The price of strata office space in the Sydney CBD is continuing its rapid ascent as investors and owner-occupiers jostle for stock that is becoming harder to find, new Ray White Commercial data shows.
However, this growth is expected to slow in the near future as more owners opt to hold on to properties, either to shelter from expensive rents or to continue receiving high returns.
The new figures are in the latest Ray White Commercial report, Between the Lines Sydney CBD Office Market Update February 2018.
Average capital values reached $9,742 per square metre in 2017 — an increase of 27.9 per cent over the year, according to Ray White Commercial head of research Vanessa Rader.
“This follows four years of outstanding results off the back of the strong increases in rents due to limited vacancies together with low interest rates,” Ms Rader says.
“The rapid increase has been most notable over the past two years, growing values across the total market by 56.2 per cent.”
However, volumes for 2017 were slightly down on 2016 results as stock becomes more difficult to source. Property Council of Australia figures for 2017 released last week show the Sydney CBD office market has seen its first decrease in total stock — a reduction of 54,606sqm to a total of 5,023,997sqm.
In the past six months, 11 buildings have been withdrawn from the Sydney office market as a result of major infrastructure projects.
Refurbished office space returning to the market has dominated new additions to available stock in the same period. The only new completion was the 6,885sqm International House Sydney, Australia’s first engineered timber office building, at Barangaroo.
“With limited quality stock entering the market and owners opting to retain their assets, $145.063 million changed hands compared with $844,000 in 2015 and averages closer to $700,000 over the longer term,” Ms Rader says.
The most activity was in the Core and Western Corridor precincts, which represented 78.2 per cent of the total pool of investment.
“Midtown reduced its volume, while the Southern precinct continues to yield the lowest volume of transactions,” Ms Rader says.
Strong demand from both investors and owner-occupiers has pushed the average price paid per strata premises to an average of $1.142 million in 2017 compared to just $844,000 in 2015 and averages closer to $700,000 over the longer term.
Ray White Commercial Office Leasing Sydney principal Anthony Harris says a large sample of sales has determined the huge increase in average capital values in Sydney’s most active and in-demand market, the Core precinct.
Strata office space in the area now costs an average of $11,260 per square metre — a 40.1 per cent increase on 2016 results.
Midtown, which had the highest value strata space in 2016, is now in second position at an average of $9,808 per square metre — a 21.4 per cent rise in the past year.
Western Corridor recorded improvement of 21.6 per cent to average $8,865 per square metre and the Southern precinct — which has the lowest stock levels and fewer transactions recorded — is at $7,266 per square metre.
“This is a 19.2 per cent increase compared to 2016 and the third consecutive year of double-digit value growth,” Mr Harris says.
However, he says robust growth at levels of the past few years appears to be unsustainable.
“While values are anticipated to keep on their upward trajectory, the growth rate and volume of sales are expected to slow,” he says.
“This is because more owners and occupiers are opting to hold on to their assets to either shelter from rents or continue to receive high returns during these strong Sydney CBD market conditions.”
The report also includes data from the Property Council of Australia released last week which shows net absorption of just 345sqm has been recorded in the six months to January 2018, despite the large withdrawal of stock. This change has seen vacancy compress to a low of 4.6 per cent.
In 2018, more than 85,000sqm is expected to arrive in the Sydney CBD office market, led by refurbishment projects (more than 80 per cent pre-committed) including Darling Park Tower 2 and 140 Sussex Street.
Recent key lease deals
100 Harris Street, Pyrmont
Print marketing business PMP Limited has subleased 1,625sqm from Domain Group, which leases three floors of the converted five-storey heritage building from Dexus. The deal for the ground- and first-floor space ranges from $600 to $700 per square metre (gross).
25 Bligh Street, Sydney
Law firm Lewis King Blumberg has taken a direct lease from Kingsmede on level 18 after vacating a sublease at 135 King Street. The 175sqm premises’ existing legal-style fit-out was the key driver for the three-year deal — $1,050 per square metre per annum (gross).