Office space in North Sydney is in high demand from an increasingly wide range of tenants due to its strategic location, relative affordability and access to transport, according to the latest research from Knight Frank.

The research also found that while rents in North Sydney were lower than those in CBD, they were climbing due to increased demand with prime and secondary markets in North Sydney recording gross effective rental growth of 9.2 per cent and 8.5 per cent respectively over the past 12 months.

Sustained investor demand and competition for North Sydney assets had seen significant yield spread compression between prime Sydney CBD and North Sydney assets, with the gap narrowing to 45 basis points, almost half its historical trend.

The Knight Frank North Shore Office Market Overview September 2019 found North Sydney was particularly attractive to technology and media companies with these tenants accounting for 34 per cent of leasing activity since 2018.

 Knight Frank Partner and Head of Office Leasing North Shore Giuseppe Ruberto said strong demand from tech companies was expected to drive positive take-up levels in the area over the next two years.

At a glance:

• Technology and media companies account for 34 per cent of leasing activity in Sydney’s North Shore office market over the past year
• North Sydney office rents running at a 27 per cent discount – on a gross basis – to the Sydney CBD, supporting demand
• Offshore capital continues to flood the North Shore markets with over 85 per cent of the $2.5 billion in investment volumes coming from offshore groups in the 12 months to July 2019. 

He said that Microsoft, SAP, Nextgen.net, Nokia, Citrix and Zurich were recent examples of companies trying to scale up or establish headquarters in the area.

 “While tech companies are underpinning leasing demand in North Sydney, other industries are also very active, with financial and insurance services comprising 20 per cent of take-up and professional, scientific and technical services making up 15 per cent of leasing activity," he said.

Mr Ruberto said while North Sydney was already strategically located to the Sydney CBD and the other North Shore markets, the new Sydney Metro rail project and planned pipeline of new office projects in the area was providing a further uplift to demand levels and resulting in new market entrants. 

“North Sydney’s office rents are running at a 27 per cent discount – on a gross basis - to the Sydney CBD, which has continued to support recent demand fundamentals,” he said.

While rents in the North Sydney office market are more affordable than the CBD, they are gradually catching up, with rising tenant demand leading to rental growth rates higher than the Sydney CBD, according to Knight Frank Associate Director Research Katy Dean.

She said that the year-on-year prime rental growth rate was currently running 200 basis points above Sydney on a gross basis, as at July 2019.

 “Prime and secondary markets in North Sydney recorded gross effective rental growth of 9.2 per cent and 8.5 per cent respectively over the past 12 months.”

 Ms Dean said the pipeline of new stock over the next year remained elevated, with more than 155,000 square metres of new and refurbished stock currently under construction across North Sydney and Macquarie Park, which was expected to be completed by the end of 2020.

But she said demand for prime space in North Sydney was driving high commitment rates and limiting the future availability of supply, and despite ticking upwards, vacancy was still below the 10-year average of 8.6 per cent.

Knight Frank Partner Institutional Sales, Tyler Talbot said appetite for prime income-yielding assets in North Sydney remained elevated placing downward pressure on yields as investors compete for opportunities.

He said that as July 2019, average prime yields were showing a 25.8 basis point tightening year-on-year to reach 5.00 per cent, a new benchmark for North Sydney. 

“Sustained investor demand for North Sydney assets has seen significant yield spread compression between prime Sydney CBD and North Sydney assets, with the gap narrowing to 45 basis points,” Talbot said.

“This is almost half its historical trend, reflecting the strong rental growth rates seen over the last two years.”

 The Knight Frank North Shore Office Market Overview September 2019 found offshore capital continued to flood the North Shore markets with more than 85 per cent of the $2.5 billion in investment volumes coming from offshore groups in the 12 months to July 2019. 

North Shore Office Market Overview September

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