While business cycles and property cycles have never really run in parallel, a new report from real estate agent
JLL says that a "wall of money" is driving a surge of office development that is creating a tenant's market around the country.
"In the current market there is an abundance of capital seeking investment in the commercial property markets nationally," JLL said in the latest edition of The Wrap.
"This weight of money is creating its own dynamic, which is also providing an alternate avenue for accommodation strategy for tenants beyond basic supply and demand.
"As this capital competes to find a home it is allowing developers to commence new development if they can secure pre commitments.
"This means there are opportunities for tenants to take advantage of the current conditions and upgrade their real estate to the new space, creating a workplace experience that will resonate with their people
and their brand," JLL said.
JLL said the capital is often off-shore and is satisfied with a lower yield, which translates into a more competitive deal for the occupier.
"This is a unique situation where an occupier can secure new, purpose built premises at a market competitive rate in a market where multiple choices already exist," the report says.
Below, we wrap up where JLL sees the best opportunities for corporate occupiers over the next one to two years.
As with many commercial markets around Australia, the weight of money and yield compression in the sector is driving the development pipeline.
Sydney’s CBD currently has 300,000sqm of space under construction excluding the first tower at Barangaroo.
The choice tenants have in the market today is not only existing space, but new stock that has yet to be built. If these sites could secure a pre-commitment of 40% plus, we are likely to see them come into the market over the next three to five years.
The developments have the potential add a further 272,000sqm to the Sydney CBD office stock over the medium to longer term.
This will provide opportunities for tenants to upgrade from their existing space into newer, more efficient and more sustainable space on attractive terms, reflecting the ‘tenant friendly’ market and the willingness of landlords to back-fill these vacancies.
Current incentive levels are high, sitting in the low 30% gross rental range as owners continue to maintain high face rents and escalate these above CPI. It is unlikely we will see any change in lease structures in the short to medium timeframe.
Demand will be consistent over the next 12 months, but real growth will be limited to the technology sector, with other corporate occupiers focused on “doing more with less” rather than creating an expansionary environment.