The popularity of prime office space and plush living are allowing large organisations and private developers to blast through strengthening headwinds as they carve a path to brighter times. Several such as Fortis, Deicorp and listed company Charter Hall are forging ahead with billions of dollars’ worth of developments in Sydney and Melbourne despite CBD and urban office vacancy rates remaining elevated and smaller construction firms continuing to collapse under the weight of current economic pressures.
Buoying these large-scale projects is the “flight to quality” which offset the most recent hike in office vacancy rates: while latest analysis from Property Council of Australia saw the national office vacancy rate rise to 14.8%, this was due not only to hybrid work but the rapidly increasing tendency for companies to shun older premises in preference for the most modern of slick new offices. Prime space in the office sectors of almost every major city and urban hub currently experiencing the healthiest office occupancy, the Property Council data showing secondary CBD offices nationally dealing with higher vacancy rates of 14.5% compared to 12.9% for their freshly built A-grade counterparts.
Good news
Positive indicators for the sector include the Property Council forecast for robust demand for higher-quality and better located offices to continue. Furthermore, CBRE research found overall physical CBD occupancy rates improved to 70% of pre-COVID levels in the third quarter of last year, a 55% jump from a year earlier.
Even in Sydney, the only city besides Adelaide to see prime vacancy rates rise above those of lower quality assets, occupancy in the city’s core premium buildings remains within a whisker of 100%. Sydney leasing experts attribute the latest result for the NSW capital’s office sector to the performance of a handful of office towers rather than the entire A-grade office market. Companies seeking a bargain lease and better deal overall will further find that incentives will stay in place, the only way many Sydney CBD landlords will be able to lure tenants, especially those in the city’s western corridor, midtown and southern CBD.
Onward and upward
On the development side, private group Fortis is forging ahead with recently lodged plans for over half a billion dollars’ worth of commercial, luxury residential and mixed-use towers. Run by real estate financier and investment manager Pallas Group, Fortis has the green light for an $80 million commercial building in Manly on Sydney’s Northern Beaches plus a landmark $170 million precinct in Double Bay in the city’s east, and in Richmond, Melbourne, the second tower of the $320 million Wiltshire House. Plans for this second tower have switched from commercial to boutique architect-designed residential apartments since the original lodgement, due to the fast-expanding market for housing in Melbourne’s inner suburbs.
Deicorp also has the thumbs up for an enormous project in Parramatta in Sydney’s west. Tagged the Melrose Central project, it will lead to the creation of a new town centre within the burgeoning suburb, plus 500 apartments and a large retail complex. Work recently started on the ambitious venture which is scheduled for 2027 completion and will encompass a station on the Parramatta Light rail Stage 2 route.
Another recent commencement is Charter Hall’s $1.8 billion Chifley South development. The Sydney CBD project is a prime office tower where, in a positive sign, more than half the space is already leased to law firm Gilbert + Tobin, investment bank UBS and Charter Hall.
Interesting times
This level of activity by major players is making for one of the most interesting periods in the evolution of Sydney’s commercial market according to Peter Vines, Managing Director at Ray White Commercial Western Sydney.
“This is especially so due to the current commercial headwinds,” Mr Vines said. “There is no doubt the proactive stance of private developers right now is a strong indication of their faith in forecast future demand - despite the fact they have to face economic challenges today.
“The construction progress of Charter Hall’s Chifley South Towers for instance is a perfect example of private developers investing in their keen understanding of future demand – and it’s certainly not the only project that is firing up this year.”
Mr Vines said another example of private developers “planning for a change in tides” was the investment via Ray White by Freecity in a property adjoining the Rouse Hill Town Centre in the western suburb’s Tempus Street.
“The private developer is taking a proactive stance in providing the rapidly growing community in Sydney's northwest with what the market is demanding,” Mr Vines said. “
“This is for the Tempus Street's development to incorporate innovative urban planning with the aim of merging work, leisure and daily community necessities like cafes and such. Whilst this isn’t DA-approved just yet, the plan is certainly in play.”
On the purely residential side, Mr Vines’ agency recently sold an Ermington site at 47-49 Fitzgerald Road. The property attracted great interest and was eventually bought by a private developer who is now preparing to break ground on an approved project for three sets of duplexes.
“This property cemented the value of diverse residential developments from developers, especially as prices for completed properties continue to rise,” Mr Vines said.