September 2013 Parramatta Reversing the prime-grade office slide Key Points With the largest employment catchment area in metropolitan Sydney, Parramatta has evolved into Sydney s third largest office market (716,800 sqm). After a growth period in the 1990 s and early 2000 s, supply has been scarce with Parramatta recording one of the lowest 5-year growth rates in Australia. Degradation of current stock coupled with a lack of refurbishment has meant that prime grade stock within the Parramatta CBD has decreased 22% over the last five years. Increased competition from neighbouring business precincts with competitive rents and a more modern stock profile has dampened tenant demand in Parramatta. Parramatta has reached a critical point. Future supply is low and in a public-sector dominated office market requiring strong sustainability benchmarks, flight-risk has increased. We believe that these conditions will place increased pressure on secondary grade office asset owners in the Parramatta CBD to upgrade their buildings to future-proof the market. Introduction Parramatta has been the economic heart of Western Sydney ever since the NSW Government initiated a decentralisation plan during the 1980 s. However, despite the city s status as the second regional centre for Sydney and its continually low prime grade vacancy over the last decade, growth in the Parramatta office market has slowed. The recent low demand / low supply environment has created a city with a dated stock profile; a stalled city when compared to emerging business precincts such as Macquarie Park and Rhodes that surround it. With new NSW Government environmental benchmarks in place for all government accommodation, this public sector dominated office market needs to modernise or face the consequences in the future. This Pulse paper explores the factors in play that have adversely affected the CBD and what solutions are available to reverse them. The white collar boom and the birth of Sydney s second CBD Parramatta s development into Sydney s second largest office market began in the 1980 s. Rents were increasing rapidly in the Sydney CBD during the 1980 s (in the ten years to 1989, average prime net face rents in the Sydney CBD increased 300% from AUD 131 per sqm p.a. at the beginning of 1980 to AUD 525 per sqm p.a.). With vast potential employment resources residing in Western Sydney, the New South Wales Government made the decision to decentralise. Parramatta was selected as the favoured relocation target. Parramatta offered substantial costs savings on rent compared to the Sydney CBD (on average, prime net face rents in Parramatta were 48% lower than the Sydney CBD throughout the 1980 s). Furthermore, the existing rail infrastructure in place that reached the greater west of metropolitan Sydney (via Granville station) made Parramatta an attractive destination for workers in the west of Sydney.
Pulse Reversing the prime-grade slide in Parramatta September 2013 2 What started as a trickle of public departments relocating westwards in the 1980 s became a torrent in the late 1990 s with the introduction of the Government Office Reform Program in 1998. Over the next decade, public sector net take-up in Parramatta totalled 85,100 sqm. Major relocations included; The Health Insurance Commission relocated to Parramatta in 1998 and expanded operations as Medicare in 2005 (17,200 sqm) The NSW Roads and Traffic Authority consolidated offices from Flemington, Milsons Point and Rosebery into Parramatta in 2001 & 2006 (16,000 sqm) NSW Police relocated their headquarters from the Sydney CBD into 1 Charles Street and 130 George Street in 2003 and 2004 (45,800 sqm) The Attorney General s Office consolidated from various locations including their Sydney CBD head office into Parramatta s Justice Precinct in 2007 (20,700 sqm) Between 1998 and 2007, private sector tenants followed their public sector counterparts into the Parramatta CBD. Tightening vacancy in the Sydney CBD had limited the availability of suitable floor space, which led to the decentralisation of back-office operations within the predominantly city-based finance and insurance sectors. In this period, many corporations relocated some operations into Parramatta; this included AMP (both their insurance and AMP Life and investment arm AMP Henderson Global), Commonwealth Bank of Australia, IAG, Suncorp and St George Bank. for investors, it has actually been symptomatic of subdued tenant activity and lack of new development. With many government tenants locked into long-term lease agreements, the availability of contiguous prime-grade space has been scarce. This has acted as a smoke-screen