Sydney Office Update December Leasing Magazine online | Page 13

SYDNEY OFFICE UPDATE | 11
Both AMP and Lend Lease will
experience the full legacy of this when
they develop their towers on Circular
Quay in 2020/21. Ok, so Barangaroo
was a negative, but that’s the only one.
Very few of us in the property
industry noticed the trend in the
US of technology firms growing up,
graduating from their suburban play
pens with slides and ball pools to adult
office buildings. In the USA, Amazon,
Google, Salesforce and myriad others
are crowding the major cities (2) . In
Sydney, the likes of Linked In, Apple,
Salesforce, Amazon, Expedia and
others have eschew Macquarie Park
for Martin Place (and nearby). No-one
predicted the “recentralisation” of the
IT industry, or the explosive growth of
the likes of Atlassian (3) .
In addition, no-one would have
predicted the emergence of a new
industry, Fintech, and its need to
be with or adjacent to its customer
base, the big four banks. Both the
Technology industry and the Banks
have exhibited a voracious appetite for
office space to feed “Fintech”. (4)
The residential development
boom across both Melbourne
and Sydney has led to traditional
suburban office locations such
as Chatswood, St Leonards,
Strathfield, Epping, Ashfield,
Burwood (Camberwell, Hawthorn,
Box Hill) being over-run by
residential development.
With residential sales rates on a “per
square metre” basis greatly exceeding
that which can be achieved for office,
no developer in their right mind would
develop office ahead of residential.
This furthered the phenomena of
recentralisation of office space users,
which shows no sign of stopping
given the fundamentals of on going
residential demand (5) .
At the same time all this was bouncing
around in the background, the NSW
government and to a lesser extent,
the Victorian government have
embarked upon a once in a generation
infrastructure program. In NSW this
measures more than $75 billion,
and counting (6) . The Sydney Light
Rail Project and the Metro alone are
accounting for a jobs growth boom
that would have the resources states
(Qld, WA and SA) drooling.
No models would have forecast that
11 A & B grade buildings in Sydney
would be demolished disgorging
60,000 square metres of office
space users on to our streets (7) .
Especially during a period where
every conceivable development site
(except a couple) was being re-zoned
to fulfil the exploding demand for hotel
rooms, serviced apartments and CBD
residential living (8) . Across Sydney
since 2014, more than 60 sites have
been approved for Hotel or Serviced
Apartment development.
And this has only compounded the
problem for UBS’ Evidence Lab.
Whereas old office buildings were
traditionally knocked down and
replaced with new office buildings, now
they are being replaced with expensive
higher yielding apartments (9). This has
forced development land prices to soar
to new levels, making the feasibility
for office development even more
challenging, unless of course, we can
justify higher rents (10) .
But higher development land prices
are just the beginning. The cost of
development is going to be further
impacted post 2018 when the
infrastructure projects move into the
development phase (11) . Try getting a
demolition contractor, a scaffolder
or a form worker in 2019/20/21!
We saw in Perth what happened to
construction prices when the mining
boom created a vacuum of resources
in the construction industry.
Construction price escalation rates
could rival rental growth!
And we haven’t even mentioned the
We Work phenomena and the rise of
“3rd spaces” (12) or the death of the
home office. All factors few of us let
alone the UBS Evidence Lab could
predict.
During the depths of the GFC,
we couldn’t see an end to the
destruction of the real estate
industry, but it recovered.
Conversely, during a boom, it is
difficult to predict when it will end.
Sydney’s explosive 20% per annum
rental growth over the last 2 years may
not be sustainable, but calling an end
to the cycle in 2019 may be a little
premature.
In calendar year 2018, there is only
one small building being completed.
In 2019, another single building. Then
in 2020, another single building, then
its just a few refurbished projects
before Lend Lease completes its
latest project in Circular Quay. This
constrained supply cycle will persist
until the completion of the Metro Over
Station Developments in 2023/24,
which means rental growth is likely to
continue through the early 2020’s. And
the more prolonged this rental cycle
persists, the greater the pressure on
incentives.
Ordinarily, I would sit up and take
notice of a UBS forecast, especially one
using the rigour of the Evidence Lab,
but this is not an ordinary cycle, this
time it really is different.
MICHAEL COOK
Group Executive
Investa Property Group
October 25, 2017