After years of price stagnation, dwindling supply and pent up owner occupier demand, commercial strata office rates have been pushed to record highs across Australia’s eastern seaboard, particularly in Sydney and Melbourne.
With consistent year on year increase in office rents throughout Sydney and Melbourne and a record low interest rate environment, Colliers have been inundated with buyer demand from owner occupiers looking to acquire strata titled commercial assets. We have seen considerable growth in capital values as they have near doubled since 2015, in line with the growth of commercial freehold assets.
A historic focus on alternative uses including residential and hotel development has created a lack of new strata office supply with the scarcity factor having a significant impact on the increase in price. Tom Appleby and Chris Ling from Colliers Investment Services team have been calling on developers to strongly consider commercial strata developments as highest and best use.
With backfill recycling in existing commercial freeholds expected to result in an increase in vacancy, there is a strong opportunity for landlords to capitalise on significant demand, from both owner occupiers and private investors potentially look to strata down their asset/s.
What does this look like for Sydney?
The recent reform to NSW strata laws, in particular the introduction of the ‘75% rule’ (whereby at least 75% of lots within a strata scheme can opt to collectively sell), has seen countless commercial strata buildings being ‘amalgamated’ and sold to developers. Tom Appleby, Associate Director, Investment Services specialises in facilitating multiple collective sales, including the recent on-market sale of 68 Alfred Street Milsons Point.
Strata office buildings that have reached the end of their life cycle, particularly those with favorable planning controls in prime locations, are being aggressively targeted by savvy development groups. Recent and ongoing amalgamations have reduced the availability of existing strata office accommodation.
With a significant supply of new freehold office stock approaching, Colliers expects vacancy rates to rise in dated commercial freeholds, and such, increase the opportunity for owners to strata down buildings. The appetite from owner-occupiers and private investors is healthy.
In Sydney’s North, approximately 60,000sqm of commercial strata stock is slated to be withdrawn from the market in the coming years; a new strata office development would be wholeheartedly embraced and absorbed by the deep pool of demand.
Sold for $48,000,000
How is this reflected in Melbourne?
The Melbourne office market has similarly seen significant rental and capital growth since 2015 with a strong surge of owner occupiers and investors looking to capitalise. Compared to other major cities across the eastern seaboard, Melbourne has had more supply of commercial strata projects including Lendlease’s Lifestyle Workings at 838 Collins Street and most recently UEM Sunrises’ development at 224 La Trobe Street. However, this supply has not kept up with the considerable demand which has consistently seen record prices being achieved.
Sold for $33,000,000
Within the past 12 months, Chris Ling, Associate Director, Investment Services has observed a strong uptake in the number of new commercial strata buildings being built, as land owners and developers look to investigate the highest and best use for the sites. With considerable supply of hotel and residential accommodation in the Melbourne CBD strata office projects offer the highest value due to the record rates being achieved in the market. This new solution is set to benefit Vendors and their sites, enabling them to extract the most value from the development.
For the developer, the benefits of strata office developments include; lower build costs, lower settlement risk and unrestricted buyer demand throughout Asia and other offshore destinations.
Within the past 12 months, Chris Ling, Associate Director, Investment Services has observed a strong uptake in the number of new commercial strata buildings being built, as land owners and developers look to investigate the highest and best use for the sites. With considerable supply of hotel and residential accommodation in the Melbourne CBD strata office projects offer the highest value due to the record rates being achieved in the market. This new solution is set to benefit Vendors and their sites, enabling them to extract the most value from the development.
For the developer, the benefits of strata office developments include; lower build costs, lower settlement risk and unrestricted buyer demand throughout Asia and other offshore destinations.
To conclude
It is without doubt that, the lack of available development sites, as well as a focus on residential and hotel development, has created a shortage in supply of new commercial strata development especially in Victoria and New South Wales. Strata reforms in New South Wales have further reduced the available strata accommodation providing an opportunity for developers and land owners to capitalise on the buyer demand that has been evident throughout Australia’s eastern seaboard.
