IN COLLABORATION WITH RAY WHITE COMMERCIAL
Sydney CBD office rents have surged in the past year putting commercial office rental affordability in the spotlight. We analyse this in a historical context and whether affordability will impact future office leasing decisions.
Recent property commentary and debate in Australia has centred around the issue of housing (un)affordability, with the ‘smashed avocado’ theory having potential first home buyers now questioning their weekend breakfast choice in cafes all over the country.
However, affordability is also becoming more relevant in office market commentary, The recent surge in rents has reflected the combined impact of strong office market conditions and a degree of ‘catch up’, following five years of modest rental growth.
Accounting for the cost of outgoings, ‘net’ face rents in the Sydney prime office markets are increasing at strong double-digit growth rates (~13%). In Sydney, tenant leasing incentives are falling, adding to ‘effective’ rent growth, while easing the upward pressure on face rents.
RENTS OUTPACING BUSINESS INCOME
In comparison, positive trading conditions have driven white collar business income growth to five-year highs of 4.5%. In a relative sense, this has reflected more difficult rental affordability for office tenants in these markets.
However, when compared to prime office rental affordability over the past 13 years, Sydney CBD prime office rents have only recently breached historical norms. This is not unusual in strong office market conditions.
While we expect office rents will continue to reflect strong market conditions in 2018, growth is likely to soften from the strong gains in 2017. We expect prime office face rent growth in 2018 to ease to 9-10% in Sydney CBD and 5-6% in Melbourne CBD.
MARKET DYNAMICS TO EASE AFFORDABILITY
In the longer term, the supply response to strong rental growth and low vacancy will further ease pressure on rent growth. Consequently, prime office rental growth in Sydney is unlikely to continue at the current multiple of almost 3-to-1 for much longer, when compared to business revenue growth, softening the affordability pressures.
Nonetheless, other critical elements should not be ignored when considering the potential impact of rental affordability on office market absorption, including the quality and availability of appropriate office space. Like any individual economic decision, price or affordability is only one element in a range of factors, including consumer preferences (ie. office space and location requirements) and capacity (ie. availability).
With office amenity (ie. technology, fit out/facilities, lifestyle offering) increasingly important to businesses ability to attract and retain talented workers, ‘more affordable’ prime office space options may provide a viable alternative for tenants unable to make a Sydney CBD move ‘stack up’. This could result in positive spill over to absorption in North Sydney, Parramatta, Melbourne and Brisbane.
AFFORDABILITY VARIATION ACROSS MARKETS
Looking ahead, the supply response to strong market conditions in Sydney is coming. This will not only impact the relative availability of high quality office space, but will also ease market pressures on rental growth and affordability.
Time will tell if strong market conditions and rental affordability will have a significant impact on business leasing decisions. However, when paired with a combination of strong underlying demand, a multi-year shortage of space and upward pressure on business operating costs and outgoings in the Sydney CBD market, variation in rental affordability compared to competing markets is expected to have some impact in the coming years.
So, while office tenants can still enjoy their smashed avocado, further strong growth in rent in some markets will drive some tenants to either reconsider their choice of office location or find further efficiencies with their existing office location.
Read full magazine here: https://view.joomag.com/sydney-office-update-sydney-office-update-november-edition/0186888001509947657?short
FURTHER INFORMATION
David Cannington
Head of Research & Strategy
T +61 3 8600 9209
DCannington@investa.com.au
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Investa is a leading Australian real estate company managing more than A$11 billion of institutional-grade office real estate. The Investa Research team focuses on understanding the drivers and analysing trends within the Australian office sector, publishing regular updates on the performance of the major office markets across Australia.
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Ray White’s top 10 listings for November: (Click on address to view listing)
5 / 9 Castlereagh Street, Sydney
14 / 77 King Street, Sydney
14 / 1 Market Street, Sydney
4 / 62 Pitt Street, Sydney
9 / 46 Market Street, Sydney
11 / 61 York Street, Sydney
8.03 / 46 Market Street, Sydney
10.01 / 45 Clarence Street, Sydney
7.01 / 261 George Street, Sydney
14 / 187 Macquarie Street, Sydney