for a low-demand environment, dampened by a lack of modern supply that would attract new tenants to Parramatta or allow existing tenants to expand or modernise their accommodation. Competition from rapidly emerging neighbouring office precincts also hampered growth. Precincts like Rhodes, Sydney Olympic Park (Homebush) and Macquarie Park have become the focus of the majority of Sydney s suburban office demand during the last decade, where existing modern space and pre-commitment development opportunities have been more readily available. The outperformance in these precincts can be measured in the divergent pre-lease and absorption rates. Since 2009, Macquarie Park has recorded 96,300 sqm of positive net absorption (equivalent to 17% of total stock). More modestly, The Sydney Olympic Park / Rhodes market (from 2010, when Jones Lang LaSalle began monitoring the market) recorded 28,900 sqm of positive net absorption (or 11% of total stock). From 2009, Parramatta recorded positive net absorption of 49,800 sqm, equivalent to just 7% of total stock (Figure 1). Figure 1: Post Global Financial Crisis Net Absorption Sydney Suburban Office Markets 2009-10 to Present Spurred on by this influx of public and private sector tenant demand, net supply increased 121,800 sqm over the decade to 2007. Some of Parramatta s largest assets were built in this period, all with pre-commitments from new tenants to the office market. These included the NSW Police Headquarters at 1 Charles Street (32,500 sqm), the 20,700 sqm development at 160 Marsden Street (precommitted to the NSW Attorney General s Office) and 101 George Street which had a 17,500 sqm pre-commitment from the Commonwealth Bank. The tide turns Growth in the Parramatta CBD began to stall in the late 2000 s. The last major public sector relocation into Parramatta came at the start of 2009 when Sydney Water moved into their new 23,000 sqm headquarters at 1 Smith Street. Since that point (Q1/2009), A-Grade vacancy has averaged 3.3%. While this has positive connotations There has been a disproportionate number of suburban office precommitments secured outside the Parramatta office market. Since 2009 (as to remove any legacy pre-commitment deals from pre- GFC), there have been nine significantly pre-committed office developments in Macquarie Park and Sydney Olympic Park/Rhodes, compared with just two in Parramatta. With the strong growth of a young workforce in Parramatta, commercial development has more recently been superseded by
Pulse Reversing the prime-grade slide in Parramatta September 2013 3 residential development. Apart from the aforementioned 2009 office development at 1 Smith Street which was subsequently leased to Sydney Water, the only significant commercial addition to the market in the last five years has been the completion of the 25,700 sqm Eclipse tower at 60 Station Street in 2012. Conversely, there has been numerous commercial development sites repositioned into residential sites over the same time period: employment opportunities and another 7.1% travelling to Macquarie Park (City of Ryde). Figure 2: Population Growth and Educational Attainment 2006 to 2011 Crown Developments 25-storey mixed-use residential V by Crown at 45 Macquarie Street was a site purchased from Becton in 2009, originally slated for commercial development. Meriton purchased the commercial Riverside Business Centre at 330 Church Street for conversion to future residential in 2011. Eureka Funds Management divested a proposed 24,000 sqm commercial site to Dyldam in 2012 for the Koi Parramatta residential project. Multiple commercial properties were demolished in 2010 to make way for the recently completed B1 Tower at 118 Church Street which has become Parramatta s tallest building at 107 metres. Further stock withdrawals are expected upon the commencement of residential developments at 27 Hassall Street (22 Storeys) and 29 Hunter Street (28 Storeys) in the short term. Future-Proofing the Parramatta CBD Parramatta is a city undergoing a population growth spurt. According to 2011 census data, the population within the Parramatta SLA has grown by 12.5% in the five years from 2006, almost doubling the growth rate recorded across Greater Sydney (6.7%). Considerably more important though is that the growing population is young and well-educated. The growth rate for young workers (25 to 34 years old) increased 29.2% in Parramatta, while the residents with an educational attainment of a bachelor degree or higher increased by a staggering 42.3% (Figure 2). Source: ABS Census 2011, Jones Lang LaSalle The Parramatta office market is dominated by the public sector. According to the 