Sydney Office Squeeze Worsens as Buildings Torn Down for Metro

(Bloomberg) -- Australia's infrastructure boom has kept Sydney's office rents the world's fastest growing for a second year.

Prime office rents in Sydney surged 30 percent in the 12 months ended Sept. 30, according to Jones Lang LaSalle Inc. Commercial space in the city is being squeezed as buildings are torn down to make way for a A$12.5 billion ($9.7 billion) metro line, while developers are cashing in on the housing boom by converting harborside towers into luxury apartments.

“You can't dump a planned infrastructure spend on an economy and not expect things, particularly in the office sector, to be buoyant,” said Kevin George, executive general manager of office and industrial at Dexus, Australia's largest office manager. Tenants needing to find new space because buildings were being demolished or converted “was the icing on the cake,” he said.

The New South Wales state government is spending about A$80 billion over four years to build roads, hospitals and schools and revamp public transport as the city chokes from faster immigration. Sydney's population has swollen to 5 million from 4 million in about 16 years, half the time it took to add the previous million, according to the Australian Bureau of Statistics.

Demolishing Buildings

About 400,000 square meters of office space has been removed in Sydney and its outer suburbs as buildings are demolished for the Sydney Metro and other developments, said Anneke Thompson, director of Australia research at Colliers International. In Sydney's central business district, 17 towers are being knocked down to make way for two metro stations.

The net effect is that only 135,000 square meters of office space has been added in the past three years, Thompson said, with LendLease Group's A$7.9 billion Barangaroo South accounting for most of that.

Meantime, China's Dalian Wanda Group is turning Gold Fields House at Circular Quay into apartments and a hotel, while Coca-Cola Amatil Ltd.'s former headquarters near the Sydney Opera House is being converted to luxury residential units.

“Tenants are basically being squeezed all over Sydney,” Thompson said. “You've not only had this low supply in the CBD, you've also had low supply in traditional markets as well.”

Global City

Still, that's not discouraging companies as Sydney's rental costs are more akin to Singapore than Hong Kong, the world's most expensive office market. 

Google Inc.'s Sydney presence is now its second largest in the region, while RocketSpace Inc., the startup incubator that helped launch Spotify Ltd. and Uber Technologies Inc., has partnered with Dexus to search for sites for three campuses on Australia's east coast.

“It's really seen as a global city now,” Thompson said. “That's part of the reason why we've seen the rental growth.” 

To contact the reporter on this story: Matthew Burgess in Sydney at mburgess46@bloomberg.net.

To contact the editors responsible for this story: Edward Johnson at ejohnson28@bloomberg.net, Peter Vercoe, Paul Panckhurst

©2017 Bloomberg L.P.