Between the Lines
Between the Lines Commercial Research - May 2014 Sydney CBD Small Suite Report
The Sydney CBD Strata market is a unique offering compared to the broader Prime office market, representing approximately 10% of the total CBD office market. The small suite size and definition barriers regarding building size ensures that this market operates differently from the over 1,000sqm floorplate Prime market; achieving differing rents, incentives and levels of investment activity. Across the total market, D grade assets are the best performing in terms of occupancy across the CBD recording vacancy of just 6.7% as at January 2014, followed by C grade of 7.8% showing the greatest 6 monthly absorption of all quality grades of 10,873sqm. These results when compared to the total Sydney CBD vacancy of 9.0% demonstrate the ongoing, solid demand for smaller suites in these Secondary assets.
Investment Activity
The strata office market is made up of predominantly C and D grade stock within the CBD. Despite internal building quality, this market is considered as Secondary due to the building amenity, size and efficiency ratings. Strata sales volumes historically have shown great volatility, with 2013 no exception with total sales turnover down 13.34% to $125.14 million.
Sydney CBD Strata Volumes
Average Strata Office Capital Values by CBD Precincts ($/sqm)
Source: Cityscope, Ray White Group
Source: Cityscope, Ray White Group
Robust results were recorded in 2012 due to a combination of low interest rates and an influx of self managed super funds entering the market; however this activity has slowed in 2013 despite these factors still in play due to poor sentiment surrounding rising vacancies and the stagnant rental market. The attractiveness of purchasing has further declined as incentives remain a prominent feature of the market which is unlikely to change in the near term, this encouraging the potential owner occupier market to remain in rented accommodation and the investor market to be more cautious. The split across regions remain reasonably steady with most activity recorded within the Core and Western Corridor in line with the greatest volume of stock as little new supply has been added to the market over the past few years.
The average value of strata property has remained reasonably consistent over the past four years; during 2013 across the total market, the average price achieved was $5,092/sqm. This result is just 1.75% up on the previous year yet still below the highs recorded in 2007. Across the precincts however there has been a little more volatility, which is mostly due to the volume of new or poor stock which has entered each of the markets. The Midtown and Southern precincts show the most limited turnover and similarly have seen greater movement in average values; the Core has continuously dominated the bulk of transactions resulting in the most consistent averages, currently $5,501/sqm, while the Western Corridor with its varying quality of stock currently averages $4,904/sqm despite peaking in 2011 at $5,304/sqm.
...the Core has continuously dominated the bulk of transactions resulting in the most consistent averages, currently $5,501/sqm.
Rental Market Sydney CBD Gross Face Rents ($/sqm)
Sydney CBD Incentives
Source: Ray White Group
Source: Ray White Group
Historically, this Secondary market has not had the same fluctuations in rents achieved as Prime grade assets due to the regular and ongoing volume of transactions in the sub 500sqm size range.
Unlike the Prime CBD office market, incentive levels are drastically different in this Secondary market. Across the CBD the average incentives regularly quoted have been around 30% for the past four years which is representative on a five year term on a Prime grade asset; with these incentives generally taken as a combination of contribution to fit out and rental abatement. Whereas the Secondary market has a far more variable incentive structure which varies dependant on lease size, term, quality or lease type; incentives can be as low as 5% to as high as 35%+ for sublease space, shown as a combination of fitout and rent free periods. Quality small suites in attractive, modern assets continue to be highly sought after by small businesses and can be somewhat sheltered from these high incentives and achieve strong effective rental rates.
Currently the Gross Face Rents achieved for this Secondary (or small suite) market across the CBD averages $579/sqm which has recorded a 2.65% increase in the last year; a better result than the Prime market which currently averages $778/sqm only showing 1.89% growth over the 12 months. Despite these average rates, the range in which rents are achievable can vary as much as $200 above or below this average depending on its size, quality and location.
Looking forward, the affordability within the CBD for the Secondary market will continue to assist in attracting new businesses previously priced out of the CBD; this is likely to have a positive influence on future face and effective rental growth for this segment of the market. Investment activity via strata purchases is expected to be subdued in 2014 despite the continued low interest rate environment due to the overarching weakness in the broader Prime office market. The combination of increased supply and limited employment growth prospects are expected to keep Prime face rents steady and incentives high in the short term. This will deter owner occupier investment activity and weaken market sentiment affecting the private investment market. Opportunities do exist however in this Secondary market for quality, small assets which offer a value add to keep incentives below the current highs achieved.
