Sydney entry-level office market shows solid growth trend: HTW

Over the past 12 to 24 months, the entry-level Sydney CBD, CBD fringe and secondary office markets have experienced significant capital and rental growth amid a strong rental environment and low vacancy due to a number of factors, say valuation firm Herron Todd White in their latest office market review.

The withdrawal of office space for alternative uses or redevelopment, including Goldfields House at 1 Alfred Street, Fairfax House at 19 Pitt Street and the Department of Lands building at 23-33 Bridge Street has not been counterbalanced by entry-level gross supply within the Sydney CBD. 

Further, the construction of the Sydney Metro and residential redevelopments will place further pressure on supply and office rents in the Sydney CBD, adds HTW.

Secondary office precincts in areas such as the northern beaches suburbs of Belrose, Warriewood and Brookvale, together with CBD fringe precincts including Surry Hills, Ultimo and Pyrmont, have only recently shown signs of coming out of a long GFC-impacted period of subdued growth with values only recently matching those last seen in 2007. 

The entry level market in the CBD is generally characterised by smaller (10 to 75 square metres) strata title office stock within B and C grade office complexes such as 147 King Street and 368 Sussex Street with prices ranging from $200,000 (less than 100 square metres) to $500,000, reflecting market yields in the range of 5% to 7%, says HTW.

An example of such a sale was a commercial suite in Quay West, 111 Harrington Street, that recently sold for $330,000 through Noonan Property, Corelogic RP Data shows.

Similar office stock in secondary locations such as Belrose and Brookvale tends to sell in the $200,000 to $400,000 bracket reflecting yields in the range of 5.5% to 7.5%. 

“Belrose is an example of a suburb that had been significantly impacted by a pre-GFC glut of stock leading to oversupply with resultant subdued growth in capital values and market rents and high levels of vacancy,” said HTW.

Recently, an office space in Belrose changed hands for $220,000 through LJ Hooker.

The entry-level market is generally characterised by owner occupiers and sitting tenant purchasers driven by the low interest rate environment in which the cost of finance compares favourably with market rents, mum and dad investors looking for 5% plus yields in an environment where alternative property investments with sufficiently positive yield profiles are few and far between and superannuation fund investors. 

The strong residential market has added further fuel to the fire in providing significant equity to invest. 

To counterbalance this, the main threats to continued growth in entry-level office markets would include rising interest rates, a general downturn in the economy negatively impacting affordability and confidence and a reversal in Sydney’s residential property market. 

“Many commentators are reflecting that we are at the peak of the current property cycle, though time will tell,” conclude HTW.