Parramatta has become Australia’s tightest office market, ahead of other big city centres and strong fringe office suburbs, a new report shows.
The Parramatta office vacancy rate contracted by 0.2 per cent in the second half of 2018, overtaking the popular fringe area of East Melbourne, where vacancy edged up by 0.1 per cent to 3.2 per cent.
Despite major project completions and the re-entry of refurbished buildings, office space availability in the western Sydney suburb shrunk to 21,877 square metres in the six months to January 2019, according to Ray White’s Between the Lines – Parramatta CBD Office Market Overview.
This was mainly due to the withdrawal of stock, especially among secondary assets, as well as rising demand for office accommodation outside of the Sydney CBD.
Of the nearly 2000 square metres of office space withdrawn from Parramatta, more than 1500 square metres was B-grade, according to Property Council of Australia’s latest data.
Premium offices are seeing higher demand than in the overall market, with the proportion of empty space dipping to 0.8 per cent from 1 per cent in the second half of 2018.
Ray White’s head of research Vanessa Rader said the Parramatta CBD was rising in popularity as it was still viewed as relatively affordable compared with Sydney, coupled with major project commencements and CBD infrastructure improvements that have attracted new occupiers and investors.
“After a robust few years for Parramatta CBD, the six months to January 2019 has allowed the market to take a breath, sit back and watch the construction of both the highly anticipated Parramatta Square and infrastructure projects,” Ms Rader said.
A “subdued” 900 square metres of office space was taken up in Parramatta, due to the lack of considerable developments completed during this period.
But Ms Rader said the figure demonstrated “the calm before the storm”, with Tower Four of Lang Walker’s Parramatta Square scheduled to be completed in late 2019, which will add 80,000 square metres of mostly pre-committed office space to the market.
Tower Three, which will be the new home of NAB, will release 46,000 square metres to the market in late 2020, while GPT’s 32 Smith Street office tower will deliver more than 26,000 square metres at about the same time.
And Scentre Group, owner of Westfield Parramatta, has lodged plans to add a further 112,000 square metres of office space on top of its mall, in a $492 million redevelopment.
Property Council figures indicate that the Parramatta market will see new office space come in steadily, with 64,000 square metres set to be delivered in 2019, followed by more than 97,000 square metres in 2020 and almost 74,000 square metres expected from 2021 onwards.
Returns on both prime-grade and secondary assets have lowered by five basis points to 5.5 per cent and 6.25 per cent respectively in the six months to January 2019, Ray White data shows.
One prominent deal was the sale of 33 Argyle Street, which fetched $40.8 million on a reported yield of 4.9 per cent in November 2018. The 5200-square-metre office property was purchased by foreign investors.
But smaller strata office suites, which are categorised as secondary assets, have been selling on yields below 4.25 per cent, largely fuelled by an influx of investors who have lowered their buying standards to enter the Parramatta market.
Despite the flurry of activity, Ray White Commercial NSW western Sydney associate director Joseph Assaf said rental growth had curbed after a boom in recent years, with prime gross face rents up by 2.44 per cent to $630 a square metre in the past 12 months.
“Over the past five years, the high demand for office accommodation, coupled with the addition of new quality stock, has ensured ceilings have been broken regarding rental rates,” Mr Assaf said.
Meanwhile, rents for secondary assets rose by 2 per cent to $510 a square metre in the past year.
Growth for both prime and secondary office space has been about 5 per cent a year, in the past five years.
“Affordability continues to be key for this market when compared to Sydney CBD market, which now averages more than $1000 a square metre net for prime space,” Mr Assaf said.
CBRE’s regional director of office leasing Paul Badenhorst agreed, pointing out that large corporate tenants were increasingly looking at markets outside of the city centre – including Parramatta – due to affordability and better new development options, as well as worsening stock availability in the Sydney CBD market.
“Thanks to new public and private investment, Parramatta is also being viewed as a primary locale option, rather than just a location for satellite offices,” Mr Badenhorst said.