Home World Business Surge in B-grade CBD rents boosting returns for landlords

Surge in B-grade CBD rents boosting returns for landlords

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Office markets across all grades, from premium to even D-grade, are in demand as businesses seek out a city address and new tenants are snapping up older stock that can be converted to open-plan and less traditional fit-outs.

One of the latest properties to raise tenant interest is 28 O’Connell Street, where seven leases have been signed at the boutique B-grade office building.

28 O'Connell Street, Sydney, has been substantially leased. 28 O’Connell Street, Sydney, has been substantially leased. 

This reflects the strong tenant demand and the lower vacancies that continue to buoy gross effective rental growth, according to the agents at Cushman & Wakefield, who completed the leases.

According to Cushman & Wakefield research, the latest leasing deals reflect the broader Sydney CBD B-grade office market, which continues to tighten as recent leasing deals put further pressure on the 4 per cent vacancies seen at the end of 2016.

The firm said gross effective rents in the year to the end of the March quarter have also risen by 27.5 per cent to $728 per sq m, well beyond the 17 per cent growth seen in the prime office space, which was at $902 per sq m for the first quarter.

The leases bring an average rent per square metre of $1041 with five and six-year lease terms with average incentives across these leases of 14.5 per cent. B-grade stock accounts for 27 per cent of the Sydney CBD, compared to 29 per cent in Melbourne and 33 per cent in Brisbane and is predominantly privately owned, with institutional ownership at 42 per cent, much lower than prime stock

Incoming tenants to 28 O’Connell Street include Davidson Consulting, Solomon Capital, Qatar, Ensure Recruitment, Genex Power and Klein.

Cushman & Wakefield’s director of office leasing, Antonia Foweraker, manager office leasing, Emma Barnier and Ray White’s Anthony Harris, managed the leasing transactions, with landlord Coombes Property Group appointing the agents after the relocation of major tenant, Ace Insurance (Chubb Insurance), last November.

Ms Barnier said there was substantial rental growth in the B-grade Sydney office market and the demand from tenants for boutique buildings like 28 O’Connell Street “shows this trend is likely to continue”.

“When the landlord purchased the property for $91 million they had anticipated a lower capitalisation rate than initially realised, however with rents in the building averaging well in excess of $1000 per sq m, these strong yields and cash flow are underpinning increasing value in the investment over the medium term with cap rates north of 6 per cent,” she said,  

Ms Foweraker said it appears that landlord-favourable conditions within the B-grade CBD market in Sydney remain firmly in place, illustrated by strong rents and lower incentives negotiated at 28 O’Connell Street.

“This is in line with the broader market, as we have seen B-grade rents surge over the last 12 months and incentives remain lower at around 10-15 per cent,” she said.

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