The modern Australian Metro Market

Transcription

Research and
Forecast Report
First Half 2016
Australia
METRO OFFICE
The modern Australian
Metro Market
Contemporary ingredients for success
Accelerating success.
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Research and
Forecast Report
Second Half 2015
Australia
HOTELS
Destination Australia
Arrivals increase as accommodation
sector takes off
Metro Office
METRO OFFICE
Contents
Investment tide continues
5
Our perspective - metro office
10
Sydney
12
Melbourne
18
Brisbane
24
Adelaide
27
Perth
29
Newcastle 33
Gold Coast 36
Our experience - metro office
38
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Metro Office | Research & Forecast Report | First Half 2016
3
Louisa Lawson Building, 25 Colishaw Street, Canberra ACT
Sold on behalf of GDC (ACT) Pty Ltd
4
A Colliers International publication
Metro Office
METRO OFFICE
Creating Metro Appeal
Perhaps the best way to describe Australia’s metro office
markets is “mixed”. There is no real “national metro
market” due to the multitude of factors that have an impact
in this sector and the variation of conditions across states.
However there are some common themes that emerge
when discussing the current state of metro markets
together with factors that can potentially make certain
markets more appealing over others in a commercial
sense.
By Daniel Lees
[email protected]
The merits of centralisation
Post the Global Financial Crisis when vacancy and incentive levels increased
across Australian CBDs, the competitive rents on offer provided tenants with the
opportunity to centralise. The scenario brought with it some opportunities, with
tenants in most cases having improved access to amenity, transport infrastructure,
and potentially becoming more appealing to a wider pool of labour.
Today, a case remains for centralisation because much of the commercial supply
pipeline being built is concentrated within core CBD precincts, particularly in
Sydney and Melbourne. The incentives on offer in these CBDs are edging lower
slowly but in some cases are still high enough to entice tenants away from metro
alternatives.
Even so, many metro markets, especially within the inner and fringe areas of
Melbourne and Sydney remain quite tight for a number of reasons. Firstly, there
has been a significant amount of withdrawal for infrastructure, and many assets
acquired in prior years for development are being sold as residential or other
higher and best use purposes. Secondly, the supply pipeline is fairly limited in
metro markets with new construction being concentrated in CBDs. Finally, it’s not
only the metro markets experiencing a loss of secondary stock. Withdrawals have
also been widespread in CBDs, placing pressure on secondary grade tenants to find
new locations, and in some cases this may lead to an element of decentralisation
over time.
Proximity to the CBD
Whilst metropolitan locations can sometimes offer lifestyle upside to tenants, being
close to the CBD remains an important tenant consideration due the close proximity
of business and financial services, public and private clients, suppliers, financiers
and key decision makers. From a talent retention and attraction perspective, CBD
proximity allows tenants to access a wider pool of recruits due to the central
location of the business. In terms of cost management, tenants can enjoy the
amenity advantages of a CBD adjacent location at a lower rental cost. From an
investment perspective, there tends to be higher levels of domestic institutional
and offshore investment given the dynamics of fringe markets tend to be similar in
nature to the CBD and enjoy easier access to transport services.
5
25 Montpelier Road, Bowen Hills, QLD
Leased on behalf of GWC Property
Transport infrastructure
•
scheduled for completion in 2019. This will feature a metro
Close proximity to public transport networks, roads and taxis is
rail system that will deliver eight new railway stations
consistently ranked as a top requirement by tenants and building
with trains running every four minutes in peak times.
owners in metropolitan locations. While road transport and car
The infrastructure will improve the access and employee
parking in metropolitan markets are often cited as a necessity
catchment for the North Western precincts of Sydney such
to ensure tenants can readily access their office location, public
transport access in the form of bus and rail are becoming
increasingly important.
Transport accessibility works as a driver when:
•
•
•
as Macquarie Park.
•
Perth City Link: A master plan designed to reconnect the
Perth CBD with the Northbridge and beyond to West Perth.
In 2013 the $360 million rail component of the project was
Well connected to arterial road, and freeway networks.
delivered, and the second stage involving an underground
Travel times to CBD locations under 30 minutes will be most
bus station is scheduled for delivery this year. Once the
positive for tenant accessibility;
bus station is completed and is delivered, accessibility
Close proximity to airports and other intermodal hubs. Where
between Northbridge and the CBD will improve and should
trucks, or other large vehicles can access locations will
start generating more interest from tenants to move to the
enable a wider use and expand the tenant mix;
Northbridge precinct.
Public transport access to rail, tram, bus or taxis is within a
100-500 metre walk of the office site, at multiple times.
Examples of infrastructure development that will enhance the
appeal of metro markets include;
6
Sydney Metro: The Northwest component of the project is
Amenity
Amenity covers services available in buildings where the cost
of building such services is typically borne by landlords as an
Metro Office
METRO OFFICE
incentive or attraction for prospective tenants. It also covers local
attractions that are available to the building’s workforce. Based
on tenant surveys, amenity services in high demand include;
end of trip facilities, bike parking, private lockers, meeting rooms
on demand and client conference areas. However the location
of a metro precinct will also heavily dictate the level of amenity
on offer to tenants. Employees prefer to work in areas that
have access to a variety of different food and beverage options,
childcare centres, gyms, banking and medical services together
with a compelling retail offering. It’s important to note that while
relocating businesses to outer metro locations can reduce rental
expenses, it can also adversely impact employee sentiment and
result in increased staff churn and subsequent recruitment costs.
In Sydney examples of metro markets with strong amenity include
North Sydney and Parramatta, while Sydney Olympic Park has a
less favourable offering. In Melbourne, the east City Fringe and
Inner East markets are experiencing very strong demand due
Stock withdrawal and preserving the
commercial environment
A combination of record low interest rates and insufficient
housing stock has led to prolific expansion of residential
development as supply scrambles to catch up with demand. As
such, the highest and best use of sites has in many cases rotated
from commercial to residential and stock within both CBD and
metro markets is being withdrawn for conversion. In Sydney,
the withdrawals have been widespread although the effects
are perhaps most noticeable in markets such as St Leonards,
Chatswood and to a certain extent North Sydney. Likewise in
Melbourne, St Kilda Rd has witnessed withdrawal for residential
purposes. While the increase in housing supply is in most cases
welcome, the impact can be detrimental as a precinct begins
to lose its commercial look and feel. With little in the way of
new supply coming on line in metro precincts, the growth of
residential has the potential to steadily erode the commercial
to the local amenity that suburbs within these precincts offer,
while the Outer East still has issues when it comes to appropriate
amenity for office workers, and demand is suffering as a result.
core. This dynamic is challenging for local councils who are
under pressure from developers to make way for new projects
81-85 Flushcombe Road, Blacktown NSW
Valued on behalf of Denison Funds Management
7
however the impact of residential growth can be mitigated. For
example in Sydney, markets of North Sydney and Macquarie Park
have attempted to ring-fence the commercial core to preserve its
identity, ensuring that amenity used to attract key tenants
is retained.
Centuria
commentary
Jason Huljich
CEO, Unlisted Property Funds
Centuria
Investment opportunities
While domestic institutions are the overwhelming weight behind
CBD office investment, metro markets are characterised by higher
levels of private investor activity. Generally speaking, offshore
investors are less active in the metro space due to the more
complex set of drivers that can vary from market to market. It’s
very hard to simply group all metro markets together and carry
out analysis that would apply to all tenants in all precincts. For
this reason investment activity is prevalent amongst smaller fund
managers, high net worth private investors and a limited amount
of offshore activity. We note however that as yields continue to
compress in CBD markets, institutions and offshore investors may
be forced to look outside of the CBD to boost yields by moving
further up the risk curve. Still, the challenge of deploying large
amounts of capital over a small number of transactions remains.
For example, in the second half of 2015 average transaction
amounts across Australian metro markets were ~$44 million in
Infrastructure Investment
Metropolitan office markets across Australia will be transformed
over the next decade as considerable infrastructure investment
occurs along the eastern seaboard. Currently, New South Wales
appears to be the hub of infrastructure activity with projects such
as Sydney Metro, WestConnex, and the anticipated Parramatta
Light Rail expected to open during this period. Our house view is
that improved infrastructure will enable greater connectivity across
metro markets, and enhance the appeal of metro accommodation to
a broader tenant base.
the second half of 2015 compared to CBD transactions which
Consequently, Sydney has been the focus of our attention this past
averaged ~$115 million over the same period.
year and has presented opportunities with compelling value.
Planning
Urban planning will continue to present prospects for superior
performance with several large-scale urban renewal projects to take
place over the long-term. In late 2015, Centuria, as co-tenderer with
Mirvac, acquired assets within Australian Technology Park. This 14
hectare site, just three kilometres from the Sydney CBD, will be the
site of a $1 billion development for CBA and will drastically impact
the broader Central-to-Eveleigh corridor.
Stock Withdrawal
Given the significant amount of office stock being withdrawn across
the Sydney CBD and various metro markets, we believe established
markets will be supported by reduced vacancy and above average
rental growth over the short to medium-term. In the case of the
North Shore office markets, this trend will be further reinforced by
a limited development pipeline for the foreseeable future.
Rise of the Secondary Market
146 Arthur Street, North Sydney NSW
Managed by Colliers International
In particular, we believe that stock withdrawals will be particularly
favourable to owners of secondary office buildings. This is due to
the fact that stock withdrawals have primarily been focused on this
segment of the market, while nearly all of the future supply being
developed is prime grade stock. This dynamic will have a powerful
effect by markedly reducing the supply in the secondary market and
increasing the number of displaced tenants seeking space. As a
result, we anticipate B Grade buildings in select metro markets will
face an exciting period with potentially robust rental growth.
8
Metro Office
METRO OFFICE
Forum
commentary
Propertylink
commentary
Andrew Faulk
Managing Director,
Forum Partners
Australia
Peter McDonald
Executive Director
and Head of Property,
Propertylink
Foreign & domestic investor demand
remains high
The Sydney metropolitan office market is in an exciting phase.
The current NSW Government infrastructure spending initiatives
As a specialist, opportunistic property investor, we like Australia’s
safe-haven status within the wider Asian market. Our investors
who are typically large offshore pension funds and insurance
to increase density, development and employment areas primarily
centered around transport hubs reflects the progressive nature of
the state government to realign the workforce closer to home.
companies are drawn to Australia’s strong economic fundamentals
This shift is especially evident within the government where they
and transparent regulatory environment compared to some of our
continue to transition towards Parramatta and other western
Asian counterparts.
metropolitan markets, providing workspace that is closer to home
Currently, metro office is a key sector focus for Forum Partners in
for the western labor force.
Australia, obviously yielding higher than core CBD property, though
Correspondingly, Propertylink expects that tenant demand for
moreover benefits from lower entry cost and greater turn around
metropolitan office locations will continue to strengthen as the
asset management expertise, such as intense leasing campaigns
Sydney CBD vacancy tightens, tenants will be looking for cost
and capital expenditure strategies. Additionally, less vacancy
effective solutions in the suburbs that also offer large floor plates
risk exists as a result of lower stock introduction and higher
and reasonable car parking ratios.
withdrawals to residential than many CBD markets.
A further contributing factor to the demand equation in Sydney
From a local capital markets perspective, the metro office sector
is the withdrawal of stock for alternative uses such as residential
has proven itself attractive both to private equity investors, like
and also the compulsory acquisitions being conducted for the
Forum and more recently to listed markets, evidenced by quality
new metro rail line, however a negative net supply situation is
product and yield offerings, such as Centuria Metropolitan REIT.
anticipated for some time to come. This will accordingly lead to
This is an important step for the evolution of the sector previously
lower vacancy rates and competition amongst tenants for space.
dominated by small syndicators and unlisted retail trusts that
The net loss of stock within the Sydney market compounded
struggled with liquidity.
by the already low vacancy rates across all commercial grades,
Evolving metro landscape
now provides strong parameters for effective rental growth and
improved returns for owners. In an environment of historically
Obvious metro markets with high demand, ongoing growth
low cap rates. Effective rental growth is the key to driving returns.
prospects and low vacancy are St Kilda Road, Melbourne and
North Sydney just outside the Sydney CBD. Looking further afield,
as a result of changing infrastructure, markets like Parramatta,
25 kilometres north-west of Sydney’s CBD will benefit from the
Furthermore there will continue to be examples of additional
upside as a result of conversions from commercial use to
alternate uses.
further decentralisation of the CBD core office market, as we’ve
The above factors all compound and point to a positive outlook
seen in Macquarie Park, North Ryde. The same theory applies for
for metro office market and as such Propertylink’s recent
Box Hill in Melbourne and Mount Gravatt in Brisbane.
