Increased Residential Development To Impact Office Supply

The increased appetite for residential development in Australia metropolitan has created an imminent shortage of office development sites.

According to a new

Colliers International report, Competitive Rivalry: Office Versus Residential in Metro Markets, competition for assets is heating up in most metropolitan markets as increased residential development impacts upon new office supply.

John Marasco, Colliers International Managing Director of Capital Markets & Investment Services, said the land previously earmarked for office developments has been purchased for residential use land.  

“This is increasing competitive pressure on land values across metropolitan office markets, at the same time as demand from investors for office investments continues,” Mr Marasco said.

“Zoned sites and existing commercial buildings are being converted to residential at an increasing rate, and in metropolitan markets this had led to minimal new development of office buildings. This increased competition has resulted in a tightening in yields for most eastern seaboard markets, following the similar trend witnessed in CBD office markets on the east coast.”

Zoning changes at Sydney Olympic Park will allow for more mixed use development. The transitioning of this market towards a more mixed use, residential focus through the Sydney Olympic Park Masterplan and the Carter Street UAP.

A 1,100 square metre site at 73-77 Wellington Street in Collingwood, originally held by the Smith Family of Australia, was converted into residential apartments by Pace Development Group to meet the rising demand of inner city living.
Related Article: The Smith Family’s Collingwood Headquarters Sells To Local Developer

Kate Gray, Colliers International Associate Director of Research, said 80 per cent of people in white collar occupations being employed outside a CBD location, when metropolitan office markets were the engine room of employment in all capital cities.

“However, with population growth and limited land supply, residential use is increasingly competing with commercial projects for development sites,” Ms Gray said.

“In recent years there are several examples of residential developers purchasing secondary commercial sites, both office and industrial, with medium term plans to redevelop as residential.

“Population growth is expected to be significant over the next few decades with Melbourne planning for 1.6 million new dwellings by 2051, and Sydney planning for 545,000 new dwellings by 2031.”

Nationally, new supply to be delivered to metropolitan markets during 2014 represents 124,996 square metres of new office space. There is a further 100,963 square metres of space forecast to complete in 2015. Victoria and Queensland are driving the supply pipeline, accounting for 37.6 per cent and 33.6 per cent of the supply through 2014.

Mr Marasco said there was growing demand from investors, particularly institutional, for A Grade metropolitan office assets.

“Institutional investors remain highly active in the metropolitan office markets, accounting for 69 per cent of total sales volume during the year,” he said.

“Compared to last year, there is a significant shift towards domestic investment in metro markets, in particular domestic institutional investment. Last year, offshore investment in metro markets was driving the lion’s share of investment.”

“Metro office is becoming increasingly sought after as it provides attractive yields and in some cases development upside,” Mr Marasco said.

“Hot spots such as Parramatta

 in New South Wales, Fortitude

 Valley

 in Queensland and the soon-to-be redeveloped Chadstone commercial precinct in Victoria, are particularly sought-after.

“And while the amount of funds available for investment in property remains high, it is limited by the amount of stock available for sale in the metro markets.”

The most significant metropolitan office sales this year were part of the portfolio sale of the Commonwealth Property Fund to the joint venture of Dexus and CPP Board. This sale alone resulted in $291.45 million of metro sales during this year.

The report found that on the leasing side, vacancy has fallen slightly across most metropolitan markets, with the exception of the Adelaide market. Vacancy in Brisbane, Sydney and Adelaide remains above or close to 10 per cent.

Net absorption is positive across most markets, but demand has been particularly strong in the Melbourne and Brisbane.