Commercial strata property - who cares?

After years of price stagnation, the continued lack of supply and pent up demand has pushed commercial strata rates to record highs in the second half of 2018 across the North Shore of Sydney.

Whilst some baulked at the prediction that rates would exceed $6000/sqm back in February 2016, others were buoyed by strong underlying fundamentals, spearheaded by the North Sydney CBD’s renaissance.

Colliers International’s research indicates that in the 12 months to November 2018, the total transaction volume for the North Shore’s commercial and retail strata market reduced by an incredible 70.1 per cent from the previous year. Supply is low, demand is high – this is reflected in rates now being achieved. As at Q4 2018, capital values in North Sydney are now breaking $9,000/sqm, an estimated 45.6 per cent increase from 2014 pricing.

The recent off-market sale of a 174sqm strata suite in 71 Walker Street, North Sydney validates this. The property was recently sold to an owner occupier, who permitted the provision of a short-term leaseback arrangement to the vendor. The sale price reflected a rate of $9,080/sqm, a record for the building.

In the latest Property Council of Australia Office Market report, the total vacancy factor for North Sydney's D-grade buildings fell 1.5 points to 2.5 per cent, the lowest level since January 2005. This is expected to filter through to neighbouring North Shore submarkets in the short term. 

But how long will prices remain high and vacancy rates remain low? With the supply of approximately 193,419sqm of commercial stock forecast for the North Sydney CBD over the next few years, backfill recycling is widely expected to lead to increase in vacancy rates for older strata buildings as tenants seek to upgrade. As such, it is predicted an increased number of investors will seek to divest in 2019, especially given the uncertain political environment.

So, who cares?

Owner occupier certainly seem to. A trend has emerged whereby a favourable swing towards owner occupiers has been observed. As commercial stock continues to be withdrawn for residential development throughout Sydney’s North, displaced owner occupiers are naturally migrating towards the major centres, causing vacant strata properties that come to market to be hotly contested.

As B and C-grade effective rents continue to rise and incentives continue to fall, the desire to ‘buy to occupy’ seems to far outweigh leasing alternatives. Offices are generally now worth more vacant to prospective owner occupiers than they are as a tenanted investment to investors.

Surprisingly though, it seems development groups seem to care the most about strata at present. Whilst the majority of commercial strata buildings generally don’t tend to offer modern end-of-trip facilities, an onsite building manager, or even a NABERS rating, they do tend to offer development upside. The current amalgamation sale campaign for 68 Alfred Street is an example of this. 

As the market tops out, and dated commercial strata buildings reach the end of their life cycle, a multitude of strata amalgamations have begun to emerge as owners seek to capitalise on development group’s insatiable demand for large commercial and residential projects in prime Lower North Shore locations.

Overall, expect to see the ‘care factor’ for commercial strata property to remain strong in the first half of 2019, with transaction volumes predicted to increase as owners seek to capitalise on a shifting market.
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