With commercial property offering rental returns of 6-8 percent, investor interest in strata and freehold office investments in city fringe suburbs is gathering pace.
Alternative opportunities to the CBD are in strong demand. For instance, in Sydney, where there is an undersupply of commercial development in the CBD, many smaller tenants are being forced out and relocating to Redfern, Alexandria, Potts Point, Mascot, Darlinghurst and other fringe precincts. In Sydney’s case, the removal of commercial towers for the Sydney Metro and the buoyant NSW economy – where unemployment was only at 4.3% at the start of the year - have made CBD commercial space a prized commodity.
Smart fringe investors now watching the migration out of the CBD’s streets. In response, they’re upgrading their facilities to attract relocating tenants who can pay premium rents and who want to commit to a long-term lease.
LJ Hooker Commercial Sydney’s Jonathon Regan recently secured a lease for a Potts Point asset where the landlord had completed a dramatic facelift.
For 30 years, the Roslyn Street address was home to a panel beater – one of the last in the area – before a complete overhaul created 350sqm of commercial space, incorporating everything from exposed brickwork and trusses for a funky aesthetic to restoration of its sandstone basement.
The upgrade underpinned tenant enquiry, said Mr Regan.
“I was getting three calls a day during the leasing campaign,” he said.
“Commercial in fringe suburbs is picking up and quality tenants – especially those that were sub-leasing in the city – are now looking around areas like Potts Point, Glebe, Chippendale and Darlinghurst.
“Location is always going to be a lead decision-maker but the demand for quality has really risen in recent years. Tenants are increasingly discerning and the landlord at Roslyn Street responded to that; he went to great expense in meeting the demands of Council Heritage officers in his treatment of the sandstone in the building.”
Mr Regan said a whole suite of new amenities were emerging in fringe commercial spaces.
“We’ve transitioned from pods and break-out spaces to fully-fledged food corners which are almost like cafeterias.”
At the upper-end of the market, LJ Hooker South Sydney Managing Director Daniel O’Brien has been managing the leasing campaign of an entire Mascot office tower. Only 10 minutes by train from Central Station, Mascot is proving a popular choice for workers with lunch, shopping and other amenities being introduced in to the suburb in recent years.
Mr O’Brien is managing the leasing campaign for a seven-level tower in Ricketty Street. The landlord bought the development in 2017 with the strategic plan to capitalise on the CBD’s anticipated under-supply.
“The owners looked at the forecasts and saw there would be minimal contiguous office space available in the CBD over the next couple of years,” said Mr O’Brien.
“They purchased the shell and engaged architects to deliver what was, in essence, a rebuild.
“They’ve created an A-grade asset over 7,000sqm that’s 10 minutes from the CBD, with a lease rate that’s 20% below the CBD. Because of the investment in quality we’ve had a lot of enquiries for the whole building.”
But whilst the CBD supply was limited, Mr O’Brien said it was a similar – if not tighter – situation in South Sydney.
“For instance, in Mascot, there hasn’t been anything of 5,000sqm in size or larger introduced to the market.
“Consequently, office rents have gone from around $410psm (net) a year ago to $450psm (net) now.”
After being able to fire a gun down Perth’s CBD and West Perth in recent years, momentum in the resources sector is starting to tighten vacancies.
But, similarly, activity hasn’t been confined to the CBD in the WA capital.
LJ Hooker Commercial Perth Director Brian Neo has secured a run of leases through South Perth recently, on-selling the properties to investors.
In Subiaco, Mr Neo recently secured an off market 10-year term with options to the WA Government’s Department of Health. The 1,000sqm commercial space underwent a complete refurbishment to meet public service criteria.
There’s also interest from owner-occupants in Perth’s suburbs, said Mr Neo.
“We are currently marketing medical suites for sale in the Murdoch Health and Knowledge Medical Precinct, neighbouring the Fiona Stanley Hospital,” he said.
“We have secured registrations of interest of approximately 1,500sqm already, which is growing daily. That’s unheard of in the current climate, even on established stock.”
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