This article is from the Australian Property Journal archive
AUSTRALIA’S office market is set for a major test, with the country’s biggest office landlord Dexus shopping around towers at 1 Margaret Street and 44 Market Street at a time of price rediscovery.
There have been few transactions of this magnitude of late. Office values have meanwhile come off heavily overseas as fallout from COVID’s impact on higher vacancies, low occupancy, and higher incentives continues, and the trend is expected to land down under.
Barrenjoey analysts have warned office tower prices could come off by 15% to 20%. Colliers is expecting capital values to drop by an average of 10% from peak-to-trough, before the market recovers in 2024, a much less turbulent trajectory than the GFC which saw some assets suffer 25% in devaluations.
Listed office asset values have held up so far in Australia, but are likely to fall in the coming 12 months because of weaker market fundamentals and the increasing cost of debt, Moody’s Investors Service has said.
Valued at over $100 million, 1 Margaret Street, also known as Dexus Place, is an 18-level prime-grade tower near Barangaroo with 99% occupancy, but a low weighted average lease expiry of 2.1 years. It returns $20.4 million in net passing income. The Financial Review has reported agents conjunctional agents Colliers and CBRE are touting development upside, with the tower could be increased to 33 levels, and have had a number of groups in due diligence.
Dexus has had Knight Frank and JLL working on 44 Market Street, located in the south end of town. Tenants within the 26-level tower include the Australian Bureau of Statistics. Occupancy is 85.4% and the WALE is also low, at 2.7 years, while it returns net passing income of $24.3 million.
The market is also set to be tested by Blackstone’s offering of the JPMorgan tower at 85 Castlereagh Street, which had a June book value of $835 million, while Mirvac has offered 60 Margaret Street.
Observing the US market – which some analysts believe is leading the way in commercial real estate trends – Morgan Stanley Wealth Management chief investment officer Lisa Shalett said recently in a Global Investment Committee note from the firm that there is a “huge hurdle” ahead.
“More than 50% of the $2.9 trillion in commercial mortgages will need to be renegotiated in the next 24 months when new lending rates are likely to be up by 350 to 450 basis points,” Shalett wrote, noting that regional banks accounted for between 70% and 80% of all new loan originations in the past cycle.
Office assets are already facing “secular headwinds” from remote work, she said, and she now sees a wipe-out with vacancy rates near a 20-year high.
“MS & Co. analysts forecast a peak-to-trough CRE price decline of as much as 40%, worse than in the Great Financial Crisis,” she said.
