Sydney office market reaches fever pitch

Sydney’s red-hot office market has posted enormous growth, with capital values surging a third in the first eight months of the year.

Investors vying for space have helped push up the figure.

Tenants facing huge rental hikes are turning to co-working spaces as they feel the squeeze.

New data from Ray White Commercial shows Sydney’s CBD yielded a capital value rate of $10,127 per sqm — up 33% over the last year. It comes off 22.1% growth over the previous 12 months.

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A large pool of eager investors has been vying for the limited number of strata premises available with $38.9 million in transactions recorded between January and August.

The city’s core accounted for 60.3% of sales followed by the western corridor and midtown attributing 17.6% and 14.9% respectively.

Volumes are down.

“Historically there has been a busier end to the year but based on current results these sales levels are unlikely to reach the $154 million recorded last year,” Ray White Commercial head of research Vanessa Rader says.

The average price paid per strata premises averaged more than $1 million. Sydney’s core was the standout for value improvement, surging 45.7% on last year to $11,711 per sqm.
The August sale of 43sqm at 37 Bligh St — which fetched $641,000 — had the precinct’s highest value at $14,907 per sqm.

The market remains “firmly” on the international radar, the research notes.

Midtown recorded a 10.9% improvement to $8955 per sqm. The western corridor had 19.9% growth to $8737 per sqm. There were minimal sales in the southern precinct but the upward trend continued, growing 18.3% to $7214 per sqm.

Limited stock and a growing investment pool of buyers are tipped to further boost values.

Demand held office vacancies stable at 5.9%.

“Affordability is a big issue for many tenants in the CBD faced with huge rental hikes and limited incentive, many turning to co-working spaces or the quest to purchase strata stock which has now seen an unprecedented lift in value rendering this also unaffordable to many,” Ray White Commercial (Office Sydney Leasing) director Christian Minards says.

Ray White’s research notes there is further scope for vacancies to reduce by the end of the year — noting much of the near 50,000 sqm of mostly refurbished additional stock to be added over the next six months has already been committed.

But it says further ahead completion of several buildings under construction or in site works could result in a turnaround in the low vacancy rate.

Projects to unlock extra space include 151 Clarence St (22,000sqm), 10 Carrington St (56,000sqm) and 60 Martin Pl (38,600sqm), which are all yet to secure commitment.

Ray White’s research notes there is further scope for vacancies to reduce by the end of the year

The total stock level in Sydney’s CBD office market now stands at 5,086,316 sqm.

The market remains “firmly” on the international radar, the research notes.

Prime investment yields average 4.85% and secondary assets 6.5% but the gap is narrowing.

Ray White Commercial (Office Sydney Leasing) property analyst Nicholas Yeoh says: “Strata stock has also been highly sought after by both investors and owner-occupiers looking to shelter from the ongoing rental increases.”

“There have been few investor transactions for this market in 2017, attracting new highs in capital values with yields as low as 5%,’’ Mr Yeoh says.