Sydney City Fringe Office Market

Investment Rating - The report indicates a positive outlook for the Sydney City Fringe office market, highlighting strong demand and limited supply as key factors driving investment interest. Core Insights - The Sydney City Fringe is increasingly becoming a preferred destination for occupiers and investors due to its favorable demographic profile and proximity to major health and education precincts [2][12] - There is a significant undersupply of prime office stock in the fringe, with prime grade space accounting for under 40% of total stock compared to 64% in the CBD [8][12] - Overall vacancy rates in the fringe markets are tracking below those in the Sydney CBD, indicating strong occupier demand [13][14] - The rental gap between fringe locations and the CBD is narrowing, with current discounts significantly reduced from previous years [14][15] Summary by Sections Economic Drivers - The gross regional product in the City of Sydney reached $141.7 billion in 2023, with a growth rate of 3.4% per annum over the past two decades, significantly outpacing Greater Sydney's growth [4][5] - Population growth in inner Sydney has been robust, with a 53% increase over the past 20 years, compared to 29% for Greater Sydney [5][6] Demographics - The city fringe has a relatively young and highly educated population, with over 42% aged between 20 and 34 years and around half holding a bachelor's degree [7] - High-income earners are more prevalent in the fringe, with 20% of residents in Darlinghurst earning over $3,000 weekly, compared to 7.5% for Greater Sydney [7] Supply and Demand - The development pipeline in the fringe is limited, with only boutique projects anticipated, leading to a continued undersupply of prime office space [9][10] - Recent developments have shown strong pre-commitment rates, indicating a healthy demand for new quality office spaces [9] Rental Trends - Average net face rents for prime space range between $700 and $1,000 per square meter, with Surry Hills experiencing a 4.5% growth over the past year [14] - The current rental discount between Surry Hills and the CBD is 38%, down from 50% in 2017, indicating a tightening rental market [14] Investment Activity - Investment volumes in 2023 were subdued at $98.3 million, but activity has improved in 2024 with transactions totaling $135 million [17][19] - Prime office yields in the fringe markets range between 6.00% and 7.50%, with strong interest in high-quality assets [18] Future Outlook - The report anticipates further rental growth as occupier demand remains strong amidst limited new supply, with the potential for the fringe markets to mature and evolve [15][20]