Smaller spaces pick up tenants

Leasing activity in the small to medium spaces across Sydney is gaining momentum, reflecting the changing face of the city from legal and financial tenants to self-employed and private consultants.

There has also been a shift towards different businesses, such as hospitality, that are taking up space that would have once been occupied by the traditional CBD sectors of finance and accounting.

The trigger has been the consolidation of banks and law firms into one big site, such as the ANZ Bank into 161 Castlereagh Street, the CBA into Darling Park and Westpac's overflow to Barangaroo South.

The same has occurred in Melbourne as companies take up space at Docklands.

Redundancies among stockbrokers, investment bankers and the legal professions have also made these companies reluctant to take up any expansion options, leaving agents with space to sub-let.

Analysts at Deutsche Bank say prime grade vacancy in Sydney and Melbourne increased over the second quarter of this year by 133 basis points and 235 basis points to 11.3 per cent and 8.7 per cent respectively, while secondary grade vacancy was broadly flat.

Sub-lease vacancy as a proportion of total Sydney vacancy lifted materially over the quarter to June 30, up 5 per cent to 17 per cent in Sydney while in Melbourne it was about 21 per cent.

"Our discussions with leasing agents suggest that tenants are willing to accept 50¢ to 75¢ in the dollar to clear excess space, undercutting direct vacancy," the analysts said.

One of the latest properties in Sydney to tackle the leasing challenges by offering flexible space is 20 Martin Place.

Jack Clark, vice-president and director of the Sydney office for Pembroke Real Estate, which owns 20 Martin Place, has awarded Built Holdings the construction contract for the redevelopment.

Under the plans, the new owners will undertake a $250 million refurbishment of the 21-storey asset, which will leave the ANZ Bank in a chamber on the ground floor.

"The design of 20 Martin Place includes the reconfiguration of the building's core to create efficient, flexible floorplates along with new building systems and technology to address the evolving needs of tenants," Mr Clark said.

"While the building can offer vertical connections to accommodate traditional large tenants, such as law firms and financial services groups, it is also very well suited for the many smaller and medium-sized tenants in search of high quality space in the heart of the CBD."

Savills divisional director of research NSW Simon Hemphill said in the past 24 months almost half the leases taken out in the CBD have been between 500 square metres and 1000 square metres, therefore landlords should be willing to subdivide floors into suites.

Savills research shows that, of the 221 leasing deals brokered in the past 24 months, 100 (45.2 per cent) were for space between 500 and 1000 square metres and a further 67 deals (30.3 per cent) were for space between 1000 and 2000 square metres.

Mr Hemphill said there were a number of prime full floor spaces available that had been on the market for more than two years.

"Indeed, further analysis of the current market availability highlights that almost 25 per cent of 279 floors that were available as at the end of June 2013 have been on the market for 12 months or longer," Mr Hemphill said.