Research
Ray White Commercial (Office Leasing Sydney)
Ray White Commercial NSW
Vanessa Rader Head of Research T 02 9249 3724 M 0432 652 115 E [email protected]
Anthony Harris Director M 0409 319 060 E [email protected]
Jeff Moxham Managing Director T 02 9249 3725 M 0413 838 339 E [email protected]
John Skufris Director M 0414 969 221 E [email protected] Jeremy Piggin Director M 0413 336 161 E [email protected]
raywhitecommercial.com raywhitecommercial.com
Brad Lord Director, Property Managment T 02 8016 3827 M 0439 594 121 E [email protected]
The Sydney CBD Strata market is a unique offering compared to the broader Prime office market, representing approximately 10% of the total CBD office market. The small suite size and definition barriers regarding building size ensures that this market operates differently from the over 1,000sqm floorplate Prime market; achieving differing rents, incentives and levels of investment activity. Across the total market, D grade assets are the best performing in terms of occupancy across the CBD recording vacancy of just 6.7% as at January 2014, followed by C grade of 7.8% showing the greatest 6 monthly absorption of all quality grades of 10,873sqm. These results when compared to the total Sydney CBD vacancy of 9.0% demonstrate the ongoing, solid demand for smaller suites in these Secondary assets.
Investment Activity
The strata office market is made up of predominantly C and D grade stock within the CBD. Despite internal building quality, this market is considered as Secondary due to the building amenity, size and efficiency ratings. Strata sales volumes historically have shown great volatility, with 2013 no exception with total sales turnover down 13.34% to $125.14 million.
Sydney CBD Strata Volumes
Average Strata Office Capital Values by CBD Precincts ($/sqm)
Source: Cityscope, Ray White Group
Source: Cityscope, Ray White Group
Robust results were recorded in 2012 due to a combination of low interest rates and an influx of self managed super funds entering the market; however this activity has slowed in 2013 despite these factors still in play due to poor sentiment surrounding rising vacancies and the stagnant rental market. The attractiveness of purchasing has further declined as incentives remain a prominent feature of the market which is unlikely to change in the near term, this encouraging the potential owner occupier market to remain in rented accommodation and the investor market to be more cautious. The split across regions remain reasonably steady with most activity recorded within the Core and Western Corridor in line with the greatest volume of stock as little new supply has been added to the market over the past few years.
The average value of strata property has remained reasonably consistent over the past four years; during 2013 across the total market, the average price achieved was $5,092/sqm. This result is just 1.75% up on the previous year yet still below the highs recorded in 2007. Across the precincts however there has been a little more volatility, which is mostly due to the volume of new or poor stock which has entered each of the markets. The Midtown and Southern precincts show the most limited turnover and similarly have seen greater movement in average values; the Core has continuously dominated the bulk of transactions resulting in the most consistent averages, currently $5,501/sqm, while the Western Corridor with its varying quality of stock currently averages $4,904/sqm despite peaking in 2011 at $5,304/sqm.
...the Core has continuously dominated the bulk of transactions resulting in the most consistent averages, currently $5,501/sqm.
Rental Market Sydney CBD Gross Face Rents ($/sqm)
Sydney CBD Incentives
Source: Ray White Group
Source: Ray White Group
Historically, this Secondary market has not had the same fluctuations in rents achieved as Prime grade assets due to the regular and ongoing volume of transactions in the sub 500sqm size range.
Unlike the Prime CBD office market, incentive levels are drastically different in this Secondary market. Across the CBD the average incentives regularly quoted have been around 30% for the past four years which is representative on a five year term on a Prime grade asset; with these incentives generally taken as a combination of contribution to fit out and rental abatement. Whereas the Secondary market has a far more variable incentive structure which varies dependant on lease size, term, quality or lease type; incentives can be as low as 5% to as high as 35%+ for sublease space, shown as a combination of fitout and rent free periods. Quality small suites in attractive, modern assets continue to be highly sought after by small businesses and can be somewhat sheltered from these high incentives and achieve strong effective rental rates.
Currently the Gross Face Rents achieved for this Secondary (or small suite) market across the CBD averages $579/sqm which has recorded a 2.65% increase in the last year; a better result than the Prime market which currently averages $778/sqm only showing 1.89% growth over the 12 months. Despite these average rates, the range in which rents are achievable can vary as much as $200 above or below this average depending on its size, quality and location.
Looking forward, the affordability within the CBD for the Secondary market will continue to assist in attracting new businesses previously priced out of the CBD; this is likely to have a positive influence on future face and effective rental growth for this segment of the market. Investment activity via strata purchases is expected to be subdued in 2014 despite the continued low interest rate environment due to the overarching weakness in the broader Prime office market. The combination of increased supply and limited employment growth prospects are expected to keep Prime face rents steady and incentives high in the short term. This will deter owner occupier investment activity and weaken market sentiment affecting the private investment market. Opportunities do exist however in this Secondary market for quality, small assets which offer a value add to keep incentives below the current highs achieved.
Research
Ray White Commercial (Office Leasing Sydney)
Ray White Commercial NSW
Vanessa Rader Head of Research T 02 9249 3724 M 0432 652 115 E [email protected]
Anthony Harris Director M 0409 319 060 E [email protected]
Jeff Moxham Managing Director T 02 9249 3725 M 0413 838 339 E [email protected]
John Skufris Director M 0414 969 221 E [email protected] Jeremy Piggin Director M 0413 336 161 E [email protected]
raywhitecommercial.com raywhitecommercial.com
Brad Lord Director, Property Managment T 02 8016 3827 M 0439 594 121 E [email protected]
