Tech occupiers drive rapid growth in out of town office market
Commercial investor activity on the outskirts of Sydney is expected to reach record levels before the end of the year.
Knight Frank’s Sydney City Fringe Insight Report 2022 showed that office markets in the CBD periphery have grown rapidly over the past 18 months following a steep pandemic-induced decline.
The City of Sydney LGA’s gross regional product totaled $131.2 billion in 2021 and has more than doubled over the past 20 years.
Office sales in the outskirts of town rebounded in 2021 to $747 million, nearly three times the fall of 2020 and 26% above the five-year average to 2019.
Knight Frank associate director Marco Mascitelli said suburbs such as Surry Hills, Eveleigh and Pyrmont have proven particularly popular with investors.
“The outskirts of the city are now seen as a natural extension of the CBD, but also as an organic growing market in their own right with a distinctly different feel,” he said.
“The sub-2% vacancy rate for prime space in Surry Hills and Eveleigh highlights the potential of the outlying market to catch up with more established areas.
“A key finding of this report is the substantial growth in rents in the outskirts of the city, with these rents approaching key values in Sydney’s central business district and already outperforming inner city assets.”
Over the past five years, net effective rents in Pyrmont and Surry Hills have increased by 60% and 40% respectively, compared to a 12% rise in the CBD.
Net rents in marginal markets range between $600 and 800 sq ft for prime space, while best-in-class assets can command rents above $1,000.
Anthony Pirrottina, co-director of South Sydney’s Knight Frank, said the tech, creative and education industries had driven demand, with tech occupants accounting for 35% of business activity each year over the past five years.
A recent example is AfterPay’s pre-commitment to 3,700m² as part of the IP Generations Brewery Central Park development.
In contrast, tech occupiers accounted for 18% of business activity in the CBD.
“The COVID-19 pandemic has accelerated the trend towards decentralization of office workspace, driven by staff wanting to work closer to where they live,” he said.
“This trend is particularly evident in places such as Surry Hills, Redfern, Potts Point and Woolloomooloo, which are inner-city neighborhoods that offer the opportunity to live, work and enjoy local amenities within walking distance.
“As a result, we have seen office rental rates in the outskirts of the city become more comparable to those in the CBD.
“The outperformance of fringe markets can also be attributed to the growth of the technology sector, triggering increased demand for less traditional and more fashionable office environments.”
Mr Pirrottina said the central precinct, around 24ha bounded by Pitt St, Cleveland St, Eddy Ave and Elizabeth St, would benefit from large-scale urban regeneration over the next decade.
“Tech companies are drawn to these outlying suburbs of the city for their vibrant amenities, their ability to help shape brand identity and attract potential new recruits,” he said.
Demand for prime office space is expected to reach record levels by the end of the year, with a number of major assets currently on the market attracting strong interest.
Premium space accounts for less than 30% of total fringe inventory, compared to over 60% in CBD.
Surry Hills is the largest fringe market, but its core composition is only 12%.
“Looking ahead, despite strong demand for prime inventory and new development inventory, the development pipeline in the edge remains limited, with only boutique-sized projects expected to be delivered in the coming years,” said Mr Mascitelli.
“This presents an opportunity for potential developers to enter the market given the limited competition for new space.”