$94m acquisition of 4 buildings in North Ryde is a show of our
The game changer could be major infrastructure developments like
Sydney’s new airport at Badgerys Creek, having the potential to
shift the demand for all types of property, especially metro office
confidence in the metro office markets. The recently created
Propertylink Office Partnership III is seeking additional acquisitions
in this market and will look to capitalise on the positive outlook.
space, further west than ever before, thus dragging the geographic
centre of Sydney further west.
9
Our perspective
METRO OFFICE
PRIVATE INVESTORS ACCOUNT FOR 29% OF TRANSACTION VOLUME
IN DOLLAR TERMS AND 47% OF OVERALL TRANSACTIONS
Number of Metro transactions
CORPORATE
$450
million
21
Volume of transactions
DEVELOPMENT
GOVERNMENT
$1.28
billion
25
INSTITUTION
$7.1
billion
140
PRIVATE
$60
million
2
OTHER
$4.34
billion
236
$1.54
billion
82
METRO OFFICE STOCK BEING ERODED BY RESIDENTIAL AND INFRASTRUCTURE WITHDRAWALS
Jan-15
7.34 million m²
Jul-15
7.33 million m²
Jan-16
7.29 million m²
[email protected]
AUSTRALIA
FIRST HALF 2016
OFFSHORE ACTIVITY REMAINS HIGH ON AN ABSOLUTE LEVEL
DOMESTIC INVESTORS
DOMINATE METRO ACQUISITION
$2.72 BILLION
Domestic
Offshore
$1.83 BILLION
2013
$1.67 BILLION
$670 MILLION
55%
45%
2015
2012
2013
2014
2015
63%
AVERAGE TRASACTION SIZES ARE FAR HIGHER IN CBD MARKETS
31%
2014
$115.06 million
$43.65 million
60%
CBD
METRO
For more information about Colliers International
and working with us visit:
www.colliers.com.au
40%
Research and
Forecast Report
First Half 2016
SYDNEY METRO OFFICE
The new frontier for Sydney metro
By Sas Liyanage
Research Analyst | Research
[email protected]
SYDNEY METRO OFFICE SPACE INDICATORS
130000
14%
110000
12%
10%
evolution, underpinned by a historically high infrastructure spend
and a state economy that remains the envy of the nation. Indeed,
70000
Floorspace (sqm)
The Sydney metro markets are embracing a long awaited
30000
employment growth in Sydney has been staggering with the
10000
most recent state budget revealing a $2.1 billion surplus with
-10000
over $68.6 billion of infrastructure spending over four years.
8%
50000
6%
4%
2%
-30000
-50000
Vacancy rates in metro markets have continued their downward
motion, driven by a lacklustre supply and a significant withdrawal
Metro Market Average Vacancy (%)
90000
0%
Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 Jul-15 Jan-16
Net Supply
Net Aborption
Vacancy (RHS)
Source: PCA OMR Jan-16/Colliers Edge
of stock. In recent years, the omnipotent demand for residential
developments has led to withdrawal of underperforming assets
for conversion. The forthcoming Sydney Metro rail network
COLLIERS INTERNATIONAL RESEARCH FORECASTS
project will amplify these effects as it triggers a new flurry of
SYDNEY METROPOLITAN A GRADE OFFICE MARKET
activity, with secondary assets set to face wrecking ball to make
MARKET
AVERAGE NET FACE
RENTS ($/m² pa)
REGION
H1 2016 H2 2016 H1 2016 H2 2016 H1 2016 H2 2016
way for the proposed stations.
AVERAGE
INCENTIVES
AVERAGE
MARKET YIELD
North Sydney
$600
28%
6.75%
St Leonards/
Crows Nest
$455
28%
7.38%
Chatswood
$480
25%
7.75%
North Ryde/
Macquarie Park
$323
30%
7.13%
Parramatta
$445
18%
7.38%
Sydney Olympic
Park/Homebush
Bay
$363
28%
7.63%
Rhodes
$380
26%
7.75%
Norwest
$355
23%
8.50%
South Sydney
$375
18%
7.25%
Sydney CBD Fringe
$545
24%
6.25%
Note: Figures represent market averages at 1 March 2016
Figures relate to existing A Grade floorspace, not newly built floorspace
Source: Colliers Edge
22 Lambs Road, Artarmon
Project managed on behalf of Bard Medical
12
Metro Office
METRO OFFICE
SYDNEY METRO OFFICE VACANCY
Parramatta
Macquarie Park
Chatswood
St Leonards
North Sydney
0%
5%
10%
Jan-16
15%
20%
Jul-10
Source: PCA OMR Jan-16/Colliers Edge
These withdrawals have undoubtedly increased leasing activity,
as tenants are forced back into the market to vie over an ever
diminishing vacant space. However, in certain markets, the
sheer scale of withdrawals are now at risk of undermining
their commercial culture. Councils presiding over these markets
continue the acrimonious debate over the quantum and location
of residential developments amongst the commercial precincts.
Markets like St Leonards, grappled by 3 councils, will be challenged
to reverse course as it snowballs towards a residential precinct.
The market’s viability as a commercial hub is contingent on the
councils’ ability to work in concert on an effective, well-planned,
activation precinct. By contrast, markets like North Sydney, North
Ryde and Parramatta with the luxury of scale, have protected their
commercial core from encroaching residential uses.
33 Berry Street, North Sydney
Sold by Colliers International
Looking forward, the significant infrastructure development
will ease trepidations for the longer term investor. Public
Above all, the market will benefit from infrastructure. Long-
transportation fears that stalked the metro market are finally being
term funding for these multi-year programs to rebuild the metro
addressed. Most significantly, there will be access to a larger
landscape has never been more powerful. Over 33 buildings in the
working population. This will be achieved directly through an
metro markets will be compulsory acquired for the aforementioned
increased population from the induced residential development,
Metro Rail project. With major construction scheduled to
and indirectly through the shorter travel times to other regions.
commence in 2017, a large number of commercial properties
Given comparatively higher yield offer, a at lower price point,
have received vacant possession notices. These withdrawals, all
metro assets will continue to lure investment while providing a
involving secondary grade assets, will have implications for this
shelter for capital.
tightly held market as displaced tenants look to secure space.
Now, for the first time since the GFC, these markets have a
platform to emerge from a period of mediocre rental growth. As
the competition for scarce secondary space intensifies, secondary
grade assets are likely to experience a decline in vacancy and, in
turn, incentives offered.
Although investment volumes were below those in 2014, they
were above the high levels witnessed in 2007. Symptomatic
of the scarcity of stock on market, and sustained competition,
transactional yields continued to decline. As such, average yields
on Metro assets transacted in the Sydney markets reached
their lowest level since 2007, falling to 7.49 per cent. Unlike the
significant participation by offshore investors witnessed in 2014,
investment from offshore buyers was largely restricted to North
Sydney market, which accounted for 59 per cent of the overseas
based transaction volumes in 2015.
North Sydney
North Sydney is on the forefront of this transition, with
significant investment activity underscored by the implicit uplift
in infrastructure and leasing conditions. In the last year, over
48,000sqm was withdrawn from the market. Indeed much of this
was for the residential conversation, with over 1,700 units and
57,000sqm of residential floorspace in the current pipeline. These
withdrawals, though, were restricted to market fringe, with the
commercial core ring-fenced by defensive zoning.
An additional five buildings amounting to 19,223sqm will be
withdrawn for the proposed Victoria Cross Metro line station.
This will impose further pressure on a historically tight secondary
market, with the secondary grade vacancy currently at its lowest
level since the peak of the GFC. The B Grade market in particular
is expected to experience the greatest tightening as displaced
13
tenants scramble to secure deals. This demand is exemplified by
the fall in incentives given to smaller sized leases, with incentives
dropping from 30 per cent to 25-27 per cent. The North Sydney
secondary market now has the tailwinds for effective rental
growth, which has hitherto been benign. The market remains
a recipient of tenants looking to centralise. Major leases of
this nature recently signed include Jacobs, Beam Suntory and
Vodafone, totalling to over 17,151sqm of floorspace. Moreover, the
quantum of space leased in the second half of 2015 was 74 per
cent higher than the first half of the year and 28 per cent higher
the corresponding period in 2014.
Similarly, development activity is now gathering pace. 177 Pacific
Highway will be the first new development to the market in six
years and scheduled for completion in the third quarter this
year. It is now all but fully let. Building on this momentum, Dexus
Property Group (DEXUS) and DEXUS Wholesale Property Fund
(DWPF) has activated the 41,163sqm premium development at
100 Mount Street after acquiring it in February. With construction
programmed to commence in the middle of the year, vacant
notices have been handed to occupiers, placing more tenants
back into market. Finally, it is understood Charter Hall has entered
into discussions for North Sydney’s last remaining major mooted
development, 1 Denision. If successful, the development will likely
include the shopping centre on Berry Street, and expand beyond
the proposed 40,000sqm tower.
Investment activity continued at high levels, with over $301 million
of sales occurring the second half of the year. Although 26 per
cent below the corresponding period in the previous year, the
average transaction value was at a 23 per cent premium. North
Sydney remains a beneficiary of foreign interest, with 70 per cent
of sales volume in the second half of 2015 originating from China.
Sales growth is expected to continue with transaction volumes
and average values in the current half-year already exceeding
those in the previous 4 periods. In addition to the aforementioned
Dexus acquisition of 100 Mount Street for $41 million, Ascendas
purchased the Innovation Centre on Arthur Street for $315 million
at a yield of 6.2 per cent.
St Leonards/
Crows Nest
The St Leonards market vacancy has fallen to its lowest level
since July 2008, ending at 8.5 per cent. This fall was predicated
by an anaemic supply and withdrawals for conversation. This
lack of supply lies subordinate to ongoing demand for residential
developments. Notwithstanding this, the second half of 2015 was
the first positive half-year net absorption since 2012. The market
has recently undergone significant rezoning, with over 6,279 units
or 108,716sqm of residential floorspace in the pipeline. Meanwhile,
the commercial leases signed in the second half the year was 58
per cent below the first half of the year and 63.5 per cent under
the same period the previous year. But despite this, positives lie
14
181 Miller Street, North Sydney
Leased on behalf of Local Government Superannuation Scheme
ahead. The leasing market will benefit from the withdrawal of
9,791sqm of space for the Crows Nest Metro line station. And
once the large supply of residential developments are completed,
the commercial developments will likely benefit from immediate
proximity to a larger working population. The market, moreover,
will receive an uplift from the major developments; Gore Hill and
88 Christie Street. The developments will provide 46,000sqm and
28,000sqm of floorspace respectively. Furthermore, the market
will also benefit from the extensive expansion of NSW health
infrastructure, with an additional 40,000sqm to be provided. In
the interim, however, the leasing market will encounter challenges
with several small tenants pushed out to the North Sydney and
North Ryde markets.
Sales volumes in 2015, somewhat disconnected from leasing
movements, were the highest ever recorded. There were over
$424 million worth of sales in 2015, 62 per cent above the
previous record high levels seen in 2014. This was driven by
acquisition of 203 Pacific Highway by Centuria Capital Ltd and
Centuria Metropolitan for $86 million, at a yield of eight per
cent. Although investment interest will continue moving forward,
volumes will likely be curtailed by the availability of stock.
Chatswood
Chatswood much like St Leonards will be challenged by the
competing forces posed by residential developments. The overall
vacancy rate climbed in the 6 months to January 2016, increasing
from 6.8 per cent to 7.7 per cent. Some larger deals signed
recently will reverse this upward leg in vacancy, though. In a
strong start to this period, in excess of 4,493sqm of leases are
Metro Office
METRO OFFICE
to commence in the first half of the year. Indeed, demand will
remain relatively stable given its quality in the retail amenity and
strong transportation links. Chatswood’s main attraction will be
its relatively lower price offer compared to North Sydney. In the
near term, the market will continue to tighten with no commercial
developments in the pipeline and lease lengths tied up existing
6 months, but 65 per cent below that in same period in 2014.
