Sydney office market still hasn't peaked: HTW Commercial

The Sydney CBD office market has seen several big transactions so far in 2019 in both strata and freehold spaces plus it still has room to grow, according to the latest report from property valuation firm Herron Todd White.

The most significant transaction, at $800 million, was Dexus and its unlisted Dexus Wholesale Property Fund’s purchase of GPT Group’s halfshare in the MLC Centre at 19-29 Martin Place.

Dexus already owned fifty per cent of the property prior to this transaction and now with full control of the property, the transaction cements them as the largest office landlord in Australia.

At 67 storeys, the MLC Centre was for many years the tallest office building in the country and the site remains one of the largest freehold sites within the Sydney CBD.

The valuation firm found, On a much smaller scale, the strata office market has seen a number of strong results, continuing to push square metre rates to unprecedented levels.

One such example is Noonan Property’s sale of Level 10 (398 square metres) of Heritage listed Culwalla Chambers, at 67-69 Castlereagh Street, achieved $6.395 million at auction, reflecting $16,068 per square metre of lettable area.

The report stated, "a result such as this shows the continued strength of the office strata market, however the number of transactions does appear to have slowed."

"On the leasing side, while there have been a number of large leases across the CBD, it is particularly worth noting the continued and growing presence of WeWork, who have recently signed a 12-year lease agreement over 11,000 square metres of office space across ten floors at 320 Pitt Street."

"It’s unclear what the impact of co-working space will have on the wider market, however it does present new options for tenants looking for more flexible options," the report noted

Vacancy rates remain very low across the CBD, reported at 3.7% as at July 2019 (PCA), down from 4.1% in January.

Low vacancy is driven by low supply which in turn causes above average rental growth.

The valuers said, "supply was particularly hampered during the first half of 2019 by withdrawals outweighing supply, reflecting -23,400 square metres of net supply (PCA)."

"A total of 32,039 square metres of office accommodation across eight sites was taken offline in the first half of 2019. Five of these sites are situated in the city core precinct."

"New approvals for office accommodation are low across the CBD, with approvals being generally focused on residential and hotel redevelopment rather than traditional office space."

"As an example, there are currently more than 20 hotels either under construction or approved for redevelopment."

"That said, there is new office supply on the horizon, however the majority of this will not come online until 2020 or 2021.

"For the time being, CBD rents are anticipated to remain strong, although will likely moderate, until supply catches up to demand and values are likely to remain strong for good quality stock," the valuers concluded.