At the recent PCA mid-year breakfast in Sydney, consensus was incentives were decreasing but the panel could not agree to what level. Even though most would believe market fundamentals are healthy with 5.6% vacancy (lower than average) and 6 month positive net absorption of 50,500 m2 (above average), the discussion around incentives was cautious and non-committal.

Incentives were introduced in the early 1990’s property recession to prop up valuations and over the last 25 years incentives have allowed landlords to achieve 4% annual increases (or more) in face rents. This is despite CPI for 1996-2006 averaging only 2.5% and for 2006-2016 averaging only 2.3% (Bloomberg).

Since their introduction, incentives have become an integral part of the Sydney office market. Without them who knows what would happen. In Sydney over the years, they have averaged 10-20% in “good” times, 20-30% in “normal” times, and 25% + in “not as good” times. We have not had “soft” times for 25 years. In the early 1990’s they reached up to 50%. Perth and Brisbane are currently a good an indicator of soft times.

So where are Sydney CBD incentives now?

According to many, the pre-commitment deals, the major IT / Tech deals, and even the co-work deals are all pretty much done. So the current excitement is around withdrawals and the displacement of tenants from future residential or Metro buildings. However this is going to run its course shortly and the focus will have to return to Barangaroo, the backfill space and the sublease space that is creeping back into the market. There is more space than people think.

That means we will go back to normal times – back to leasing vacant space. No one wants to carry vacant space in cautious economic times. That means incentives will return to “normal” levels even though in some buildings they never really left. They were just not as visible as everyone was distracted with the action of the day.

Interesting times are ahead and more analysis of the office markets to come.


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