Surge in Sydney CBD sublease stock provides opportunities in a tight market

The Sydney CBD’s office sub-lease vacancy rate has spiked to a near five-year high, surging from 28,706sqm to 70,244sqm between Q1 and Q2 this year.

The increase, highlighted in CBRE’s quarterly sub-lease barometer, shows that opportunities remain for savvy tenants, despite the CBD’s overall vacancy dropping to a low 3.7% as at the end of June 30, 2019 according to Property Council of Australia data.

“With no significant new supply entering the market until 2022, direct leasing opportunities are limited. However, numerous opportunities are now presenting in the sub-lease market,” said CBRE Director, Office Leasing, Chris Fisher.

“Some 87% of the sub-lease space is fitted, providing opportunities for occupiers to secure space offering a high-quality fitout, mostly at a below market rental position under leases negotiated prior to the Sydney CBD’s 78% growth in prime net effective rents over the past four years.”

CBRE’s quarterly sub-lease barometer tracks sub-lease space available now and becoming available in the future.

The surge in availability between Q1 and Q2 2019 puts the volume of CBD sub lease stock at the highest level since September 2015, with approximately 60% of the sub-lease supply consisting of Premium and A Grade stock.

Tenants in the Finance & Insurance Services sector account for the highest proportion of sub-lease space at 24,243sqm.

“The main driver for the increase in sub-lease stock is relocation, accounting for 41% of the space,” Mr Fisher said.

“We are continually seeing businesses assess their office space utilisation, efficiencies and densities, and the environment they are providing for employees,” Mr Fisher said.

“The re-shaping of the workplace and war for talent has seen businesses readily commit to new accommodation whilst carrying a lease tail commitment. The ability to off-load their existing space, at attractive underlying rentals, provides the confidence to carry this leasing risk.”

Recent examples include QBE and First State Super’s commitments to 388 George Street, leaving lease tails at 8 Chifley Square, 2 Park Street and 83 Clarence Street.

The NSW Government’s commitment to Parramatta Square will result in approximately 10,000sqm of sub-lease space at 59 Goulburn Street.

Recent M&A’s have also driven relocations, with Marsh’s acquisition of JLT resulting in 3,000sqm of high quality fitted space becoming available in Grosvenor Place. 

Cost and contraction has been another driver of the uptick in sublease stock, the likes of KPMG and PwC each offering two floors at Barangaroo to the market.

“The increase in sub-lease space provides somewhat of a pressure release to the market,” Mr Fisher said.

“With over 50% of the space having lease expiries from 2024 onwards, it provides genuine tenure and allows businesses the opportunities to grow and fulfil their strategies and not be constrained by limited stock availability.