_The Property Perspective Episode 1 | Occupational drivers influencing the Sydney CBD office market

Katy Dean: Hello and welcome to the first edition of Knight Frank's Property Perspective, a podcast where we explore key market themes and trends. I'm Katy Dean, Associate Director with Research and Consultancy. I'm joined by Al Dunlop, Director, Head of Office Leasing for Sydney CBD. We've just released the August edition of the Sydney CBD Office Market Report and in this podcast episode Al and I will be talking about some of the key occupational drivers we’ve observed recently. I think a good place for us to start this podcast episode is to talk about tenant demand. Certainly being topical recently, even though we're still seeing positive take-up of prime office in Sydney CBD it is running below average. Al, what do you think is driving this trend?

Al Dunlop: I think it's two fold. In the last 24 months we've seen some large corporates recognise that this period's going to be particularly supply constrained and those groups have been taking a proactive approach to engage with landlords and reset and extend their leases to straddle and get past this tight 24 month period of the market. This has certainly been evidenced with the institutional landlords hitting high renewal rates across their portfolios. We've seen the likes of GBT exceeding 70%, Charter Hall in the high seventies and IOF, prior to takeover, around 75% as well. You know, anything over 70%, you would say are very strong retention renewal rights. This high renewal rate has had, in my opinion, a hibernating demand effect on the market where some occupiers have opted to renew early and just avoid this period.

So, we're not necessarily seeing all these corporates come to market like we used to. Scour the market for options and potentially consider relocation options outside of their current address. 

Katy Dean: We were talking earlier this week about venture capital investment. I reckon that's a really good topic for us to touch on now.

Al Dunlop: VC, or venture capital investment is, from what we understand, at record levels on a global scale. But we're certainly seeing that drilling down into a Sydney local level, we're seeing a strong flow of VC funding into these startups and small to medium enterprises. And obviously the tech sector has been a huge benefactor of that. There’s been a fair bit of growth in the industry that is having a knock-on effect to these small medium occupiers. And as these businesses mature and the funding comes in inflows, we're seeing office requirements off the back of that.

It's very typical for some of these groups that may only be 10 to 15 staff members, and what you'd effectively classify as a startup, sourcing or securing a big round of funding and then coming to market for a large portion of office space. You know, that's what I would dub hyper-growth. And when you've got multiple groups acting in that fashion, it certainly puts a strain on supply and has a downward effect on vacancy. 

Katy Dean: Yeah, that's so true. I mean, if we link that back to tech, it also ties into some of the diversification we’re witnessing and in regard to active industry sectors in the CBD recently. I mean, in terms of take up fintech and insurance services have started to outpace professional service occupiers over the last 12 to 18 months. 

Al Dunlop: It's also worth noting that we're seeing again, focusing on tech, but we're seeing some of the global established tech firms and brands scaling heavily their presence in Sydney.

To name a couple that have been recent movers. We've seen Facebook almost triple their footprint in Sydney, moving to Barangaroo. We've seen Amazon set up a second headquarters for a different business unit down in Market Street. At a local level, we've seen some of our local tech success stories such as Atlassian continue to extend their growth across the city. They’re across several addresses and approaching 25,000 metres. We've seen Canva down in the Surry Hills precinct again expand rapidly. SiteMinder is another name that springs to memory, again more than doubling their footprint down at the Rocks. So I mean this, these larger players are all scaling their presence and that again, has a constrained effect on the market, particularly when it's not necessarily lease expiry driven demand.

Katy Dean: Al, what about the ramp up in M&A activity recently? That appears to be playing into the positive story around occupational demand.

Al Dunlop: Yeah, we're seeing consolidation across a number of industries. Legals being one of those examples. We've seen global players come in and buy up smaller firms and there's been movement off the back of that. There's been consolidation in the insurance industry. The banking sector off the back of the Royal Commission has divested a number of the, the top four banks have divested business unit. So, and then, you know, back to the Royal Commission, that extra level of probity and compliance has added or created a number of office requirements. We've seen accounting firms set up project teams to support clients and contracts on a probity basis. So that again, in turn is all driving enquiry and movement. Obviously the consolidation effect can result in some subway space come back to the market. And we have seen pockets of that, but generally much lower than what we've historically used to.

Katy Dean: It's been really great chatting with you Al for this first podcast edition of Knight Frank's Property Perspective. For more content on Sydney CBD office market trends, check out our August report. Thank you for listening.