In late 2015 the New South Wales (NSW) state government announced a new metro rail line that will go through the Sydney CBD. The Sydney Metro will be a fully automated metro rail extending from Rouse Hill, in the North West of metropolitan Sydney, through the Sydney CBD, down to Bankstown, in the south west of Sydney (Figure 1).

Figure 1: Route of the Sydney Metro development
Source: Transport for NSW press release, Sydney Metro accelerates through CBD:
Stations confirmed and first borer to arrive in 2018, 16^th November 2015

How will the Sydney Metro affect the office market?

A reality of constructing the Sydney Metro through a commercial precinct such as the Sydney CBD is the compulsory acquisition of office assets by the NSW government to make way for the new metro stations. JLL Research estimates the project will affect up to 63,000 sqm of office stock across the Sydney CBD, which equates to 1.1% of total stock.

Data compiled by the JLL Leasing team suggests that as many as 100 tenants will be displaced within the Sydney CBD because of these compulsory acquisitions. The withdrawals come at a time where market conditions are already tight in the CBD. Total net absorption over the 12 months to 2Q16 (119,100 sqm) is well above the 20 year long-term average of 50,000 sqm. This has pushed the total vacancy rate from a cyclical high of 10.7% in 3Q13 down to 7.1%.

On top of this, a further 182,300 sqm of CBD office stock (3.6% of total stock) is expected to be withdrawn between 2016 and 2018. Figure 2 shows where the majority of tenants will be displaced in the Sydney CBD. On top of tenants to be displaced by the compulsory acquisitions, JLL Leasing estimates as many as 280 tenants will be displaced because of office redevelopments and residential conversion during this period of time.

Tenants are also being forced to assess their space options well before their lease expiry, which is causing a flurry of leasing activity, particularly in the less than 500 sqm tenant cohort of the market. A combination of secondary asset withdrawals and tenants relocating into secondary space has pushed the secondary vacancy rate (currently 5.5%) to the lowest level since 2002.

Figure 2: Sydney CBD office withdrawals and displacement of tenants, 2016 to 2018
Source: JLL Research, JLL Leasing

This leads to a difficult question to answer: where can the tenants go? The nearest office market to the CBD – the Sydney Fringe – has the lowest total vacancy rate (4.3%) of the 19 Australian markets monitored by JLL. North Sydney, the second closest market to the CBD, also has limited space options because of the withdrawal of office space within that market – 35,100 sqm in 2016 or 4.5% of total stock.

More than three quarters of the tenants to be displaced in the Sydney CBD have space requirements less than 500 sqm. It is likely they will be forced to expand their search into suburban markets because of the limited options in the CBD and surrounding markets. This points to positive leasing conditions over the medium term across metropolitan Sydney’s office markets. However, if current market conditions persist, finding a place for tenants which suits their space requirements will prove to be a difficult task.

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