Competitive pressure on the rise in metro office markets
Colliers International report finds looming site shortage as residential appetite grows.An imminent shortage of office development sites resulting from an increased appetite for residential development is driving competition in Australia’s metropolitan office markets.
According to a new Colliers International report, Competitive Rivalry: Office Versus Residential in Metro Markets, competition for assets is heating up in most metropolitan markets as increased residential development impacts upon new office supply.
John Marasco, Colliers International Managing Director of Capital Markets & Investment Services, said developers were increasingly buying and developing for residential use land previously earmarked for office development.
“This is increasing competitive pressure on land values across metropolitan office markets, at the same time as demand from investors for office investments continues,” Mr Marasco said.
“Zoned sites and existing commercial buildings are being converted to residential at an increasing rate, and in metropolitan markets this had led to minimal new development of office buildings. This increased competition has resulted in a tightening in yields for most eastern seaboard markets, following the similar trend witnessed in CBD office markets on the east coast.”
At Sydney Olympic Park, zoning changes will allow for more mixed use development. This market is transitioning towards a more mixed use, residential focus through the Sydney Olympic Park Masterplan and the Carter Street UAP.
In Melbourne, a 1,100 sq m site at 73-77 Wellington Street in Collingwood, originally held by the Smith Family of Australia, was sold to Pace Development Group and will now be converted to residential apartments to meet rising inner city demand for housing.
Kate Gray, Colliers International Associate Director of Research, said metropolitan office markets were the engine room of employment in all capital cities, with more than 80 per cent of people in white collar occupations being employed outside a CBD location.
“However, with population growth and limited land supply, residential use is increasingly competing with commercial projects for development sites,” Ms Gray said. “In recent years there are several examples of residential developers purchasing secondary commercial sites, both office and industrial, with medium term plans to redevelop as residential.
Nationally, new supply to be delivered to metropolitan markets during 2014 represents 124,996sq m of new office space. There is a further 100,963sq m of space forecast to complete in 2015. Victoria and Queensland are driving the supply pipeline, accounting for 37.6 per cent and 33.6 per cent of the supply through 2014.
Mr Marasco said there was growing demand from investors, particularly institutional, for A Grade metropolitan office assets.
“Institutional investors remain highly active in the metropolitan office markets, accounting for 69 per cent of total sales volume during the year,” he said. “Compared to last year, there is a significant shift towards domestic investment in metro markets, in particular domestic institutional investment. Last year, offshore investment in metro markets was driving the lion’s share of investment.”
Late last week, GPT Group announced plans to list a $376million suburban office portfolio by the end of October, in line with its strategy to boost earnings from funds management. With expectations of cash rates remaining low, the expected dividend yield of 7.4 per cent was expected to catch investors’ attention. The $255million capital raising for the GPT Metro Office Fund had already been soft-sounded among existing investors, where responses were positive. GPT Group itself will subscribe to at least 10 per cent.
“Metro office is becoming increasingly sought after as it provides attractive yields and in some cases development upside,” Mr Marasco said. “Hot spots such as Parramatta in New South Wales, Fortitude Valley in Queensland and the soon-to-be redeveloped Chadstone commercial precinct in Victoria, are particularly sought-after.
“And while the amount of funds available for investment in property remains high, it is limited by the amount of stock available for sale in the metro markets.”
The most significant metropolitan office sales this year were part of the portfolio sale of the Commonwealth Property Fund to the joint venture of Dexus and CPP Board. Included in this national portfolio sale were 10 metro assets in Sydney, two assets in Melbourne and two in Perth. This sale alone resulted in $291.45million of metro sales during this year.
The report found that on the leasing side, vacancy has fallen slightly across most metropolitan markets, with the exception of the Adelaide market. Vacancy in Brisbane, Sydney and Adelaide remains above or close to 10 per cent. Net absorption is positive across most markets, but demand has been particularly strong in the Melbourne and Brisbane.