CBD fringe suburbs draw office tenants with lower rents
The inner-Sydney suburbs of Pyrmont and Ultimo, where the best gross office rents are on average 43% lower than the nearby CBD, are likely to get an influx of big businesses over the next five years.
Pyrmont and Ultimo are identified as city fringe markets with the biggest percentage difference in office gross rents compared with the corresponding CBD market, according to analysis from CB Richard Ellis.
CBRE regional director of office services James Patterson expects the gap between Ultimo/Pyrmont rents and the Sydney CBD to be maintained, as rents in both areas are likely to rise in the next three to five years.
“On a national basis, some of the markets with older and smaller office stock, which have suffered higher vacancy rates recently, are those with the widest gap between CBD and city fringe rents,” he says.
The second-most discounted fringe market is Melbourne’s St Kilda Road, where office rents are 35% lower than the Melbourne CBD.
“St Kilda Road in Melbourne is a good example with a rental gap of 35% relative to the CBD. Anecdotal evidence suggests leasing enquiry is starting to pick up in St Kilda Road at present, and the lower rents there are certainly compelling,” Patterson says.
Overall, gross rents in the fringe areas immediately adjacent to CBDs are on average 32% lower than comparable space in the centre of the city.
This stark difference in rental rates is one of the compelling factors forcing businesses to consider moving to the fringe of CBDs or to split operations between a CBD head office while relocating other functions to city fringe locations, according to CBRE executive director of global research and consulting Kevin Stanley
Other contributing factors, Stanley says, are forecasts of CBD office rent rises of between 12% and 24% over the next three to five and a lack of sufficiently large and appropriate floor space.
“Looking back in history, the gap between CBD rents and the fringe markets never closes, although it may vary depending on the cycle,” Stanley says.
“With CBD rents forecast to rise, we expect this gap to be maintained or increase in the next three to five years, although the cost of building may also punch up rents for new buildings in fringe markets.”
The rental gap between the Brisbane city and fringe markets has remained fairly consistent and is quite large, despite a fall in rents over the last few years.
New buildings recently constructed in Breakfast Creek, Fortitude Valley and Bowen Hills are likely to be popular options for corporations and government departments, according to Stanley.
“Our analysis shows that, despite the downturn in Brisbane, more affordable rents can still be found in quality buildings on the fringe, even if those buildings need to be built specifically for the tenant,” he says.
In Adelaide, the gap between fringe and city is about 24%, lower than the national average of 32%, suggesting less financial benefit in being located outside of the city core.
In Perth, the strength of the economy has caused the higher rents of the CBD to spread to neighbouring locations, such as West Perth.
“With the business cycle now gearing up again, the same pressures are likely to re-emerge as vacancy rates fall in the CBD and rents start to rise both there and in West Perth, providing few options for tenants to escape high gross rentals,” says Stanley.