The Impact of Large Developments on CBD Office Leasing

The Savills Blog

The Impact of Large Developments on CBD Office Leasing

Major new office developments are extending, redefining and ultimately changing the face of CBDs in Sydney and Melbourne.

Barangaroo is set to add over 300,000 square metres of office space to the western corridor of Sydney’s CBD. High-profile tenants already signed up include Westpac, KPMG, Lend Lease, PricewaterhouseCoopers (PwC), HSBC and law firm Gilbert + Tobin.

This follows the pattern set in Melbourne, where big-name banks like ANZ and Westpac led the way to Docklands 10 years ago, quickly followed by government agencies and other corporates. The pace of development of new office space in Docklands and Southbank on the fringes of the existing CBD has now been outstripping traditional city office growth for some time.

Is new better?

Newer office buildings are appealing because they provide flexible working environments for the way we work today, with bigger floor plates (2000sq m+), designs that factor in technology and activity-based working and eco-credentials that make them more energy efficient to run.

But not every new building leases easily. It’s a matter of weighing up the cultural benefits of a new work environment, amenity, quality, cost and location from a corporate profile perspective.

Sydney’s Barangaroo isn’t simply new. It’s also its own precinct, which incorporates premium grade buildings within one of the greatest waterfront commercial, residential, retail and entertainment regeneration projects in Australia. Within this development, International Towers Sydney (ITS) has become a corporate hotspot, says Rob Dickins, National Head of Office Leasing for Savills.

“True landmark premium grade buildings aren’t built every day of the week,” says Dickins. “A lot of these bigger tenants, like PwC, HSBC and Westpac, have gone through two lease lifecycles where they are to change their workplace design, gain some efficiencies to create a more collaborative culture and to give staff a better amenity and environment around them, hopefully with an economic benefit.”

Premium tenants

Rob Dickins says the new precincts like Barangaroo in Sydney’s western CBD corridor will spread the quality and amenity of the city, providing current premium-grade occupiers with the opportunity to consider other parts of the city they haven’t traditionally been able to.

“The quality and scale of buildings within precincts such as Barangaroo has meant corporate users now see them as firmly established precincts. This has been evidenced by not only those commitments to ITS but by adjoining occupants such as American Express, Macquarie Bank and AON. And, while a greater percentage of premium grade buildings will always occupy the ‘golden triangle’ up the hill, ITS certainly spreads the rental and grade profile across the city.”

Efficiency, cultural change and amenity are driving the relocations.

“Most tenants see it might cost them the same or more on a cost-per-metre. But it provides greater efficiency benefits than they’d get in their current premises and a more modern collaborative environment.”

Under or oversupplied?

Rob Dickins quashes any major concerns that these new developments will result in an oversupply of office space.

“You need to analyse the backfill stock in more microscopic detail. It’s not just a matter of Barangaroo providing 300,000 square metres and suddenly you’ve got a 300,000-square-metre vacancy in the city. The reality is, half of those buildings being vacated will be provided back to the market on a staged availability over two to three years due to redevelopment. Those buildings that are only undergoing refurbishment will be provided in a shorter period but one of low supply.”

The withdrawal of stock for conversion to residential/serviced apartments and the like over the next two to three years will also provide a 'spill' of tenants that will create some competitive leasing tension.

“With additional large requirements from Commonwealth Bank, Westpac, Google, ING, Suncorp and the like, significant positive absorption can affect market fundamentals.” 

Dickins points to historic evidence of massive spikes in growth after previous downturns: periods of 100,000 to 200,000 square metres of net absorption. Economic conditions over the next 18 months will dictate how quickly the space will be absorbed and whether we will have a meaningful oversupply or just a short-term oversupply.

He also believes CBD office space rents will continue to grow marginally every year, led by tenants continuing to want new stock to re-engineer their businesses.

Changing geographies

There is good news for building owners in – or near – the western corridor, as other smaller services/providers will want to be located close to big-name tenants like Westpac, KPMG and PwC, and gradually follow them westwards. Dickins describes this as a business-synergy effect.

And the landscape will change in other ways: new restaurants, bars, cafes, childcare centres and gyms, the regeneration of neighbouring areas and the connection of the western corridor with Circular Quay by ferry and Wynyard via a walkway.

The new office space will also have flow-on effects for retail. Dickins believes it’s highly likely that more retailers will shift westwards from the traditional Pitt Street centre and down George Street towards Circular Quay as the office components at Barangaroo are developed.

Lifting the benchmark

Each time a new quality office building enters the market, the bar is raised in terms of amenities, accommodation and facilities in buildings. As a premium building, ITS in Barangaroo is anticipated to set a high standard.

“Things like end-of-trip facilities are now an expectation," says Dickins. "1 O’Connell Street put The Porter in there, a ground-floor meeting facility. It’s just another little different facility that building owners are putting into their buildings to add amenities for the tenants, over and above what most standard buildings have.”

ITS is focusing heavily on sustainability, aiming for zero waste and carbon-neutral buildings.

This puts pressure on other building owners to compete, but the overall result is a better-quality precinct and a better-quality offering for office tenants.

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