Blog - Commercial

01 May 2018

WHAT TO CONSIDER WHEN BUYING COMMERCIAL OFFICE SPACE IN SYDNEY

We live in exciting times with multiple opportunities for investors in commercial office space.

Population Australia estimates that by June this year, the number of people living in the Sydney CBD and suburbs will have ballooned out to 5.64 million. And projections suggest that growth will continue on a steady upwards trajectory.

In the 1989 movie, Field of Dreams, actor Kevin Costner hears a voice saying that if he “builds it, they will come”. The “it” in this case is a baseball pitch in the middle of his Iowa cornfield.

But when it comes to investing in office property, the opposite is true – first, you wait for the people to come, and then you build the commercial office space in which they need to work.

According to the Australian Bureau of Statistics, more than 68 per cent of Sydney’s labour force works in offices. So as the population grows, so too, will the need for more commercial office space.

If you’re looking to invest in commercial property, here’s what to consider

Where are the Best Office Property Investment Opportunities in Sydney?

Commercial property buildings in the heart of Sydney

In March 2018, the New South Wales Government released its infrastructure strategy for 2018 to 2038, giving property investors further clues as to where opportunities are likely to lie in future.

The Government’s A Metropolis of Three Cities plan would have informed the overarching strategy. This plan aims to deliver jobs that are less than a 30-minute commute for Sydney’s workers, and it focusses on reinforcing infrastructure in three precincts:

  • The Western Parkland City
  • The Central River City
  • The Eastern Harbour City

As an investor, these are the three districts to watch.

Naturally, there is little justification for investing in commercial office space that isn’t close to good public transport, especially if there is minimal off-street parking for employees. Districts that are already serviced generously by public transport can command premium rents.

New Infrastructure Projects a Boon for Commercial Office Space Investors in Sydney

The light rail, a new infrastructure project in Sydney

The next-best opportunities are in areas that are about to get a transport infrastructure boost, such as is promised by the Parramatta Light Rail project. According to the Government: “By 2023, the route will link Parramatta’s CBD and train station to the Westmead Health precinct, Parramatta North Urban Transformation Program … the Camellia Precinct … the private and social housing redevelopment at Telopea … and three Western Sydney University campuses.”

These locations will be well-suited for office developments that cater to the complementary businesses servicing these specific precincts. Think, health specialists, medical diagnostics and even financial services, for starters.

An extra one million people are expected to live in and around Sydney within the next decade. And the Government is pledging to deliver infrastructure to support this population boom, “from a new light rail and a new metro railway to better road connections and train station upgrades’’, it says.

Keep tabs on the progress of these projects to discover opportunities to buy off-the-plan spaces in business parks with good transport links underway. Investing in yet-to-be-built offices may save on stamp duty and help you reap optimal returns.

It Isn’t Just About Location, Ambience Matters Too

Inside sleek commercial office, physical attributes matter when buying commercial property

If you choose instead to buy an established building, it is vital to focus on its physical attributes.

Think about the exterior. Is it old-fashioned and unattractive? What about the interiors? Are they dull and boring? And importantly, how inviting is the lobby?

If your tenants strive to make a good first impression, they will require lobbies that are pleasant for prospective clients to wait in or walk through.

There is also a great deal of evidence to suggest that productivity in the office is enhanced when workspaces are designed to suit employees’ needs. So, a forward-thinking employer will factor in the design of an office and its amenities before they sign your lease.

Does it Matter if Your Commercial Office Space is Tenanted or not?

Looking up at commercial office buildings

Whether a property is tenanted or not should be a major factor influencing your purchase decision. Only experienced investors or buyers willing to take on the additional risk should consider buying commercial property that is vacant. It is not usually recommended for first-time investors.

This point brings us to the type of tenant that you want occupying your investment property.

Tenants who have options to renew their lease beyond the initial term may seem confident about the sustainability of their business. But, as far as you can, try to research how viable the tenants of a building you want to purchase are.

If you can ascertain metrics like cash flow, gearing, payroll and other outgoings all the better. Your accountant may then be able to guide you on whether that tenant is under financial strain or not. If a business that is leasing out your property has an unexpected belly-up, it could leave you with a vacant office indefinitely.

Making the Most of Low Office Vacancy Rates in Sydney

A view of the Sydney CBD from across the water

Thankfully, the experts are generally bullish about sustained low vacancies and healthy office rents in Sydney. According to realcommercial.com.au: “Sydney’s (office) vacancy rate compressed to 5.1 per cent in 2017, the lowest in almost a decade.” In the CBD, the rate shrank further, from 6.2 per cent to 4.6 per cent for the December half, according to the latest vacancy research from the Property Council of Australia (PCA) data.

A significant driver of this low-vacancy trend is the conversion of former office buildings into residential developments, thus tightening demand for what is left over. In many cases where you see commercial stock redeveloped into apartments, you can expect a lift in the need for office space and an increase in the rents you can command.

According to the Australian Financial Review: “In Sydney, premium and A-grade advertised rents will rise more than 13 per cent annually, reaching $1094 per square metre and $840 per square metre respectively.” And further analysis from the Sydney Morning Herald suggests that low vacancies and the expectation of firmer rents will most probably flow into the suburbs.

The latest PCA was good news for major metropolitan office vacancies. In North Sydney, the rate eased to 7.9 per cent from 8.8 per cent at the same time last year. In Parramatta, the rate was more than halved, going from 7.5 per cent to 3 per cent, while Macquarie Park saw a solid decrease from 9 per cent to 6 per cent.

As we know, all good things come to an end, eventually. So now is the ideal time to buy and lock in a stable, long-term tenant ahead of a potential increase in vacancies when office developments (now in the pipeline) come on stream.

Need more Information on Investing in Commercial Office Space in Sydney?

Sydney’s wide range of commercial property options can be baffling if you’re unsure of where to start. At TGC, we connect people with property that suits their needs. Contact us today for more information!

You can also take a look at this checklist, which runs through 10 factors to consider before you buy.

Date: 01 May 2018 Author: TGC Writer
Commercial
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About the author:

TGC Writer

TGC is the largest privately owned commercial real estate agency in the Sydney CBD, with over 20 years experience servicing the CBD, City Fringe and greater Metropolitan property market. We’re committed to assisting you with your total property needs, including buying, selling, leasing and property management.

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