Volumes in this half have already exceeded those in corresponding
half last year. This was largely a result of the Propertylink and
Grosveners acquisition of 4 buildings from Blackstone. The assets,
valued at $94 million, will be placed into a new fund; Propertylink
Office Partnership 3.
stock. Chatswood is likely to have reached its peak commercial
office development capacity. Meanwhile, investment activity in the
market has been subdued. The Zenith still remains on the market,
after being brought to the market in the first half of 2015.
Macquarie Park
The Macquarie Park market has continued on its progression
towards a dominant office precinct. Buoyed by scale and a
healthy supply, the market has experienced over 43,896sqm of
net absorption in the 18 months to January 2016. Macquarie
Park has run a course contrary to the other markets, with stock
expanding steadily, while others contracted. In the past 36 months
Macquarie Park’s stock grew by six per cent. By contrast, in the
same period, the average metro market contracted by 13 per
cent. Despite this significant supply of over 84,529sqm since July
2013, the vacancy rate declined from 9.5 per cent to 8.2 per cent.
Additionally, the market will be the beneficiary on infrastructure
investment. Macquarie Park will accommodate both the Sydney
Metro line project as well as the Northwest Rapid Transit project.
Once complete, Macquarie Park will receive trains every four
minutes at peak times, substantially quicker than a train every 15
minutes seen presently.
Leasing activity has continued to grow since the first half of 2015.
The volume of spaces leased was in the six months January
2016 was 55 per cent percent higher than the corresponding
period in 2014. The $48 million in sales volume witnessed in the
second half of 2015 was 31 per cent above that in the preceding
Parramatta
As the political spectre surrounding Parramatta and its prospects
as Sydney’s second CBD settles, the material advantages of a
substantial infrastructure spend is now emerging in the investment
and leasing indicators. Despite CBA’s announcement to vacate
40,000sqm of floorspace, tenant demand has remained robust.
Leasing demand was largely driven by the education sector and
businesses priced out of the CBD and fringe markets. Meanwhile,
average yields have progressed in downward fashion. In the 6
months to January, B grade yields compressed by 25 basis points,
declining from 8.00 to 7.75 per cent. Investment demand remained
in the hand local buyers; syndicates and wealthy privates. Indeed,
sales in the last 2 years have only been B grade assets. However
now, for the first time since 2012, 18 Smith Street will be the first
sub $100 million building brought to market.
Parramatta has experienced a mediocre level of commercial
supply, with the current stock levels akin to those at the beginning
of 2010. In recent years, the demand for residential developments
has led to a withdrawal fringe assets for conversion. Presently
over 3700 apartments are mooted or under construction. Given
the complexity in satisfying the pre-commitment requirements,
the pressure for residential developments will continue in the
near term. As such, the commercial supply remains restricted.
Nevertheless, the increased tenant demand is now beginning to
trigger mooted developments. 89 George Street, 169 Macquarie
Street, and 105 Phillip Street will now commence having secured
pre-commitments. At 105 Phillip Street, it is understood that HoA
were reached with GPNSW for the 25,000sqm development,
programmed for completion in March 2018.
There however remains a shortage of large contiguous space.
This was exemplified in the 6,300sqm lease at 126 Church Street
to Parramatta Council, which attracted a low incentive of 8.33 per
cent. Similarly, this lack of larger floor plates has pushed Office
of State Revenue (OSR) to look in building a new development
at 12 George Street Parramatta, on the Justice Precinct site of
32,000sqm.
Lachlan Tower Base, Parramatta
Project managed by Colliers International
Vacancy rates in the market have fallen well below the 10-yearaverage of 8.2 per cent, currently at 5.4 per cent. In the 6 months
to January 2015, meanwhile, there was a net absorption 5,715sqm
of floorspace. This was the highest half-year net absorption in
three years. However, unlike 2013, where this positive absorption
was caused by the addition in 25,050sqm of floorspace, the
recently experienced abosoption was the result of an increase in
tenant demand. Mirroring this, average rents in the market have
climbed by $30-$40/sqm since mid-2015.
15
City fringe
Vacancy in the city fringe market has continued to tighten following
a third consecutive year in leasing growth. This activity, however,
will be restricted by the availability of stock moving forward. The
city fringe will now be insulated by the ongoing development
in Darling Park and proposed ones in the South Sydney.
Furthermore, the market has received an increase in demand from
tenants displaced by the withdrawals for the infrastructure and
residential projects alike.
The Southern CBD and fringe areas are undergoing a significant
rejuvenation, underpinned by a renewal in the surrounding markets
and infrastructure spend. Commercial markets in the area will
benefit from improved connections as a result of the Sydney Light
rail project and Sydney Metro project. Moreover, tenants will look
to the precinct to capitalise from its proximity to South Sydney, one
the nation’s fastest growing residential corridors. In the near term
the precinct will be sought after by tenants displaced by the metro
line. These tenants, all from secondary buildings, will be seeking
8 Australia Avenue, Sydney Olympic Park
Valued on behalf of The Trust Company (Australia)
Sydney Olympic Park
Sydney Olympic Park was shaken by CBA’s announcement to
leave the precinct. The market has suffered from an intermittent
train and bus lines available to tenants. However, now, given the
recent announcement for the delivery of a light rail station, these
transportation trepidations will be more acute rather than chronic
condition. Furthermore, the Westconnex project will provide
improved road transportation to the precinct. Both these projects
will provide the long required access to the large western Sydney
working population. In the interim however the precinct will likely
incur a spike in vacancy. Temporary relief will come from tenants
unable to find space in the tighter markets like Parramatta, Norwest
and Rhodes. Additionally, the buildings, similar to those in the wider
metro markets, will be pursued for residential conversion.
Norwest
The Norwest market remains robust with significant interest
growing in anticipation of the Norwest Metro line. The sale and
15-year-leaseback of the iconic Woolworths headquarters was a
source of reassurance for the precinct. The building was sold for
$336 million on a yield of 6.07 to the Korean based firm Inmark
Asset Management. The vacancy rate continued its downward
progression ending on 8.01 per cent, down from 10.4 per cent. The
quantum of floorspace leased increased for the third consecutive
quarter, with leases signed in the second half of year 41 per cent
higher than the preceding half of year and 400 per cent greater than
those in the corresponding period in 2014.
16
affordable alternatives which may exclusively be available in the
South or the fringe. These withdrawals, all involving secondary
grade assets, will have implications for this tightly held market
as displaced tenants look to secure space, as approximately 78
per cent of the floor space to be withdrawn will be from B grade
properties. The most important effect of these withdrawals will
be firstly, a reduction in smaller tenancies available for lease and
secondly a large uptick in demand for smaller sized tenancies as
the displaced tenants seek alternate premises. With particular
reference to the CBD Metro project, the average size of the
incumbent tenants in the buildings to be acquired, and therefore
withdrawn from stock, is 417sqm, with only five tenancies above
900sqm. In contrast, the weighted average size of the floor
plates of the developments scheduled for delivery in the coming
24 months is 2,000sqm. Ahead of these changes, the number
of leases for tenancies under 800sqm increased by 49 per cent
since 2013, with limited new supply to meet this smaller occupier
market. Incentives in the market are likely to tighten further
from its inundation of interest from the secondary tenants in the
surrounding markets.
Tenants within the precinct have experienced organic growth,
too. These firms need to be domiciled in the market to succeed.
Moreover, there has been increased activity in the creative
advertising and media groups as consolidation of offices occur, or
conglomerate organisations decide to keep businesses separate.
In the six months to January, there was over 10,000sqm of
advertising agency or creative related demand in the fringe. There
are presently minimum options for spaces in the 2,000-4,000sqm
range, making it challenging for tenants to find space. Pyrmont’s
A Grade vacancy in the Pirrama Rd area adjoining the Star Casino
is now all but exhausted following a lease to Fairfax Media Limited
(FXJ). FXJ took up 1,610sqm of space at “Wharf 10” Pirrama Road
Metro Office
METRO OFFICE
to facilitate its growth in the digital business. Outside Pyrmont,
Trip Advisor leased 2,700sqm at Cleveland Street to service
growth in its business. Overall, in the second half of 2015, A grade
vacancy in the City fringe fell from 5.3 per cent to 4.4 per cent.
Similarly the vacancy in the B grade market, predominantly due
to the withdrawal of 100 Harris St for refurbishment, fell from 7.4
per cent to 2.3 per cent. Surry Hills will likely experience effective
rental growth as its overall vacancy rate tightened from 4.2 per
cent in July 2015 to an estimated 0.9 per cent by January 2016.
Investment volumes in the precinct remained relatively modest,
restrained by an availability of stock. The largest sale in the market
was 1-3 Small Street in Ultimo. This building was acquired by
Mirvac for $53 million at an initial passing yield 6.57 per cent.
Elsewhere, was a 6 storey, under-leased commercial office at
64-76 Kippax Street was sold. This building transacted at an initial
yield of 4.3 per cent for $31.5 million dollars.
South Sydney
Over the course of the last 10 years, South Sydney has undergone
one the nation’s fastest transformations. And now, it’s set to
embark on the next step of this evolutionary tale. The precinct
has now all but transitioned away from its industrial heritage,
with the shortcomings of amenity eroding with every new
development. The newly completed B4 developments will work
with the grain of public infrastructure spending to entice new
1-3 Smail Street, Ultimo
Sold on behalf of Anton Capital
commercial developments. Meanwhile, the Mirvac and Centuria
staff retention. Similarly, there has been an increased appetite from
Property’s successful campaign to build a new home for CBA
fashion orientated tenants, attracted by co-located warehousing
in Redfern’s Australia Technology Park will inspire confidence
facilities. The market, moreover, has received an influx of fleet-
in the South. Much like its commercial counterparts, South
footed tenants priced out of the City South and fringe markets.
Sydney’s pipeline is constrained by the competing forces posed
The number of briefs for spaces above 600sqm higher than ever
by residential developments. The precinct is thus limited with
before, too. This increase in overall demand has driven rental
the availability of quality stock, with very little programmed
growth in both smaller and larger tenancies. So now, this rental
to come online. Goodman’s Connect Corporate Centre is the
growth is pushing the pendulum towards strata commercial
sole major development under construction having secured a
developments as a remedy to absorb absorb this excess demand,
2,500sqm pre-commitment by Qantas Credit Union. Major leasing
particularly in the 300-600sqm range.
deals elsewhere included; Genisis Care (3,386sqm) in 41-43
South Sydney is set to benefit from the Westconnex, Sydney Metro
Bourke Road, Blackmores (1,408sqm) at 185 O’Riordan Street,
Hansen Yuncken (1,412sqm) at 75 O’Riordan Street, and Seafolly
(2,433sqm) at 41-43 Bourke Road.
and Light rail projects. However, in the interim there remains
dependency on road transportation. Parking is in high demand with
rates currently at $1,500–$2,500 per car space. Consequently,
There is also an ongoing demand from tenants displaced within
Goodman are building with parking in mind, and now charging
the market, looking to remain in South Sydney. These tenant
where they used to give it away. Notwithstanding this, estates like
demands are sticky due to their requirements of office space
Sydney Corporate Park have found success in offering free shuttle
offering co-located warehouses. Furthermore, moving their
buses to their tenants.
premises to alternate markets would present consequences on
[email protected]
For further information please contact:
Sas Liyanage
Research Analyst | Research | Tel +61 2 9249 2039
[email protected]
17
Research and
Forecast Report
First Half 2016
MELBOURNE METRO OFFICE
Another record sales year for Melbourne’s
Metro Office Market
By Anneke Thompson
[email protected]
This highlights the strength of demand in the market, with vendors
The 2015 calendar year was the second year in a row that the
MELBOURNE METRO OFFICE SALES VOLUMES (>$5 MILLION)
who may have had limited motivation to sell being convinced to
part with their property with generous unsolicited offers.
Melbourne metro office market recorded a total sales volume
$1,200
above $1 billion. In 2015, the total sales volume came in just under
$1,067
$1.1 billion, compared to $1.07 billion in 2014. Buyers were most
active in the outer east precinct, despite more challenging leasing
here, followed by the city fringe, where 17 sales occurred.
$800
Millions $AUD
conditions in that market, with 19 of the 49 office sales occurring
$607
$600
$466
$463
$404
$400
Foreign buyers were particularly active in the outer east,
accounting for 11 out of the 19 sales. The majority of these
properties were purchased for future redevelopment purposes.
Interestingly, 30 of the 49 transactions recorded in 2015 occurred
off-market, with only 19 being sold through on-market campaigns.
