The changing nature of the modern-day tenant has seen a significant transformation in the average sized tenancy leased in the Sydney CBD. This transition has seen landlords adapt their leasing strategy to reap the benefits of the hotly contested small suite leasing market.
Three main causes of the reduction of tenancy size...
1/ Breakaway professional service firms
Professional service industries such as law firms and financial organisations are breaking away from large global corporates to start their own firms. This has seen many law firm partners start their own companies whilst wanting to remain in prime quality buildings, such as ‘A’ and ‘Premium’ grade stock, in the CBD’s Core precinct.
2/ Rapid growth in start-up sector
Start-ups are experiencing rapid growth in the flexible workspace segment with co-working and serviced office organisations typically looking for sub-300sqm with the intent the space replicates an enjoyable and collaborative environment.
3/ Buildings earmarked for redevelopment
Several buildings withdrawn in Sydney CBD in 2016/2017 were comprised of smaller tenants sub 300sqm (i.e. Goldfields House). This trend is likely to cease once Young & Loftus and 50 Bridge Streets (creating the Quay Quarter Sydney precinct) is withdrawn in late 2017. Small suite tenants are attracted to shorter lease terms, as buildings earmarked for redevelopment generally allow tenant expiries aligned with their redevelopment Development Commencement date.
Did you know… There is 5,079,899sqm of total office stock across 700 commercial buildings accommodating approximately 9,000 tenants in the Sydney CBD? Of these 9,000 tenants, 58% of the market occupies smaller sized suites within the range of 0-300sqm.
According to Colliers International’s database, from January 2016-May 2017 there has been over 285,000sqm of office space leased in the Sydney CBD across 480 transactions. 60% of tenants occupy suites of less than 300sqm.
Split and Fit vs Whole Floors
Traditionally, a landlord’s preference would be to offer whole floors to larger tenants, however more recently landlords have benefited from a ‘split and fit’ strategy such as the highly successful Grosvenor Place Sky Suites campaign where 10 small suites were speculatively fitted out & leased within months. This strategy has resulted in the landlord’s ability to increase face rents and reduce downtime due to smaller tenants’ earlier commencement dates.
Speculative fit outs, if designed well, also enhance the inspection experience and allow smaller occupiers to visualise themselves in the tenancy. These have proven to be highly successful throughout a range of building grades including Premium Grade buildings through to B Grade buildings.
What does the future look like?
According to Colliers International’s database, there will be approximately 850 tenants with lease expiries from June 2017 to December 2018 totalling 597,500sqm. From our analysis, 48% of tenants occupy areas from 0-300sqm, 18% occupy 300-500sqm, 17% occupy 500-1,000sqm, 15% occupy 1,000-5,000sqm and 2% occupy areas from 5,000sqm+.
The data shows that the start-up trend does not look to be slowing down. In recent years, the number of start-ups and small businesses within Australia has grown significantly. Globally, investment into start-ups has exploded with venture capital firms deploying over USD 22 billion into more than 1,000 start-ups in 2016 alone (PWC, 2017).
We believe that the expiry profile of small suite tenants will be extremely prominent over the next 12 months, and that these tenants will continue to search for small suites.
Our recommendation for landlords looking to capitalise on their office space and reduce their time on market would be to consider a strategy that caters to small suite occupiers.
For further information on the small suite market in the Sydney CBD contact Oliver Archibald of Colliers International on +61 405 782 579 or email firstname.lastname@example.org
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