Investment into small office assets grows

The office market has been one of the most disrupted due to COVID-19 lockdowns forcing staff out of the CBDs to work from home. While some states embraced the return to work quickly, it has been a longer grind for markets such as Sydney who are now faced with businesses developing hybrid working models, sparking the question: What will the future office look like?

Despite the changing accommodation needs by many businesses, this has not put a dampener on demand to purchase office assets. A combination of low interest rates, high equity levels, lending availability, and the desire to diversify has seen a large increase in investment demand by private buyers, owner occupiers, and self-managed super funds into affordable office offerings.

Premium and A grade properties have been actively pursued by both domestic and offshore groups who see the long-term confidence and value in these trophy assets despite the current uncertainty. The flight to quality has been high with enquiry and take up elevated for these assets given the competitive terms and incentives on offer
together with their flexible working spaces aligned with changing attitudes towards office space. This has resulted in B grade assets growing their vacancies to the highest of all quality grades in Sydney at 11.3 per cent. So, what will this mean for secondary grade assets going forward?

While larger tenants may be gravitating towards this type of accommodation, smaller businesses have continued to seek out traditional office options driving investment into the smaller strata end of the market. Sydney CBD strata sales volumes grew to over $320million in 2021, a 120 per cent increase compared to 2020, with leased assets hotly contested by these private buyers pushing yields well below 5.5 per cent.

Despite effective rental growth being down, we have seen some businesses wanting more control across their future accommodation needs. Owner-occupiers purchasing via their self-managed super funds has increased, resulting in strong levels of growth in capital values, up 6.01 per cent on the year to $14,311/sqm.

The strata office market has historically offered small accommodation options in the sub 100sqm size range, this offered affordability for the private investor who had dominated investment, however, over the last year we have seen the average size grow to 147sqm which is indicative of a greater owner-occupier purchaser profile. As such, there has been a new benchmark set for average deal size to $2.1million. While this is well up on prior years, it still represents affordability for investors particularly those seeking their first foray into commercial property.

Over the first two months of 2022, we have not seen this investment appetite wane with over $10million changing hands with average values moving closer to $14,700/sqm. The current uncertainty in the office marketplace and the staff’s slow return to the CBD has not deterred buyers in this price range who continue their quest to secure commercial assets either as investment or for their own occupation.

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