Office landlords are now back in control as space is taken for infrastructure projects and residential conversions, leading to a forecast for rent rises of close to 8 per cent, according to Cushman and Wakefield.
Investment sentiment is also stable with CBD hotels, office and retail properties in the highest quartile of demand, according to the NAB quarterly Australian Commercial Property Survey, for the first quarter of calendar 2016.
However, while extensive development projects are planned – Sydney is driven by the NSW government – banks are tightening the strings, making some developers nervous.
According to NAB chief economist Alan Oster, more developers said their debt and equity funding situation had worsened over the quarter, while the average pre-commitment requirement to get projects up and running rose for the fourth straight quarter to 54 per cent.
Amid the lending concerns, John Sears, national research director for Cushman and Wakefield, said the majority of stock withdrawals would occur in the Sydney city core to give way to the construction of Sydney Metro stations and the redevelopments around the Circular Quay precinct.
Mr Sears said Cushman and Wakefield analysis indicates that as a result of development and compulsory acquisitions over 290 tenants are likely to be requiring new premises.
He said Sydney CBD office fundamentals may finally be lining up to allow landlords to ride a wave of falling vacancy and stronger rental growth over the next five years.
"The stock withdrawals, combined with limited new supply, suggest that net supply is likely to be negative or flat between 2017 and 2020," Mr Sears said.
Cushman and Wakefield's Dr Dominic Brown, the head of Australia and New Zealand research, estimates around 90,000 sq m of gross supply will be added per annum over the next four years.
"This is 34 per cent less than the 10-year average of around 140,000 sqm per annum," Dr Brown said.
"The improved demand has already resulted in stronger rental growth over 2015, with incentives declining from around 30-33 per cent to 28-30 per cent by the first quarter of 2016. If the vacancy rate continues to decline as forecast, both stronger face rent growth and an ongoing decline in incentives should continue."
Dr Brown and Mr Sears said this may result in prime gross effective rental growth averaging around 7.5 per cent per annum over the five years to 2020.
That would be the strongest sustained rental growth for the Sydney CBD office market in many years.
Recipients to the NAB survey say in leasing markets, office rents are expected to grow 1.1 per cent and 1.5 per cent, nationally in the next one to two years, led by solid returns in NSW and to a lesser extent Victoria.
Mr Oster said property professionals in the CBD hotels sector are also the most confident in the next year, followed by office and retail.