$1,091
$1,000
$348
$200
$142
$117
$2007
2008
2009
2010
2011
2012
2013
2014
2015
In this environment, average yields compressed over the year to
March 2016 from 7.93 per cent to 7.58 per cent. In the city fringe
and the inner east, average lower-end yields are 6.75 per cent.
Continuing low interest rates and volatile equities markets were
the main drivers behind the strong sales volumes in both 2014 and
2015. While it is difficult to estimate what volumes will look like
come the end of 2016, those factors still remain the same, so we
expect continuing strong demand. The challenge for the market,
however, will be supply. What assets will be available for motivated
vendors to buy? Both local and international buyers are competing
aggressively for prime assets in Melbourne’s metro office market.
We expect that A Grade or newer assets will be keenly sought
after in the $40 million plus price range, as institutions with
specific Melbourne metropolitan office market mandates seek to
increase their quota of acquisitions. We also expect the trend of
foreign buyers actively seeking office buildings situated on landrich sites or properties that have flexible zonings to continue.
5 Burwood Road, Hawthorn
Leased on behalf of Lazzcorp
18
Owner occupiers, especially those in the education, health and
medical industries, will continue to purchase office buildings
Metro Office
METRO OFFICE
for their own occupation, especially in the inner suburbs, whilst
8.18 per cent in March 2016, although this increase is not being
developers will also seek properties with zonings that allow for
felt in the eastern fringe markets, rather the majority of vacancy
future multi-level residential or mixed use developments.
is around the West Melbourne, South Melbourne and Inner North
areas. In the inner east, vacancy decreased from 6.20 per cent in
September 2015 to 5.29 per cent in March 2016, and net effective
MELBOURNE METRO OFFICE A GRADE MARKET INDICATORS
rents increased by 6.07 per cent over the same time period.
REGION
AVERAGE NET FACE
INCENTIVE RANGE
($/M² PA)
H1 2016 H2 2016 H1 2016 H2 2016
YIELD RANGE
H1 2016
H2 2016
The reason for strong demand in these markets is metro tenants
increasingly seeking to be close to amenity, employment bases
and, most importantly, public transport. The Richmond, Cremorne,
City Fringe
$355
15%-27%
6.75%-7.25%
Abbotsford, Collingwood, South Yarra, Hawthorn and Camberwell
Inner East
$360
15%-20%
6.75%-7.25%
office markets certainly meet these requirements. Rents have
Outer East
$308
20%-37%
7%-7.5%
been increasing in part due to this strong demand, but also due
South East
$293
20%-25%
7%-9%
to constrained supply as well. Any development sites that come
North & West
$253
18%-25%
8%-9%
to market in these areas are heavily sought after by residential
St Kilda Rd
$335
25%-28%
7%-7.5%
developers, and to a growing extent, childcare, education and
Southbank
$440
20%-30%
6.25%-7.5%
healthcare operators. This means that there has been no new
supply in these markets over the past year. Overall, the city fringe
City fringe/inner east
Good effective rental growth demonstrates
strength of demand
saw 20,144 sqm of new supply in the year to March 2016, but this
was new stock built in South Melbourne, so does not impact the
eastern fringe market.
A good example of the tightly held nature of the east city
fringe and the appeal of the area is Red Energy’s deal at 570
According to Deloittes Access Economics, white collar employment
Church Street. Red Energy – already tenants in the area – were
growth in Greater Melbourne was 2.98 per cent – the fastest that
considering two deals as part of their move strategy. One of those
employment has grown in five years. Demand for office space by both
was a new building in the CBD, the other 570 Church Street. After
tenants and owner occupiers in the eastern portion of the city fringe
incentives were taken into account, the CBD deal was actually
and inner east in 2015 certainly reflected this, with landlords seeing
the cheaper option. However, Red Energy still chose to stay in
very good net effective rental growth on the back of this demand.
Richmond, as the more interesting character-style space offered at
In the city fringe, A Grade net effective rents have grown from an
570 Church St, as well as continuity of location and staff retention,
average of $258/sqm in March 2015, to $280/sqm in March 2016 – a
were key factors in the deal. The net face rent achieved was
very healthy annual increase of 8.53 per cent. The vacancy rate did
believed to be between $450 and $460/sqm, significantly above
actually increase slightly, from 7.83 per cent in September 2015, to
the city fringe average.
235 Springvale Road, Glen Waverley
Project Managed On behalf of MYOB Winner of PCA Innovation and Excellence Awards 2015
19
Looking forward, the lack of new supply in the early half of the
Part of the reason for the increase in vacancy in the outer
year should see effective rental growth continue to climb. As rents
east is an increase in supply – again in stark contrast to other
do continue to climb, we may see some renewed interest in the
metro markets in Melbourne, which are either seeing no supply
area from commercial developers, who may start to see these
additions, or withdrawals of office stock. Just over 36,000 sqm
developments become more feasible as face rents move towards
of new supply was added to the outer east market in the year
economic rent levels. Later in 2016, we will see the completion
to March 2016. Most of these new buildings are predominately
of the new 13,000 sqm building at Chadstone Shopping Centre,
pre-committed, and attracting tenants to the remaining new space
currently pre-committed by Vicinity Centres, who are already
is proving successful, given the flight to quality currently being
based at Chadstone.
experienced by the market as tenants take advantage of
good incentives.
MELBOURNE METRO AVERAGE A GRADE NET EFFECTIVE
RENTAL GROWTH YEAR TO MARCH 2016
City Fringe
The real challenge that this excess supply creates is for the
8.5%
Inner East
secondary grade market. The secondary buildings find it difficult to
compete with the A Grade backfill space as well as newer prime
grade offices, given that rents in the Outer east for both grades are
2.9%
relatively affordable, compared to the rest of the Melbourne market.
South East
Average A Grade net effective rents for the outer east are $220/
1.9%
sqm, compared to $280/sqm in the city fringe, $297/sqm in the
North & West
Outer East
-12%
0.0%
inner east and $316/sqm in the CBD, meaning rents in the outer
east are considered very affordable. Unlike the city fringe and
-9.4%
inner east markets, secondary grade buildings in the outer east
-10%
-8%
-6%
-4%
-2%
0%
2%
4%
6%
8%
10%
that have reached the end of their office lifecycle and have limited
exit strategy, due to the restrictive nature of zoning in the City of
Monash. While most metro office precincts around the country are
Outer east
Vacancy at record levels
In contrast to the Melbourne city fringe and inner east markets, the
outer east has seen a slowdown in demand at the secondary end
of the market, as well as an increase in Prime Grade supply. This
has resulted in an increase of vacancy from 10.83 per cent to 11.82
per cent – the highest vacancy rate that Colliers has ever recorded
for the outer east office market. In terms of square metres, the
outer east now has almost 104,000 sqm of space vacant – also
the first time that over 100,000 sqm of space has been available.
moving towards a mixed use make up, the outer east commercial
precincts are subject to limited opportunity to re-purpose their
buildings for uses such as showroom, retail and hotel/other
accommodation.
Another issue causing an increase in the vacancy rate in the outer
east is the relocation of some tenants to different markets – the
largest by far being Jemena vacating 6,900 sqm at 351 Burwood
Highway and 7,000 sqm at Ferntree Gully Road.
Deals are still being done in Prime Grade buildings, indicating there
is still demand in precinct, and high calibre tenants that still like
to be located in the outer east. BSN Medical and Alphera (BMW
Finance) have committed to Frasers Property’s Mulgrave Office
Park. Renault have also expanded into larger premises at Salta’s
Nexus Business Park, also in Mulgrave. In Box Hill, Serco also
committed to just over 5,000 sqm of refurbished space at 990
Whitehorse Road.
MELBOURNE METRO AVERAGE A GREADE OFFICE YIELDS
10%
9.5%
9%
8.5%
8%
7.5%
7%
6.5%
20
City Fringe
Inner East
Outer East
Sep-15
Mar-16
Mar-15
Sep-14
Sep-13
Mar-14
Mar-13
Sep-12
Sep-11
Mar-12
Mar-11
Sep-10
Mar-10
Sep-09
Mar-09
Sep-08
Sep-07
Mar-08
Mar-07
Sep-06
Sep-05
Mar-06
Mar-05
Sep-04
31 Vision Drive, Burwood East
Managed on behalf of Private Co Investments No 4 Pty Ltd
Mar-04
6%
Metro Office
METRO OFFICE
Bayside Junction, 973 Nepean Highway, Bentleigh
Sold on behalf of Icon Constructions & Pacific Group
North & west
Rents and incentives for both Prime and Secondary Grade
buildings in the South East have remained steady through the past
six months, but expect that over 2016, effective rents will decline
Vacancy in the Melbourne north and west market decreased from
as landlords try to entice tenants back to the precinct.
5.35 per cent in September 2015 to 4.55 percent currently. The
long term average vacancy rate in the North and West is 4.87
MELBOURNE METRO VACANCY RATES
percent, so this market can now be viewed to be one that is slightly
14%
in favour of landlords.
12%
Despite this decrease in vacancy, A Grade Net Face rents have
remained steady, at an average of $253/sqm. While vacancy is low,
the office market in the north and west is relatively immature, and
10%
8%
6%
landlords need rents to be competitive to encourage tenants to stay
4%
in the area.
2%
City Fringe
Inner East
Outer East
Sep-15
South East
Vacancy follows trend in outer east
The vacancy rate in the South East market increased from 7.65
per cent in September 2015, to 11.76 per cent in March 2016. Just
one year ago, the vacancy rate was a mere 2.90 per cent.
The major reason for the increase is an influx of smaller space
to the market, again as tenants move to more quality spaces in
the city fringe and the inner east. On the larger side of vacancy,
Visionstream have vacated all of 236 East Boundary Road in
Bentleigh East, following the loss of a contract. This has a major
impact on vacancy in such a small market as the South East.
St Kilda Road &
Southbank
Following a record year of office investment activity in 2014,
where just over $500 million worth of office stock transacted in
the St Kilda Road precinct, there was only one investment sale
in St Kilda Road in 2015. This was the sale of 636 St Kilda Road
to AMP Capital’s Wholesale Australian Property Fund (WAPF) for
$87.5 million in December 2015. The property transacted at a 6.72
In Frankston, vacancy increased from 765 sqm in September
per cent fully let initial yield, and Colliers International brokered
2015, to 1,629 sqm in March 2016, possibly due to the competition
the sale.
provided from the strata suites and serviced offices now available
at APBC’s Peninsula on the Bay.
Mar-16
Mar-15
Sep-14
Sep-13
Mar-14
Mar-13
Sep-12
Sep-11
Mar-12
Mar-11
Sep-10
Mar-10
Sep-09
Mar-09
Sep-08
Sep-07
Mar-08
Mar-07
Sep-06
Sep-05
Mar-06
Mar-05
Mar-04
South east
Sep-04
0%
There have been two further transactions of office properties
in 2015; however both of these buildings are being converted
21
to residential use. Private investment and development group
Qualitas purchased 499 St Kilda Road in April 2015 for $80 million,
and are currently partnering with LAS Group in marketing a
residential development known as The Fawkner. The other major
transaction was the sale of St Kilda Road Police complex at 412 St
Kilda Road to Malaysian developer UEM Sunrise for $58 million.
St Kilda Road effective rents on the rise
The St Kilda Road vacancy rate has declined from 9.3 per cent
to 8.9 per cent, with total vacancy in the precinct reduced by
4,062 sqm. A decline in sublease vacancy of 4,870 sqm was the
biggest factor in the decline in vacancy, as well as 15,685 sqm in
withdrawals. The withdrawal of 499 St Kilda Road was the main
The Victorian Police Force are in the process of vacating the
building to move into their new purpose built premises in Spencer
contributor to this.
Street in the CBD. UEM Sunrise will convert the building and/or
St Kilda Road now has very few large chunks of vacancy available,
site to a residential use. More recently, 596 St Kilda Road, a 1940s
the biggest being 8,000 sqm at 553 St Kilda Road. The market
apartment complex sold for approximately $25 million, after the 19
has now very much become a small occupier market, with
owners banded together to sell the building and land as a whole.
demand primarily coming from those local tenants displaced by
The site is also expected to be retained for residential use, with the
the withdrawal of buildings for residential conversions, or other
sale representing a land value rate of approx. $14,000/sqm.
smaller tenants that don’t want to pay CBD rents, yet need to be
No investment sales were transacted in the Southbank precinct in
2015, although there were seven sales totalling almost $150 million
of development sites over the year. The sites purchased were
The vacancy rate will continue to trend down, as more buildings
are withdrawn from the market. The largest of the upcoming
withdrawals is 412 St Kilda Road, which is currently occupied
a mixture of industrial/showroom sites and small, C or D Grade
offices. Most developments planned are residential, although one
site (35-47 City Road) sold to hotel developer/operator Pro-Invest.
by Victoria Police. The building was sold last year to Malaysian
developer UEM Sunrise, who have recently submitted plans to
convert the building to accommodate 182 high-end apartments.
