautious about expanding office footprints or upgrading existing offices.
In the PCA Office Market report for the six months to January, Sydney's overall vacancy rose from 9.3 per cent to 9.6 per cent.
The NSW executive director of the PCA, Glenn Byres, said net absorption (leasing) across the Sydney CBD totalled 8122 square metres in the six months to January. Strong demand for A-grade stock - equalling 50,972 - was offset by a fall in demand across all other grades.
The NSW managing director for Jones Lang LaSalle, Michael Fenton, said despite the headwinds from global economic uncertainty, leasing demand in most NSW office precincts held up reasonably well in the final quarter of last year.
''Tenant demand has been positive in the Sydney CBD as indicated by our research with a solid 17,200 square metres of net absorption recorded in the last quarter of the year,'' he said.
''This is likely to be tempered in 2012 as we are aware that some businesses, particularly in the financial services industry, have been less focused on expansion and more cautious about relocation decisions.
''If global uncertainty persists throughout 2012 this will likely lead to softer demand, which is our current research house view for Sydney.''
In contrast, the supply of new sites in Sydney remains limited and the current vacancy rate belies the fact there are not a lot of large contiguous vacancy options available for bigger tenants looking to move this year or in 2013.
Mr Fenton said this might force some businesses requiring expansion to make decisions that are suboptimal for their operations, such as leasing additional space in another building.
The national director of office leasing in NSW for Knight Frank, Andy Collins, said across the Sydney CBD, landlords were actively competing for tenants within the ''single-floor market'', where effective growth this year would be subdued.
''Vacancy in the premium-grade market segment has jumped markedly, which is probably due to the inclusion of 1 Bligh Street and 85 Castlereagh Street,'' he said.
''Despite this, moderate growth in premium-grade effective rental levels can be expected during 2012.''
Mr Collins said he believed a recovery in the Sydney CBD's headline vacancy rate would be signalled by stability in the global equities markets and sustained growth in local business confidence.
