CBD office gluts
Tower values to tumble as rents crumble
Nick LenaghanProperty editor
Jul 27, 2020 – 12.05am
The values of Sydney's top office towers could plummet by as much as 30 per cent over the next few years as demand for space weakens, vacancy rises and rents drop sharply, according to Goldman Sachs.
The bleak outlook is driven not by the potential impact of the pandemic on the CBD office market, but the sharp pullback in values and rents due to a cyclical downturn that was already well under way before the coronavirus outbreak, Goldman Sachs analysts said in a recent client note.
Goldman Sachs says commercial property investors in Sydney and Melbourne should be concerned by a severe cyclical downturn in office rents and values. Ryan Stuart
Their view sharpened with the release this month of JLL's June quarter figures on office vacancy and overall take-up space which, the Goldman Sachs analysts said, points to "a more rapid and severe contraction in Sydney and Melbourne demand than we had expected".
"There is much debate at present re: the potential longer-term structural implications of COVID-19 on office space demand," Ian Randall and his colleagues wrote.
"We believe investors should be far more concerned by the severe cyclical downturn in office rents and values that has commenced."
Goldman Sachs' view on devaluation in the office market is far worse than expectations of a 15 per cent decline in values flagged by Citi in May after the first wave of the pandemic had passed.
"The first six months of the 2020 calendar year delivered by far the largest contraction in Sydney CBD office demand in the last 50 years," the Goldman Sachs team wrote.
Sentiment in the commercial property sector has already slipped to an all-time low, led by fears of how much damage COVID-19 could cause the office market.
The pandemic pain is already evident in the shopping mall and hotel sectors, where property values are taking a battering. Only industrial real estate, buoyed by the accelerated turn to online shopping, has shown any resilience during the crisis.
COVID contraction clears CBD office space
Fears Melbourne CBD offices won't return this year
The amount of sub-leasing space has surged in both Melbourne and Sydney as major corporates bring forward decisions to reduce their footprints in response to the uncertain business conditions.
As leases mature, companies are carefully considering how much space they will need over the long term as working from home becomes more widely accepted.
In the Sydney CBD, net absorption - the change in occupied stock from one period to another - is forecast to slump to negative 191,000 sq m this year. In Melbourne, it could fall to negative 75,000 sq m, on the Goldman Sachs forecasts.
Office occupancy in the Melbourne CBD had already fallen to about 5 per cent at the start of July, even before the shutters came back down as a fresh wave of the deadly pandemic rolled through the metropolis.
Sydney is also battling to keep a second wave at bay.
Goldman Sachs expects vacancy in the Sydney CBD to peak about 13 per cent by the end of 2022, when net effective rents will fall by 40 per cent. Peak vacancy, also close to 13 per cent, will hit the Melbourne CBD a year earlier, with net effective rents to drop by 42 per cent.
"Assuming that values ultimately trend towards marginal replacement cost, this in turn points to a 30 per cent-plus drop in value for high quality Sydney CBD office assets over the next few years," the analysts wrote.