Net effective rents in both A and B Grade buildings in St Kilda
ST KILDA RD NEW EFFECTIVE RENTS
$/sqm
close to the CBD.
$270
Road have increased by 7.8 and 13 per cent respectively over the
$250
year to March 2016. These increases are due both an increase in
$230
face rents and a slight decrease in incentives, as space availability
$210
across both grades continues to dry up. Interestingly, there is a
$190
not a great deal of difference between A and B Grade effective
$170
rents ($246 versus $213 respectively), as there is a far smaller
A Grade
B Grade
Mar-16
Sep-15
Mar-15
Sep-14
Mar-14
Sep-13
Mar-13
Sep-12
Mar-12
Sep-11
Mar-11
Sep-10
Mar-10
Sep-09
Mar-09
$150
differential between quality of buildings in this market than there
is in the CBD. Views on offer also play a major factor in the rental
level that can be achieved in St Kilda Road - a B Grade floor with
990 Whitehorse Road, Box Hill
Leased on behalf of Glorious Sun
22
Metro Office
METRO OFFICE
Botanicca 8, 576 Swan Street, Richmond
Sold on behalf of Icon Constructions & Pacific Group
excellent views can in fact achieve a higher face rent than an
by a modest 0.3 percentage points (from 8.7 per cent to 8.4 per
A Grade floor with limited outlook.
cent) over the six months to January 2016. The decrease was
While face rents have been on the increase, we expect that this
trend will slow, as there is a natural rental ‘ceiling’ that St Kilda
Road properties can achieve. This is because of the proximity to
the CBD, as well as the car parking costs that tenants need to
consider in St Kilda Road (tenants usually need more car parks
in St Kilda Road versus the CBD), means that when rents start to
resemble CBD rents, then tenants will be more likely to choose the
mostly in sublease space, which reduced from 7,235 sqm to 2,393
sqm. We expect the vacancy rate to continue to decline once
Phillip Morris move in to the precinct, although a significant jump
will be felt in mid 2017 when PWC’s new building is completed at
Riverside Quay
ST KILDA RD & SOUTHBANK OFFICE MARKET VACANCY
18%
CBD option.
16%
sqm of space vacated by Mondelez at South Wharf. Philip Morris
signed a ten year deal to relocate to the space from Moorabbin.
Phillip Morris were also considering sites in the CBD and
Vacancy Rate %
14%
In Southbank, the major deal completed was the lease of 7,800
12%
10%
8%
6%
4%
2%
access for existing staff. The vacancy rate in Southbank decreased
[email protected]
St Kilda Road
Jul-17
Jan-18
Jul-16
Jan-17
Jul-15
Jan-16
Jul-14
Jan-15
Jul-13
Jan-14
Jul-12
Jan-13
Jul-11
Jan-12
Jul-10
Jan-11
Jul-09
Jan-10
Jul-08
Jan-09
Jul-07
Jan-08
Jul-06
Jan-07
Jul-05
Jan-06
best option, due to excellent views back to the city and ease of
0%
Jan-05
Docklands, however the South Wharf building was considered the
Southbank
Source: Colliers Edge, PCA OMR Jan 2016
Anneke Thompson
Associate Director | Research | Tel +61 3 9940 7241
[email protected]
23
Research and
Forecast Report
First Half 2016
BRISBANE METRO OFFICE
Amenity is key
By Peter Willington
Manager | Research
[email protected]
Deals continued throughout the second half of 2016 despite
continued headwinds for the Brisbane Metro sector. In total nine
buildings transacted for a total of $407 million albeit negative 4,000
sqm of net absorption was recorded by the PCA during the period.
Yield compression continued for A Grade stock as investors, looking
14,286 sqm, ATO tenanted 28 Macgregor Street located in Upper
Mount Gravatt for $57.1 million (reflecting an initial yield of 8.23
percent). The campaign was swamped by enquiry reflecting the
covenant of the tenant and the five year WALE.
We’re expecting to see further pressure for residential conversions
as new neighbourhood plans prioritising residential development are
now in place. Under the new plans conversion pressure is expected
to mount in established metro markets such as Toowong and Milton.
outside of the CBD market, continue to move up the risk curve.
In order to meet infill development targets, residential development
Activity is continuing, particularly in the inner south and urban
migration abates.
renewal markets. Owners are targeting occupiers that demand
high levels of amenity, however, do not necessarily require, or
have no desire to be located in the CBD. The majority of sale
and lease transactions that occurred in the second half of 2016
were in these two markets. This correlates with the theme of the
national overview of this report stating that occupier amenity,
public transport and access to the CBD are at the top of the list for
occupiers and investors.
The abandonment of Tatts Group’s plans to develop a purpose
built facility in Breakfast Creek, is fodder for those that are
predicting that the flight to quality will be the death knell for metro
locations. Development has been constrained in some locations
sites are in high demand even as population pressure from
Additionally, relatively new markets will become further established.
For the first time, the PCA provided statistics for the Brisbane
Airport market in their January 2016 office market report. The
Brisbane Airport Corporation have ambitious targets for office
accommodation in their 2014 Property Master Plan. As critical mass
develops in this emerging sub-market, it is expected that the market
will be one to watch with interest as participants act as scarcity
prevails in established markets.
Inner south
by the contraction in the spread between the economic rent of
High levels of amenity, accessibility to public transport and proximity
development and the attractive effective rents currently being
to the George Street CBD precinct are driving an insatiable appetite
offered in the CBD. These critics of metro markets fail to mention
that two of the CBDs largest occupiers, Flight Centre and Aurizon
are soon to move outside of the CBD South Brisbane and the Urban
Renewal market respectively.
Colliers Edge leasing data shows that the urban renewal and inner
south are currently the most active markets in Brisbane.Nine of
the 15 lease deals of over 1,000sqm recorded in the half occurred
in these markets. Further optimism is drawn by noting that four of
these transactions of over 1,000sqm occurred in December 2015.
On the capital market front, investors continue to seek well tenanted
assets with a secure WALE. Colliers International recently sold the
24
40 Thompson Street, Bowen Hills
Sold on behalf of Probuild Constructions
Metro Office
METRO OFFICE
6.24 percent reflecting the high demand for good quality assets in
the market. 99 Melbourne Street transacted at an initial yield of 7.55
per cent, informed by a high tenancy risk with Stockland rumoured
BRISBANE METRO OFFICE PRIME GRADE MARKET INDICATORS
REGION
AVERAGE
GROSS FACE
($/m² pa)
H2
H1
2015 2016
INCENTIVE RANGE
H2 2015
to be looking for alternate accommodation at the expiry of their
YIELD RANGE
H1
2016
H1
2016
H2 2015
Urban Renewal $545
30% - 40%
6.75% - 7.5%
Inner South
$560
25% - 35%
6.75% - 7.5%
Milton
$485
35% - 45%
8% - 8.75%
Toowong
$475
30% - 35%
8.5% - 9%
Spring Hill
$490
30% - 40%
8.5% - 9%
current lease.
The inner south is expected to remain attractive to developers,
investors and occupiers in the medium to long term. The increasing
amenity of the area, strong public transport links and connectivity to
the future Queens Wharf precinct are expected to be a competitive
edge for occupiers when comparing metro markets.
Urban Renewal
for space in the inner south precinct. The continued demand
for space in the inner south led to the PCA reporting the lowest
The urban renewal market continues to be one of the most sought
vacancy rate in all Brisbane markets at 9.7 per cent. This is
after markets for occupiers. This is reflected by a further 7,000 sqm
a substantial increase from the previous half of six per cent,
of net absorption recorded by the PCA in the second half of 2016.
however, the vacancy is primarily in secondary accommodation.
The urban renewal market follows the inner south market as the
The inner south will be home to Flight Centre’s global
headquarters, at SouthPoint, the last vacant site in the South Bank
precinct. Currently being constructed by the Anthony John Group,
the 20,000 sqm office building is on top of the South Brisbane
second tightest market in terms of vacancy at a reported
9.8 per cent.
Attracted to the area by the high levels of amenity offered and close
links to the Fortitude Valley and CBD, the urban renewal market has
train station and is in the heart of the revamped restaurant and
parkland precinct of South Bank. The building was awarded a five
star Green Star Rating in November and will set a new benchmark
for prime office space in metro markets.
No further development is expected in the South Brisbane Precinct
until the Parlamat site, on Montague Road, is released to market,
seen continual positive net absorption for a number of years. The
area has been subject to continual gentrification and now that the
Gasworks development has reached maturity, we’re expecting to
see continual contraction in the vacancy rate supported further by
withdrawals of secondary stock.
The development pipeline that brought some 111,000 sqm of office
however, the end use and configuration of this site is still being
space to the market over the past three years, has now slowed with
debated. Vacancy levels are expected to decline on the back of
no new development expected. The abandonment of plans for the
a subdued future development pipeline and as secondary office
Tatts Group to develop a purpose built facility at Breakfast Creek
space is withdrawn for redevelopment or conversion for
is a minor setback, however, has no material impact on the
residential uses.
current market.
INNER SOUTH - SUPPLY ADDITIONS,
WITHDRAWALS, VACANCY
Two notable transactions occurred in the second half of 2016; 1 King
14%
40000
Street in Bowen Hills (as reported last half) and 1-3 Breakfast Creek
35000
12%
30000
25000
10%
20000
8%
15000
10000
6%
5000
4%
0
-5000
2%
-10000
0%
-15000
6 Month Net Absorption
Net Supply Additions
Vacancy Rate
Two sales were recorded in the half, 99 Melbourne Street and
Stanley Street House. Lasalle Investment sold Stanley Street
House to AMP Life Limited for $26.3 million at an initial yield of
25 Montpelier Road, Bowen Hills
Leasing exclusively on behalf of GWC Property
25
No major sales were recorded in the half, as many investors are in
a holding pattern waiting for the final neighbourhood plan.
Milton & Toowong
Similar to Spring Hill, the other traditional metro market of
Milton (including Toowong) is coming under increasing pressure
for residential conversion. Some 2,000 residential units are
currently being marketed or in the development pipeline along
the in the area which has been the traditional home of metro
office accommodation. Unlike the Spring Hill market, the relative
quality and age of stock is much better in Milton and the office
precincts are somewhat insulated from residential development by
419 Upper Edward Street, Spring Hill
Sold on behalf of Daniel Butlera
Road in Newstead for $131.9 million and $36.3 million respectively.
Continuing the theme of compressing yields in metro markets for
quality accommodation, the 16,500 sqm building in King Street
transacted at an initial yield of 7.02 per cent; a yield expected for
an A Grade building in the CBD.
a buffer of alternate uses and as such we’re yet to see any major
withdrawals from the market.
The competitive advantage of the inner south and urban renewal
markets is most aptly represented in the relative vacancy rates.
Milton sits substantially higher than these other markets at 20.1
per cent reported vacancy. Anecdotally however the underlying
sublease vacancy factor of 3.8 per cent is underreported as
As a swathe of residential development completes in the
contracting tenants continue to use space that is marketed for
Newstead precinct, further amenity and close links and access to
sub-lease.
an increased resident population is expected to drive a positive
perception of the urban renewal market.
Spring Hill
The Spring Hill market has come under further pressure for
residential conversion as the Spring Hill Neighbourhood Plan has
progressed through the approval process. With new height limits
of up to 15 storeys and a declining office market, we expect to see
Of further concern is the looming expiry of the Origin Energy lease;
who are expected to relocate approximately 20,000sqm to either
the inner south or urban renewal markets, further impacting the
vacancy rate.
The declining nature of the Milton market is reflected in the sales
data where no major transactions were recorded in the half.
600,000
PROPORTION OF STOCK BY MARKET
500,000
400,000
further withdrawals from the market as the highest and best use of
some assets changes to residential uses.
While only approximately 30,000 sqm of office space has been
300,000
200,000
withdrawn in recent years, as the planning scheme is approved, we
expect to see a large uptick in withdrawals over the coming years.
