The ugly duckling in property

Property managers need to find the right assets at the right price when it comes to office space.

Apparently office property is the ugly duckling when it comes to property investment at the moment. Even retail space doesn’t look as unappealing -- even in a world where consumers are increasingly turning to the internet for shopping.

Sentiment towards office space has weakened according to National Australia Bank’s quarterly commercial property survey. The graph below shows the slippery slope office property has found itself on.

Graph for The ugly duckling in property

Over the quarter property professionals raised expectations for capital growth and income in all property classes except office. At the same time, gross rents dropped the most for office properties, losing two per cent in the September quarter. Retail came in second losing 1.6 per cent, followed by industrial losing 0.4 per cent.

Vacancy rates are discernibly higher across office properties compared with retail and industrial, posing problems for property managers. It is in fact a problem beyond the survey – Australand’s 357 Collins St property currently has an 84 per cent occupancy rate as the Melbourne market remains challenged with incentives heavily favoured.

What we can conclude is even though vacancy rates are rising and expected to rise further, it isn’t an even spread across the board. Applying the current average vacancy rate of 8.8 per cent for Australian office spaces to all office buildings simply isn’t feasible. There is a demand for high quality assets, with the capacity to meet the modernised needs of large firms.

Floor space is now preferably uninterrupted by columns and can facilitate higher workspace ratios and new digital infrastructure. Consequently, newer buildings and those in the process of construction are generating their fair share of attention. At the same time older, office spaces are essentially becoming obsolete, distorting vacancy rates.

Although the National Bank survey doesn’t provide a compelling outlook for office property in general, Mirvac evidently feels differently following the acquisition of two Collins Street opportunities – an asset and development opportunity.

Mirvac has described the asset, 367 Collins Street as A-grade with efficient floor plans and largely column free, fitting in with the style now preferred by large firms. For property trusts and property managers it comes down to buying the right asset, for the right price at the right time.

While we could conclude the National Bank survey is negative for office space, it is important to remember it is not something that will impact the sector uniformly with tenant turnover likely the primary driver, 

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