Office markets set to hit new heights

The sale by Blackstone of its share of Westpac's headquarters at 275 Kent Street, Sydney, for a rumoured $800 million, marks the start of what is forecast to be a very busy year for the national office markets.

With the low vacancies, partcularly along the eastern seaboard capital cities and demand high from a range of new and traditional businesses, rents will also rise, according to agents.

Next Thursday, February 1, the Property Council of Australia will release its Office Market reports for the end of December, which are tipped to show a decline in official vacancy rates across the three main markets of Sydney, Melbourne and Brisbane.

According to CBRE senior director, capital markets, Neva Courts, Melbourne's strong fundamentals were propelling continued interest in office investment opportunities from both local and offshore investors.

This had driven a continued tightening in investment yields, which had sharpened five basis points in the fourth quarter of 2017 and 50 basis points over the 2017 year to reach a new benchmark of 5 per cent.

''Forecasts of continued strong rental growth have underpinned investor appetite for core Melbourne assets as highlighted by a series of significant transactions in 2017 fourth quarter,'' Ms Courts said.

''Among them were the three assets sold by TrustCapital Advisors, which received over 30 bids and set pricing records.''

Ms Courts said that the $100 million to $200 million price bracket was particularly competitive.

"Numerous underbidders from 2017 campaigns are yet to get set and many local funds remain underweight to Melbourne. This is expected to underpin significant interest in any available opportunities, with Melbourne still perceived to be good value relative to Sydney by both local and offshore investors," Ms Courts said.

One of the larger developments in Melbourne is the Lendlease' third and final commercial tower at Melbourne Quarter.

Named Two Melbourne Quarter, the 25-storey office tower at 697 Collins Street, will feature 40,000 sqm of office space to accommodate about 4500 workers and adjoining retail space.

Lendlease managing director urban regeneration and infrastructure development Mak Menhinnitt, said planning approval for the Woods Bagot-designed tower coincided with a period of strong demand for ''high quality'' office space in the Melbourne CBD.

Sydney's property market remains the national front winner with unprecedented investment in infrastructure and development across most sectors.

According to Savills Research, Sydney's standout performance is fundamentally underpinned by a material restriction on development potential owing to the landlocked nature of the CBD.

As such, the investment outlook for Sydney is largely dictated by the supply side into the short term, which is severely constrained as further withdrawals for government infrastructure projects and upcoming developments proceed.

This geographic supply hindrance provides the market with lower supply-led downside risk, continues to attract both local and offshore investment, drives rental growth, and justifies tighter return hurdles. This environment has resulted in continued yield compression.

The strong local and off-shore investment demand is expected to continue for all assets due to the potential to unlock positive rental reversion, secure a trophy asset in a transparent market.

Savills Research anticipate continued rental growth as tight leasing market conditions drive benchmarks further through to 2019-21.

CBRE's data points to another bumper year for office sales, with last year's national tally eclipsing the $15.37 billion in deals achieved in 2016 and tracking well above the 10-year annual average of $10.9 billion.

CBRE's NSW state director, capital markets, James Parry said a strong uplift in Sydney office rents had underpinned continued interest in core and value-add investment opportunities.

"Rental growth in Sydney has outperformed the country over the past two years and this has driven strong demand and sharper pricing," Mr Parry said.

"This was particularly in evident in the fourth qurater when $1.6 billion in Sydney office transactions were concluded, including 231 Elizabeth Street for $350 million, 130 Pitt Street for $229 million and 1 Castlereagh Street for $218 million.

Mr Parry said that foreign purchasers represented 60 per cent of the total transaction value and purchased five of the six sales over $100 million.

Simon Hunt, Colliers International managing director of office leasing said in the Sydney CBD, Colliers International recorded a 6 per cent increase in demand for office space to 185,555 sqm in the fourth quarter of 2017, up from 174,330 sqm in the same period of 2016.

The Melbourne CBD saw a slight decrease of 9 per cent overall in the fourth quarter of 2017, but recorded a 46 per cent increase in demand for small office suites under 1,000 sqm.

This story Office markets set to hit new heights first appeared on The Sydney Morning Herald.