The withdrawals are expected to be accelerated by the migration
of occupiers to emerging and higher amenity precincts such as the
inner south and urban renewal or into competitive occupancy costs
in the struggling Milton area.
While the outlook is less than positive for the Spring Hill office
market, leasing deals have continued. However, transactions that
have occurred have been relatively small, averaging just over
100 sqm.
Urban Renewal
Inner South
Milton
Spring Hill
Toowong
We’re expecting to see the Milton office market compress further
into the pocket surrounding Suncorp Stadium, where larger scale
buildings and surrounding amenity will be able to compete with
the high quality assets in the other metro markets. As such the
proportion of office space in the Milton market as a percentage of
the total metro market is expected to continue to decrease.
[email protected]
26
100,000
Peter Willington
Manager | Research | Tel +61 7 3026 3305
[email protected]
Metro Office
METRO OFFICE
Research and
Forecast Report
First Half 2016
ADELAIDE METRO OFFICE
Vacancy falls in the fringe
By Kate Gray
[email protected]
cent since the peak in December 2012. This leaves a significant
opportunity for redevelopment within these precincts.
The fringe and inner metro markets have seen significant
planning changes over the last two to three years. Most have had
The Adelaide Fringe and suburban markets have remained
stable for some time with limited changes in supply and vacancy
remaining below the CBD. However these markets are likely to
experience significant change in the coming years. Key attractions
for the suburban and fringe markets are on site car parking and
close to home for employees. There is however limited amenity
with few food offerings and services close by, and there are very
few prime options available for lease. Over the last five years
maximum building heights increased and the ability to develop
mixed use developments which are likely to include a component
of residential use. When we look at other metro markets in both
Sydney and Melbourne over the last decade there are many
examples of withdrawals for conversion of use. Although this is
not an apparent trend in Adelaide at this stage, given the high
levels of secondary grade stock it is one that will emerge in the
coming years. We are aware of several recent sales in particular
there has been limited new supply added to the metropolitan
along Greenhill Road which are likely to result in mixed use
markets with the largest building completed being World Park
back in 2010. The fringe has seen several buildings withdrawn for
refurbishment, but there has not been many recent examples of
office buildings withdrawn for a conversion of use.
An analysis of the fringe market shows that only 37 per cent is
prime grade which leaves 63 per cent of secondary grade property
in the market. Vacancy for C grade has fallen over the last three
surveys, but is due to withdrawals for refurbishment rather than
an improvement in demand. Gross face rents for C grade buildings
have fallen with incentives increasing over the last 18 months.
This combination has seen net effective rents fall by over 25 per
development. We have seen a boom in CBD apartments over the
last 12 months. We expect that the metro markets are the growth
areas for residential and mixed use development over the next
five years.
Overall the outlook for the fringe and metro markets remains
stable. With limited new supply coming to the market combined
with changes in zonings there are opportunities for some of the
secondary grade stock to be either withdrawn or converted to
mixed use. Prime stock is still in short supply. The continued flight
to quality from both tenants and investors for this type of stock will
continue to support this trend.
ADELAIDE METROPOLITAN OFFICE MARKET
INDICATOR
WorldPark, 33 Richmond Road, Keswick
Leased by Colliers International
FRINGE
SUBURBAN
Grade A Gross Rents
($/m²)
Grade A Gross Rental
Growth p.a.
$432
$395
0.0%
0.0%
Prime Incentives
25%
25%
Total Market Vacancy Rate
7.1%
6.4%
Average Prime Grade Yields
6.75%
7.75%
Prime Grade Capital Values
$4,600-$5,200
$3,600 - $4,060
New Supply Additions (m²)
0
0
27
Investment activity
New supply remains tight
There was a total of $29.4 million of major assets (over $5 million)
There is no significant new supply under construction in
exchanged during 2015 which is the highest level of transaction
either the fringe or metro office markets. There hare however
volumes seen since 2010. There were five sales in metropolitan
three significant refurbishments underway in the Fringe. The
office markets during 2015 with one sale recorded in 2016
former Austereo building at 127-128 Greenhill Road is currently
this year.
undergoing a significant refurbishment which is expected to
The Fringe and suburban office markets are traditionally a tightly
complete in the first half. The former Rural Press building at 123
held, mostly by private investors. Many of the assets within the
fringe and metro office market are smaller buildings size and
therefore are more attractive to the private investor market rather
Greenhill Road is also under construction and is due to complete in
March. In the suburban market there are plans for new offices in
Port Adelaide for the government, but construction has not
than institutional investors. There is still a strong appetite from
yet commenced.
private investors in the sub $5 million market with assets in the
Two major tenants move from the fringe
$1 million to $3 million price range particularly in demand.
Property in these markets are still seeing good returns with prime
Two large occupiers in the Fringe market have signed leases to
grade yields in the Fringe 6.5 per cent to seven percent and inner
move into the CBD. Pitcher Partners moved from 160 Greenhill
suburban 7.25 per cent to 8.25 per cent.
Road which has now been withdrawn for refurbishment and
Demand for assets in metro markets remains strong and is mostly
limited by the amount of quality stock offered to the market. We
repositioning. They signed a lease at 100 Hutt Street for 1,476 sqm
last year for three years.
expect to see continued strong demand from developers and
Grant Thornton have signed a pre lease for a floor at Frome +
private investors during 2016.
Flinders which is currently under construction. Frome + Flinders
is expected to complete in the second half of 2016 and therefore
ADELIADE METRO MARKET SALES VALUE
Grant Thornton is likely to vacate their current accommodation at
35
67 Greenhill Road providing a 1,500 sqm vacancy over one floor.
30
Mixed results for vacancy
25
$ Million
Vacancy in the Adelaide metropolitan markets has seen mixed
20
results over the last six months. Vacancy in the suburban markets
15
as increased to 6.5 per cent up from six percent six months ago.
The office fringe market however has seen vacancy fall from eight
10
per cent in July 2015 to 7.1 per cent in Jan 2016. Both the fringe
5
and metropolitan office markets have tighter vacancy rates than
the CBD markets. Demand has remained subdued over the last six
0
2011
2012
2013
2014
2015
2016
months in the fringe with net absorption of only 63 sqm.
METRO AND FRINGE OFFICE VACANCY
12%
10%
Vacancy (%)
8%
6%
4%
2%
0%
H1 2013
H2 2013
H1 2014
H2 2014
Metro office
H1 2015
H2 2015
H1 2016
Fringe office
Greenhill Road, Unley
Valued by Colliers International
[email protected]
28
Kate Gray
Associate Director | Research | Tel +61 8 8305 8806
[email protected]
Metro Office
METRO OFFICE
Research and
Forecast Report
First Half 2016
PERTH METRO OFFICE
Competition for tenants heats up
By Misha White
Manager | Research & Economics
[email protected]
The Perth metropolitan office market experienced a challenging
2015, as did the Perth CBD. Market rents continued to be driven
lower by increased vacancy and lack of demand. Not only has the
downturn in the resource sector severely impacted CBD vacancy,
but this is rippling through to the metropolitan markets. Moderating
economic activity is impacting employment conditions, wages,
population growth, retail spending and prices for some goods
and services.
Because of this, competition for tenants is heating up after a
prolonged period of above-average Perth CBD and West Perth
vacancy. Demand for office space over the past decade was
largely driven by the ramp-up in commodity prices and the
resultant large capital inflow directed at expanding capacity, then
necessary to offset demand emanating from a growing
24 Mews Road, Fremantle
Leased on behalf of owners
on the 607,500 sqm of stock in 2005. This is approximately
Chinese economy.
59,000 sqm more than the 326,350 sqm increase in Perth CBD
To a degree, the expansion in resource sector capacity was
stock over the same period.
underpinned by forecasts of further growth in commodities
A structural shift
demand and the profit potential of resource projects in the case
of higher prices. Recent developments in demand conditions
caused prices to tumble, and a readjustment of demand forecasts
Is a structural change in the economic base causing an oversupply
scenario? If so, what is going to fill the void in demand that has
eventuated, leading to capital flows into the sector declining.
arisen from this change in the economic base?
Employment conditions have deteriorated and demand for office
So far, the economic transition appears to have had limited impact
accommodation has declined.
on net absorption, with vacancy increasing and rental rates
Colliers International has noted expansion in some sectors of the
declining. However, Colliers International is optimistic that over the
economy outside resources although to date, there seems to have
been limited flow-through to office space absorption.
medium term, net absorption should recover as Perth’s population
continues to grow, helping drive demand for space by services
sectors to meet the needs of a larger population.
Since the beginning of the State’s resource sector boom,
approximately 385,500 sqm of office space was added to the Perth
Metropolitan market, within the eleven major metropolitan office
precincts Colliers International monitors; more if buildings with
space under 1,000 sqm are included. This has driven total office
stock to approximately 993,000 sqm or a 63.5 per cent increase
The expansion in other industry sectors has been assisted by a
lower exchange rate, cheaper occupancy costs and moderating
operating costs. This, plus a greater awareness of Western
Australia as an education and tourist destination, should generate
improved economic growth, and with it office space demand.
29
The opportunities
The contraction in occupancy costs is generating new
opportunities, particularly for serviced offices and co-working or
shared space – which continues to be a growing trend globally.
Fremantle’s office stock is mostly dated and low grade; there are
less than a handful of buildings younger than 10 years old. Due
to the lack of modern office accommodation, there are only a
small number of major tenants occupying commercial space in
Fremantle. Some of the major tenants include the University of
The metropolitan office market precincts with good connectivity,
Notre Dame, the Department of Immigration and Border Protection,
close to amenities and in possession of an existing creative and
Australian Federal Police and Mediterranean Shipping Company.
vibrant culture, are the ones likely to reap the most benefit from
this. Perth already has eight or so co-working or incubator spaces
in suburban market locations, with more likely to emerge as this
steady trend continues.
The Western Australian Government pledged to relocate the
Department of Housing head office to Fremantle from East Perth
during its 2012 election campaign. This commitment has yet to be
finalised but an Expression of Interest (EOI) campaign for provision
In addition to this, technological advances and innovative thinking
of 20,000 sqm of space to accommodate 1,000 departmental
are driving change in working and hiring trends. Cost effectiveness
staff within 600 metres of the Fremantle train station ended in
and flexibility are key components of this change. The popularity
September 2015 and no announcement has yet been made.
of ‘e-lancing’ (virtual freelancing) is growing and could be a major
disruptor to labour markets globally. Advances in internet speed
West Perth vacancy rising
now permit businesses and potential employers to outsource or
West Perth office market vacancy increased over the second half
contract-out work to a professional in other parts of the world,
where they wouldn’t normally have access to its labour pool.
of 2015, rising to 12.2 per cent from 10.8 per cent in July 2015.
This increase in vacancy was driven by tenants vacating space
This e-lancing trend is proving particularly attractive and
across all grades. However the largest increase in vacancy was
lucrative to highly skilled, highly recognised technical and creative
in B and C Grade space, according to the Property Council of
professionals, driving an emergence of a ‘supertemps’ sub-class.
Australia (PCA) January 2016 Office Market Report.
As e-lancers still require space to conduct business, and the home
Changing market dynamics are providing prospective and sitting
environment is not always suitable, this need for an associated
tenants an opportunity to negotiate attractive new deals and seek
flexible workspace could underpin further growth in demand for
upgrades in existing premises or, alternatively, relocate to more
serviced, shared or co-working office space.
desirable and/or larger tenancies.
An additional scenario that could drive positive net absorption
Vacancies in other suburban precincts are also more prevalent.
when economic conditions and business sentiment stabilise is
Herdsman/Osborne Park, Great Eastern Highway and Subiaco
the return to larger workspace ratios. During the boom years;
precincts have large volumes of space being advertised for lease.
historically high rents and a shortage of space caused a shift to
Colliers International research on listings found approximately
lower workspace ratios. Now lower rents and strong incentives
290,000 sqm (note - inclusive of space within buildings less than
could see employers afford their employees the luxury of
more space.
Fremantle revival
In this edition of the Metropolitan office market report Colliers
International will focus on the Fremantle office precinct.
Fremantle is undergoing a significant revitalisation with an
investment pipeline not witnessed since the America’s Cup event
in the late 1980s. Over the next 10 years over $1 billion of public
and private investment projects are expected to be completed,
some of these are currently under construction. This is expected
to increase and improve the supply of civic, commercial office,
hotel, residential and retail space within the Fremantle CBD. The
construction pipeline and related infrastructure should improve
economic activity during and after the construction period.
