The commercial capital of Australia, Sydney has always been the most sought-after destination for entrepreneurs and investors. High-rise commercial properties have covered its skyline for the longest time and enticed corporate houses and financial institutions. The A-grade properties have been the centre of attraction for off-shore investors as well as high-net-worth individuals.
Several developers have been working on towering structures that will revolutionise office properties. However, the recent turn of events has put a brake on the progress of commercial real estate in Sydney. With the COVID-19 pandemic creating a world-wide disruption, things have changed for the office property sector.
While industrial properties are witnessing a surge due to the increased demand for online shopping, the offices and retail shops are experiencing a downward trend. The social distancing norms have made a severe impact on the industry. Here is what is happening in the Sydney office sector right now.
Rental Fall In Prime Office Markets of Sydney
Most of the companies operating in Sydney have asked their employees to work from home to avoid the spread of the virus. Only a handful of businesses have been operating from the office premises currently as the digital medium has allowed them to coordinate and work online. While the restrictions have started to ease, the workforce is not willing to come back to offices.
The management is also not in a hurry to put them back on their workstations since they have been proving to be more productive while working remotely. Thus several companies are opting to move out of the big office set-ups to small ones. It is also helping them to cut costs as they have been dealing with declining sales during the pandemic.
Some of the businesses have laid-off a part of the workforce to deal with the ongoing financial crisis. Thus the demand for premium office properties is going down. Additionally, several small businesses have been badly hit by the current economic situation and shutdown. They have to either shut shop or are planning to move to cheaper markets to save money.
Thus the city fringe has been gaining all the attention and offices in Parramatta, North Sydney and South Sydney are experiencing a surge in the demand for office units. Consequently, the vacancy rates have risen and led to the downfall of rental prices.
During the June quarter, landlords offered huge incentives to retain the tenants and attract new ones. However, the rise in vacancy rates has led to a decrease in rental income. The NSW government has also extended support to commercial tenants and landlords by offering $440 million in land tax relief which will be divided equally between commercial and residential sectors.
A Steep Jump In Vacancy Rates
The financial crises created by the COVID-19 pandemic has moved people away from the CBD, and the vacancy rates have increased at a fast pace. After witnessing a record-low of 3% in 2019, the prime office market vacancy rates rose once again to 5% in the beginning of 2020. The month of June brought the record high of 16.2% across the city for the housing sector due to less number of tourists and international students visiting the city.
Palm Beach which is famous for being the hub of millionaires has been facing a 16.7% vacancy rate. Thus the residential vacancy rate is trending at an all-time high in the current circumstances. The office rents have been affected due to the increase in the sub-lease space, which has come into the market as businesses are downsizing and unemployment is rising.
The incentives have grown from 21% to 27% in the last quarter and include options like rent-free periods and inclusion of cost of fit-out. With the month of June looking brighter for the NSW economy and the restrictions being eased by the government, it appears that the demand for office spaces will rise once again.
Also, it will be difficult for companies to operate out of small units as the employees need to follow social distancing while working.
Rental Forecast For The Coming Months
According to predictions made by experts, the premium A-grade office properties will witness a fall of 4.1% in the rental yield over the next one year. The demand from tenants belonging to the information, media and technology industries helped in increasing the rental income for landlords during the beginning of 2019.
However, with a changed economic scenario, the demand is going to be coming from the same sector and some financial institutions. Since the rents will be going down, it will be a favourable time for tenants as they have been long dealing with the challenge of rising office rents in Sydney.
Landlords have also changed their stand due to the COVID-19 pandemic and are aware of the fact that several businesses are suffering. Thus they have shown a keenness to renegotiate the terms of their contracts to adjust lower rents.
Some of the wary tenants have stayed away from going through with the transactions that were supposed to take place this year. Several businesses, which had planned to expand their office space to hire more employees and grow their business, will not be taking their plans forward for apparent reasons. Therefore there will be a rise in the sublease vacancy.
Looking At The Brighter Side
Although the situation looks negative for the office property market in Sydney currently, various veterans are confident that the slow supply and low rents will help in getting it back on track. Others property experts have also suggested that it is too early to think about a downturn in the industry as the sector was going from strength to strength before the arrival of the coronavirus.
Sydney will also be insulated from a sudden downfall as the line-up for supply is weak until 2021. Although the government is trying to push forward the development work of properties that are in the pipeline, most of the projects will not hit the market too soon.
The projects are also getting postponed because of the specific demands for high-tech and modern offices in Sydney. Most of the property managers are optimistic that the city will be performing like before pretty soon since it has been the hub of commercial activity and its offices are second to none.
Most experts are confident that falling office rents will rise as soon as the conditions get back to normal. Thus if you have been waiting for low rents and high incentives to lease commercial real estate in Sydney, then it is the perfect time to get into the thriving market.
Sophie Barrett is an experienced real estate marketing professional with a specialisation in commercial property market. She has a Masters degree in marketing from the esteemed Melbourne Business School and has several property management certificates to her credit. Her shrewd marketing policies and business acumen have led to the most rewarding property deals in the major capital cities of Melbourne, Sydney and Perth. She is a popular name in the real estate market and has been serving the industry for almost two decades now. CommercialProperty2Sell is proud to partner with her for some astute discussions and advice on the booming sector.
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