Sydney, 23 July 2015 – Wellness is the new mantra for office occupiers, taking the same focus that Green Star did a decade ago.
This was one of the messages from today’s annual Sydney Market Outlook breakfast, which reviewed the outlook for the office, retail, industrial and residential sectors both in Australian and the broader Asia Pacific region.
In the breakfast panel presentation, CBRE Senior Director, Office Services, Jenine Cranston said landlords were adapting to a changing business environment, with part of this involving how to accommodate an increased tenant focus on wellness.
CBRE’s global headquarters in Los Angeles was the first to receive a WELL rating, which takes into account factors such as access to daylight, circadian rhythms and end-of-trip facilities.
Macquarie is pursuing similar WELL ratings in Australia – a factor which CBRE’s Pacific Head of Sustainability, Amanda Steele, said was part of a broader acceptance that tenants were shifting from having a focus on “location, location, location” to having one on “amenity, amenity, amenity”.
“Clever landlords are scrambling to get ready for a tenant onslaught around wellness,” Ms Steele said.
Ms Cranston agreed and said wellness was positioned in the same way that Green Star had been a decade ago.
“It’s changed the discussion from bricks & mortar to the occupants within the buildings,” Ms Cranston said.
“IT and finance, which are the growth sectors at present, are competing for the same graduates and new workplaces have to be the platform for a company’s brand.”
Fellow panelist, Emil Joubert, CBRE’s National Director, Transaction Management, said flexibility, not just in regard to accommodating wellness, was the key for landlords given that “change is the new business as usual”.
“There are massive opportunities ahead for landlords if they get ahead of the curve and embrace change,” Mr Joubert said.
He noted that tenants were increasingly examining their lease expiries well ahead of time – with some tenants whose leases expired in 2020/21 already examining if now was the right time to consider a move given the current vacancy forecasts.
Another factor for landlords to consider, Ms Cranston said, was the need for flexibility to accommodate tenants’ growth requirements.
“In 20 Martin Place, the major tenants we’re speaking to all want growth rights,” Ms Cranston said.
“It’s been a long time since we’ve seen that. For seven years, the discussions have mostly been around contraction, so this is a nice challenge for the market to have.”
Mr Joubert noted that it was a particular challenge to accommodate the “tech disruptors” – incubator IT companies that were needing short term space to accommodate their growth in six months as opposed to having a more traditional tenant focus on growth in 18 months to two years.
Looking at the overall picture, CBRE’s Head of Research Australia, Stephen McNabb said that while most Australian office markets still favored tenants, a tighter vacancy outlook in Sydney was driving an improvement in face rents, with incentives having stabilised.
He noted that CBRE’s forecast for the Sydney CBD was for a below average 7% vacancy rate over the next 3-5 years, supported by a number of factors, including the withdrawal of office stock for residential redevelopment.
“We have seen rent growth in Sydney in the first half, which we haven’t observed for a long time,” Mr McNabb said, noting that this was one of the factors that meant Sydney was better place to withstand the office yield compression anticipated in some other Asia Pacific markets.
In regard to the retail market, Mr McNabb said Australia was benefiting from a continued influx of foreign entrants, with 40 new store openings last year by new or expanding retailers and a further 12 openings in the first half of 2015.
This was helping to drive CBD rental growth, Mr McNabb said, with Sydney CBD rents having increased by 20% in the past 12 months and rental growth having also been recorded in the shopping centre sector.
On the industrial front, Mr McNabb noted that rents were generally soft across the country, particularly in Melbourne, with growth unlikely before 2016 when demand improved and supply was worked through.
However, an exception is the Sydney market, supported by a relatively low level of supply and a stronger economy.
Panelist Mike O’Neill, CBRE’s NSW State Director, Industrial & Logistics Services, said Sydney leasing activity was up by 61% this year, relative to the corresponding period in 2014.
He noted that low supply would help drive Sydney rental growth with the new wave of speculative development not expected until next year. Another driver would be residential encroachments, in addition to factors such as the recent hailstorms, which had displaced a range of tenants and soaked up a considerable amount of vacant stock.
The residential market was another focus of today’s breakfast presentation, with CBRE Managing Director, Residential Projects, David Milton forecasting continued strength in the Sydney market.
However, with more stock coming on stream, Mr Milton said buyers were becoming increasingly selective, with conversion rates having increased from one in five visitors to a display centre to one in seven or eight.
That being said, Mr Milton said sales hadn’t slowed overall, with total sales 11% higher in the first half of 2015 relative to the corresponding period in 2014. He also highlighted that buyer enquiry rates were 29% higher in the first half of 2015, underpinned by a pick-up in offshore buying, with 19% of sales in the first half requiring FIRB approval as opposed to 13% in 2014.
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