Colliers International’s research has identified 23 office buildings in
Fremantle providing office accommodation over 1,000 sqm. These
23 buildings are dispersed throughout the Fremantle CBD and
equate to approximately 61,870 sqm of office space.
30
2 Sleat Road, Applecross
Metro Office
METRO OFFICE
1,000 sqm) of office space listed for lease in precincts outside the
be launched over the next two years, with soft market conditions
Perth CBD. In Fremantle, the vacancy rate is currently estimated
having a negative impact on project feasibilities. It is likely to
to be 10.3 per cent amongst the 23 major buildings currently
remain difficult to break ground on new projects in 2016 unless
monitored by Colliers International.
developers can attract tenant commitments, demand recovers or
land and development costs adjust.
Rents and incentives
Leasing activity remained subdued over the December 2015
Investment
quarter. Continued soft demand has resulted in A Grade net face
Over 2015, nine major investment assets were transacted in the
rents in West Perth moderating a further 0.6 per cent over the
metropolitan office market; these transactions totalled $296.3
December 2015 quarter to average $417.5/sqm. This is down from
million. During the December quarter, 3 Ord Street, West Perth
a revised $420/sqm in the September 2015 quarter.
sold for $8.875 million. 53 Ord Street was sold during the
September 2015 quarter for $59 million to a foreign purchaser.
B Grade rents, which have already fallen 30 per cent since
This asset was leased to ConocoPhillips with a 7.5 year WALE, and
the peak in 2013, were stable at an average of $347.5/sqm.
equated to a passing yield of circa 7.12 per cent.
Notwithstanding this, Colliers International expects further
moderation in rents in 2016, due to the increase in vacancy and
Other transactions during the year included the ATO building at 45
low tenant demand. The projected higher level of vacancy in the
Francis Street, Northbridge ($101 million), Monadelphous occupied
Perth CBD should also act to drive rents lower in West Perth as
building at 59 Albany Hwy, Victoria Park ($72.8 million) and the
landlords compete to fill vacancies.
Federal Police headquarters at Perth Airport ($18.4 million).
Average A Grade incentives increased marginally, rising to 32.5
Market yields for A Grade West Perth assets continued to tighten
per cent in the December 2015 quarter. With the increase in
and were estimated to average 7.25 per cent at the end of the
competition and increase in B Grade vacancies, incentives are
December 2015 quarter. B Grade yields were more or less stable,
expected to remain around 30 per cent to attract good, longer-
averaging 9.38 per cent.
term tenants.
Colliers International expects yields for A Grade assets to remain
Colliers International has assessed the current suburban office
tight, with scope for further tightening in the near term if interest
market and concludes that market rents for A Grade space in the
rates remain at record lows or there is an increase in capital
Fremantle CBD area would potentially achieve between $250/sqm
seeking Western Australian assets. Any tightening in yields is likely
at the lower end and around $350/sqm at the top end. Challenging
to be centred on assets with good WALEs, as Colliers International
market conditions in the suburban markets means Fremantle’s
forecasts difficult short to medium-term leasing market conditions.
market attributes (including distance from the CBD and public
perception) would render it equally if not more challenging to
achieve rents towards the upper end of this range.
Supply
The first half of 2015 saw 1,653 sqm added to West Perth stock,
which came from the inclusion of 1 and 25 Prowse Street.
At the end of 2015, total stock for the West Perth market stands
at 425,555 sqm following the addition of 1,865 sqm at 1162 Hay
Street. A further 1,595 sqm is under construction at 18 Ventnor
Ave and was scheduled to be delivered in the second half of 2016.
However, current progress indicates this may fall into the first half
of 2017.
In Fremantle just 1,100 sqm of new space was added in 2015
via the refurbishment and extension of 11 Cliff Street. There
is approximately 1,747 sqm currently under construction and
scheduled for 2016 delivery, and approximately 35,000 sqm of
office space mooted for development. These figures exclude the
20,000 sqm for the potential relocation of the Department of
Housing from East Perth.
297 Vincent Street, Leederville
In both the West Perth and Fremantle markets, Colliers
International is not expecting any significant new build projects to
31
30 Dundebar Road, Wanneroo
Leased on behalf of Edith Cowan University
The attractiveness of commercial property yields that can deliver
leading economists see scope for further moderation making
robust cash-flow continues to generate investment demand for
it difficult to envisage an improvement in office leasing market
West Perth assets with good lease covenants. This is helping to
conditions for landlords in the short term.
maintain capital values for these quality assets. Nonetheless, the
moderation in market rents and difficult leasing conditions has
made investors and lenders more cautious. This is leading to
some negative impact on capital values, particularly in assets with
significant vacancies and potential cash flow issues.
and strength in the services sectors of the economy, with
assistance from a lower Australian dollar, should drive stability and
improvements in office space demand.
On the investment side, quality assets with secure tenants and
Outlook
good WALEs are expected to remain tightly held and sought by
Office leasing market conditions are anticipated to remain subdued
over 2016. The delivery of new vacant CBD Premium and A
Grade stock in a high-vacancy environment should continue to
exert downward pressure on CBD rents. This is expected to
flow onto West Perth and other metropolitan markets as tenants
with expired leases or pending expiries seek out superior office
accommodation.
investors, particularly by those who approach the market with
a long-term view. The search for yield is expected to persist
for the near term. There is potential for further yield tightening
if alternative investments remain low yielding in comparison
to commercial real estate and should the cost of funds remain
accommodative.
Reports of significant capital flight out of China in 2015 could see a
Vacancy in West Perth is expected to increase. Net tenant demand
has been weak and negative net absorption was recorded over
the second half of 2015. WA economic conditions continue to be
challenging with state final demand having moderated. Some
[email protected]
32
Over the medium to longer term, continued population growth
continuance in 2016. We have witnessed increased Chinese buyer
activity in the Western Australian market over 2015 and should this
continue or ramp up, there is scope for further capital value growth
and yield compression.
Misha White
Manager | Research & Economics |Tel +61 8 9261 6675
[email protected]
Metro Office
METRO OFFICE
Research and
Forecast Report
First Half 2016
NEWCASTLE METRO OFFICE
Market overview
By Mark Yazbeck
Research Analyst | Research
[email protected]
Colliers International is forecasting an increase in vacancy in
the short term. As the Australian Taxation Office has downsized
by approximately 6,628sqm within 266 King Street. However,
approximately half of the space has been committed to by the CBA
Newcastle is currently benefitting from a number of substantial
investments, together with the State Government funded
Newcastle Urban Renewal Strategy (NURS). The public investment
in urban renewal, coupled with existing projects underway such as
the University of Newcastle’s “NeW Space” city centre campus and
the Wickham Transport Interchange, has led to a substantial level
of mixed use development and increased enquiry for development
opportunities within the CBD.
Mixed use developments will increase the population density within
the CBD, in turn increasing demand from service related occupiers
and repurposing of older lower grade accommodation.
Current and projected supply
market has had reducing vacancy throughout 2015. However,
COMMERCIAL GFA (m²)
The most recent commercial development currently under
construction is a 7,000sqm A Grade office building at 18
Honeysuckle Drive, developed by Canberra based DOMA Group.
New development is otherwise unlikely in the short term, unless
there is sufficient leasing demand coupled with rental levels
ensuring the commercial feasibility of new development.
The GPT Group and Urban Growth’s application for the
redevelopment of Hunter Street Mall was placed on public
exhibition in early 2016. This staged development proposes a
reduction from the original proposal and will comprise 2,700sqm
of commercial space and 4,900sqm of retail space, together with
As new supply has been limited, the A Grade commercial
SITE
and Employers Mutual commencing May 2016.
565 residential apartments.
The table below shows current and mooted commercial projects
within the Newcastle CBD:
DESCRIPTION
18 Honeysuckle Drive
7,500
Two x seven storey buildings currently under construction by DOMA Group, a Canberra based
developer comprising:
• 7,500sqm of commercial office space
• 71 residential units
• Ground floor retail/commercial and cafe
Construction is well underway with Colliers International committed to 500sqm on the ground floor of
the Eastern Tower, together with the residential component being sold.
291 King Street
9,600
The proposed redevelopment will comprise an additional four levels of commercial office space totalling
approximately 9,600sqm. The developer obtained consent with deferred commencement (DA2013/167)
in June 2013. Unlikely to commence until a minimum of two floors have secured pre-commitment.
Former S&W Miller Site,
Stewart Ave
10,000
Proposed development yet to be DA approved, however it is currently being marketed for lease.
GPT Hunter Street Mall
Development
2,700
Proposed staged development yet to be DA Approved and will be developed in the long term over stages.
Total
29,800
33
18 Honeysuckle Drive, Newcastle
Developed by the DOMA Group
Demand
Rentals
The ground floor commercial component in the Eastern Tower
A Grade gross face rentals for good quality office accommodation
at 18 Honeysuckle Drive has been fully committed to by Colliers
typically range from $450 to $500/sqm gross, with rentals up
International as their new Newcastle headquarters, with
to $500/sqm achieved within the waterfront precinct on Wharf
construction due for completion late 2016.
Road. Most recently, gross face rental growth has occurred
The recently constructed four level 3,500sqm commercial
development on the former Newcastle Museum Site (168 Parry
Street), has been fully committed to by Auscoal, together with a
local business on the ground floor.
In terms of relocations, 266 King Street attracted CBA from 11
Argyle Street, together with Employers Mutual moving from 24
Honeysuckle Drive. Both of these moves absorbed 3,314 sqm of
A Grade stock from the market.
The migration of the legal fraternity closer to the new Law Courts
is yet to be realised, however we envisage this will contribute
towards the continued absorption of A Grade accommodation
within the CBD over time.
Over the last 12 months, we have witnessed strong market activity
in the residential market owing to the Newcastle Urban Renewal
Strategy and construction of the Newcastle University city campus,
together with the sale of The Store building at 854 Hunter
Street, Newcastle West to Urban Growth NSW for $11 million in
September 2015. These announcements have resulted in 91 per
cent of pre-sales for proposed residential developments currently
under construction, which has in turn attracted developer interest
to the Newcastle CBD. As a result, we envisage further stock
withdrawal of C and D Grade commercial space for residential
conversion to continue.
predominantly due to increasing outgoings, with nominal change
in net face rentals unless the facility is purpose built, whereby the
rental level is a function of the overall development cost.
B Grade gross face rentals have come under pressure owing to the
increasing A Grade vacancies and lack of enquiry, with refurbished
accommodation currently marketed at approximately $220 to
$260/sqm gross.
Incentives
Incentives remain a part of lease negotiations within the
Newcastle market, and in light of the reduced vacancy, have
reduced from approximately 15-20 per cent evidenced in
2008-09, back to be currently between eight to 15 per cent of
the lease term certain.
The reduction coincides with the low A Grade vacancy rate,
however, can fluctuate quickly given the small A Grade
commercial market. We note the incentives in 2008-09 were
countered in some instances by higher face rentals, resulting in
neutral net effective rental growth. In terms of back-fill space, we
note that existing fitout is frequently utilised as a form of incentive
when negotiating rentals.
Sales transactions
The Newcastle commercial market is currently experiencing similar
trends to Australian major commercial markets, whereby yields are
34
Metro Office
METRO OFFICE
tightening despite the softness in the leasing market. The weight
Recent notable transactions within the Newcastle region during
of capital is a result of the amount of available equity, coupled with
2015 are listed in the table below:
the historically low interest rate environment. This has resulted in
return expectations falling and broadened investment criteria to
include markets such as Newcastle.
The most recent example of the weight of available capital was the
sale of 266 King Street, Newcastle on behalf of Charter Hall Office
Trust for $59.6 million to Investec Australia Limited on an initial
passing yield of 6.24 per cent. Approximately 73.2 per cent of
the property was committed to at the date of sale, with the vacant
ADDRESS
SALE PRICE
DATE
LETTABLE
AREA
(SQM)
INITIAL
YIELD
WALE
(YEARS)
266 King Street,
Newcastle
$59,600,000 Dec-15
13,865
6.24%
8.59
22 Honeysuckle
Drive, Newcastle
$46,750,000
Jan-15
9,877
6.96%
12.37
95 Pacific Highway, $16,100,000
Charlestown
May-15
3,248
8.23%
5.58
portion comprising a combination of retail space on the ground
Largest commercial office sale in Newcastle
floor and office accommodation on Levels 7 and 8.
Colliers International has successfully sold 266 King Street in
Another recent example of high net worth investors and wholesale
Newcastle on behalf of Charter Hall Office Trust for $59.6 million
funds targeting Newcastle is the sale of the NIB Building at 22
to Investec Australia Limited.
Honeysuckle Drive, Newcastle was for $46.75 million on an initial
This transaction represented the largest commercial office sale in
passing yield of 6.96 per cent. The 8,006sqm five star NABERS
rated building sold on a 12.37 WALE occupied by NIB, State Super
and QBE.
the history of the Newcastle CBD. The prominent A Grade building
comprised 13,865 sqm of net lettable area over nine levels.
The Australian Taxation Office downsized by approximately
The investment market for high quality commercial assets in
Newcastle is in our opinion back to pre-GFC levels. In a broader
sense, larger commercial assets in prime locations, with strong
lease covenants are typically achieving yields between seven per
cent and 8.5 per cent fully leased.
Recent notable commercial sales indicate strong demand exists
from high net worth investors and wholesale funds. The main
6,628 sqm within 266 King Street, however Colliers International
were instrumental in securing the CBA and Employers Mutual to
approximately half of the vacated space, with both lease terms
commencing in May 2016.
The Expression of Interest sale process was hotly contested
by local and offshore entities, with Investec Australia Limited
successfully securing the asset.
attributes investors are looking for in the Newcastle market
include location, covenant strength, lease term/Weighted Average
Lease Expiry (WALE), lease provisions and building age/capital
expenditure requirements.
95 Pacific Highway, Charleston
Sold on behalf of private investor
[email protected]
Mark Yazbeck
Research Analyst | Research | Tel +61 2 4915 4033
[email protected]
35
Research and
Forecast Report
First Half 2016
GOLD COAST METRO OFFICE
The Coast is looking healthy
By Peter Willington
Manager | Research
[email protected]
education. These industries are forecast to be the fastest growing
in the medium to long term; supported by initiatives at all levels
of government to invest in health care and to transition Australia
to a knowledge economy. We believe that this industry is the
The case for the Gold Coast on paper is gaining traction. Continued
first of what will become many industries, particularly industries
population growth, substantial infrastructure investment and a
that service health professionals that will provide pathways for a
growing desire for people to work close to home are amongst a
diverse economy on the Gold Coast.
myriad of factors contributing to a positive outlook for the Coast.
This change will take time, however, in the meantime the
One of the largest inhibitors of expansion for the gold coast has
existing industries on the Coast will be supported by increased
been the lack of critical mass to retain local talent in white collar
infrastructure spending, population growth and tourism all
industries. It is widely known that a substantial proportion of the
resulting in a positive outlook for the Gold Coast.
population make the daily commute up the Pacific Motorway to
Brisbane for work. Therefore the expected increase in demand for
office space based on population growth (approximately 150,000
sqm as reported in our previous Research and Forecast Report)
may be understating requirements as a growing percentage of
these commuters are able to be based on the Gold Coast as this
critical mass develops.
Leasing
Leasing activity has increased on the Gold Coast; with the entry of
several new requirements along the Coast. Colliers International
is currently negotiating leases over approximately 8,000 sqm
While it may seem obscure; our view is that the Gold Coast
of office space, albeit at various stages of the process. These
University Hospital is one of the key catalysts in the economic
requirements amount to approximately double the net absorption
development of the Gold Coast. For the first time, school leavers
recorded by the Property Council of Australia in the last six months
have an option for both study paths and a career (at the peak of
of 4,525 sqm.
their field) on the Gold Coast in medicine, scientific research and
GOLD COAST OFFICE PRIME GRADE MARKET INDICATORS
REGION
AVERAGE GROSS FACE ($/m² pa)
H2 2015
Bankwest Business Centre, 68 Marine Parade, Southport
Sold on behalf of Northpoint Holdings
36
H1 2016
INCENTIVE RANGE
H2 2015
Broadbeach
$475
15% - 20%
Bundall
$420
20% - 30%
Robina
$450
15% - 20%
Varsity Lakes
$380
15% - 20%
Southport
$400
15% - 25%
Surfers
Paradise
$400
25% - 35%
H1 2016
Metro Office
METRO OFFICE
Five continuous years of positive net absorption has led to a
The strong purchasing fundamentals has led to a substantial
substantial decline in the vacancy rate across the market. The
uptick in investment sales transactions in the second half of 2015
Property Council of Australia reported vacancy rate is 13.2 per
and so far in 2016. The recent sales have converged on an initial
cent, down from the peak of 24.1 per cent in 2011 at the peak of
yield range of between 7.5 per cent to 8.5 per cent as investors
the previous supply cycle. In the period since, some 55,000 sqm
continue to be cautious regarding tenancy risk.
of positive net absorption has occurred, whereas only 12,000 sqm
In total seven transactions during the second half of 2015 for a
of net supply has been delivered. The high net absorption has
total of $165.3 million. However, sales continue to experience
resulted in the Gold Coast being the best performed market in
Australia in terms of net absorption as a proportion of total stock
over this period.
headwinds from tighter lending conditions for both acquisition and
development finance and competition for sites with higher value
and yielding residential uses.
As a result of high net absorption levels and a lack of supply,
We expect that the investment market will continue to tighten as
currently there are few options available for contiguous office
interest increases from investors looking to move up the yield
space across the coast. Because of this all recent and future
curve and the underlying fundamentals of the Gold Coast market
requirements of over 1,500 sqm have increased lead times to
facilitate either a full refurbishment and repositioning exercise for
an asset or alternatively a building to be purpose built.
continue to perform well compared to historical averages.
GOLD COAST - NET ABSORPTION, SUPPLY ADDITIONS &
VACANCY RATE
Additionally, tenant drivers are changing. Alliance recently
30%
16,000
committed to 2,100 sqm in the Oasis Centre at Broadbeach, a
Alliance considered a number of opportunities throughout the
Coast and decided on this project with consideration to the quality
of the building management, surrounding amenity and availability
of car parking.
25%
12,000
10,000
20%
8,000
15%
6,000
Vacancy Rate (%)
purpose built facility in a deal negotiated by Colliers International.
Total Net Absorption and Supply Additions (m²)
14,000
4,000
10%
2,000
5%
education and health best exemplified by the recent Holmes
Jul-2019
Jan-2020
Jul-2018
Jan-2019
Jul-2017
Jan-2018
Jul-2016
Supply Additions
Jan-2017
Jul-2015
Jan-2016
Jul-2014
Jan-2015
Jul-2013
Jan-2014
Jul-2012
Net Absorption (6 Months)
Jan-2013
Jul-2011
Jan-2012
Jul-2010
stock, however, other sectors are beginning to emerge including;
0%
(4,000)
Jan-2011
the dominant sector of the market occupying 51 per cent of total
(2,000)
Jan-2010
The finance, construction, real estate and media industries remains
Vacancy Rate
Source: PCA/Colliers Edge
College lease of approximately 1,000 sqm in Southport.
Positive net absorption and declining vacancy are expected
to continue throughout 2016 supported by a range of new
requirements, withdrawal of secondary stock for reconfiguration
and the inability to provide new supply without a substantial
precommitment and lead time.
Investment
The declining vacancy rate and the dearth of development pipeline
are driving demand in the $10 million plus market for quality
assets. Following the period of peak vacancy following the GFC,
the feeling is, and is supported by the data, that the market is
normalising to a somewhat equilibrium state.
Connaught Centre, 26 Marine Parade, Southport
Sold on behalf of Paulyn Investments Pty Ltd
[email protected]
Peter Willington
Manager | Research | Tel +61 7 3026 3305
[email protected]
37
Our experience
METRO OFFICE
leased
Chan Street,
Benjamin Offices
Benjamin, ACT
20 Corporate Drive
Moorabbin, VIC
990 Whitehorse Road
Box Hill, VIC
7,600m²
4,033m²
20,295m²
On behalf of Pelicano Pty Ltd
On Behalf of Glorious Sun
Louisa Lawson Building,
25 Colishaw Street
Greenway, ACT
36 George Street
Burwood, NSW
146 Arthur Street
North Sydney, NSW
14,359m²
8,162m²
26,000m²
On behalf of Holdmark
Property
On behalf of private clients
Louisa Lawson Building,
25 Colishaw Street
Greenway, ACT
33 Berry Street
North Sydney, NSW
1-3 Smail Street
Ultimo, NSW
$90-95 million
$55 million
$224.5 million
On behalf of GDC (ACT)
Pty Limited
On behalf of Horaco Property
Pty Ltd as a trustee for Low
Family Trust No 1
On behalf of Anton Capital
1 Woolworths Way
Bella Vista, NSW
Atrium
Pyrmont, NSW
80 Pacific Highway
North Sydney, NSW
44,911m²
19,832m²
13,701m²
On behalf of Inmark Group
Pty Ltd
On behalf of AFIAA Australia
1 Pty Limited
On behalf of LaSalle
Investment Management
Australia
Lachlan Tower Base
Parramatta, NSW
88 Phillip Street
Parramatta, NSW
140 Sunnyholt Road
Blacktown, NSW
11,000m²
5,800m²
5,600m²
Building upgrade and
project managed
On behalf of
IOOF Holdings Ltd
On behalf of 3M
On behalf of Benjamin
Nominees
managed
On behalf of Challenger
sold
valued
designed and project managed
[email protected]
AUSTRALIA
IN THE LAST 18 MONTHS
metro office space for more than 591 companies totalling 695,536m²
2 Julius Avenue
North Ryde, NSW
76 Skyring Terrace
Newstead, Qld
515 St Pauls Terrace
Fortitude Valley, Qld
3,715m²
2,000m²
2,000m²
On behalf of ISPT
On behalf of Aveo
On behalf of ISPT
managing over 2,400,000m² across 500 metro office assets
31 Vision Drive
Burwood East, VIC
74 High Street
Toowong, QLD
895 Ann Street
Fortitude Valley, QLD
6,400m²
4,431m²
2,385m²
On behalfof Private Co
Investments No 4 Pty Ltd
On behalf of Darveniza Group
On behalf of Edenbridge P/L
243 metro office assets totalling more than $3.61 billion
Botanicca 8,
576 Swan Street
Richmond, VIC
Connaught Centre,
26 Marine Parade
Southport, QLD
78, 80-82 Richmond Road
Keswick, SA
$46.5 million
$9.7 million
On behalf of Icon
Constructions & Pacific Group
On behalf of Paulyn
Investments Pty Ltd
On behalf of private client
$4.15 million
over 2,000,000 m² totalling more than $2.6 billion worth in value
295 Springvale Road
Glen Waverley, VIC
Goodwood Road
Wayville, SA
Nishi
NewActon, ACT
4,549m²
3,405m²
27,010m²
On behalf of IOOF Investment
Management Ltd
On behalf of Peregrine
Corporation
On behalf of Molonglo Group
projects delivered by our award winning team
235 Springvale Road
Glen Waverly, VIC
22 Lambs Road
Artarmon, NSW
885 Mountain Highway
Bayswater, VIC
4,900m²
1,700m²
1,600m²
On behalf of MYOB
On behalf of Bard Medical
On behalf of Merk Millipore
Winner of Best Workplace,
PCA Innovation and
Excellence Awards 2015
For more information about Colliers International
and working with us visit: www.colliers.com.au
Note: The Metro office track record includes the following areas; Sydney Metro (Artarmon, Bella Vista, Blacktown, Burwood,
North Ryde, North Sydney, Parrmatta, Pyrmont, Sydney Olympic Park and Ultimo); Melbourne Metro (Bayswater, Box Hill,
Burwood East, Glen Waverly, Moorabbin and Richmond); Brisbane Metro (Fortitude Valley, Newstead, Southport and Toowong);
Adelaide Metro (Keswick and Wayville); and Canberra Metro (Canberra Fringe, Greenway and NewActon). Figures calculated
over an 18 month period from August 2014 to February 2016.
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Colliers International does not give any warranty in relation to the accuracy of the information contained in this report. If you intend
to rely upon the information contained herein, you must take note that the information, figures and projections have been provided by
various sources and have not been verified by us. We have no belief one way or the other in relation to the accuracy of such information,
figures and projections. Colliers International will not be liable for any loss or damage resulting from any statement, figure, calculation
or any other information that you rely upon that is contained in the material. © Colliers International 2016.

The modern Australian Metro Market

Transcription

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