2011 census, public sector employment equated to 14.2% (or 12,996 people) of total employment in the Parramatta CBD. However, Jones Lang LaSalle believes that this number is significantly higher, with public-sector administration, accounting and other back-end staff possibly allocated to other employment sectors. In an office market so heavily dominated by public sector employment, events such as elections and public sector policy reevaluations can have significant impacts on tenant demand and vacancy. There have been two such events recently that may impact on Parramatta: A recent revision to the New South Wales government s existing accommodation policy. In the most recent sustainability policy report, the New South Wales government announced a policy that set new benchmarks to achieve and maintain a NABERS rating of 4.5 stars for energy and water in all Government owned or tenanted office buildings over 1,000 sqm. This increased population is fuelling the demand for residential development sites. However, the majority of this young and welleducated workforce has yet to find employment opportunities close to home. According to 2011 census journey-to-work data, only 18% of Parramatta residents work within the Parramatta area, with 13.7% of Parramatta residents travelling to the Sydney CBD for Secondly, New South Wales Treasurer Mike Baird announced in 2012 that the State Government had rescinded a no pre-commitment policy which had restricted public sector departments to existing buildings.
Pulse Reversing the prime-grade slide in Parramatta September 2013 4 While these decisions are yet to have a clear impact on Parramatta office demand, they may prove to be a catalyst for a rejuvenation of Sydney s second CBD. Upon completion, 56 Station Street and 1-3 Fitzwilliam will have improved their NABERS credentials and will be able to target government tenants to fill their vacancies. Jones Lang LaSalle has estimated that there are 31 office properties within the Parramatta CBD that house at least one NSW state government tenant. Of those, 22 buildings are considered secondary grade. With a large proportion of public sector tenant take-up occurring in the late 90 s and early 2000 s (on the assumption that lease expiry sits near a 10-year term), the vacancy risk for a government tenanted, secondary-grade landlord is significantly elevated. There are also opportunities for value-add investors with non-core office investment mandates. Over the last five years, Parramatta s A-grade stock has shrunk by 22% (51,200 sqm), reflective of the capital constrained post-gfc environment which saw developers delay projects and landlords deprioritise refurbishment activity. Within this same time period, many institutional owners looked to divest assets in Parramatta, while the predominant buyers were syndicates, private investors and superannuation funds (Figure 3). It is critical for these landlords to invest capital into their assets to improve their environmental credentials as well as overall occupier amenity. Jones Lang LaSalle have identified at least 10 buildings in the Parramatta office market currently considered secondary grade assets that could potentially be re-graded prime space with the incorporation of sustainability principles and the achievement of appropriate Green Star / NABERS ratings. There are a further seven assets currently considered secondary grade stock with average floor plates over 800 sqm that could also accommodate future public sector departments with the improvement of sustainability credentials. Since 2009, there have been 19 office transactions recorded in Parramatta (> AUD 5.0 million) totalling AUD 542.9 million. However, only three of these have been in the prime grade sector. There have been a disproportionate number of sales within the secondary market, with the majority of investors looking to upgrade assets through refurbishment. Figure 3: Parramatta s Evolving Ownership Balance Transaction volumes (net) by investor types - 2007-Present Some landlords have already successfully repositioned their assets with enhanced green ratings. In 2012, an AUD 5.5 million capital works program was completed at 100 George Street, replacing a tired 1980 s façade and inefficient greenhouse emissions systems. This improvement allowed the landlord to increase net face rents by 23%. With a target to achieve a 4.0 NABERS rating, the landlord has already secured a new private sector tenant in the NSW Business Chamber and are in heads of agreement with a public sector tenant for a further 2,500 sqm. Source: Jones Lang LaSalle There are currently a further two significant refurbishment projects underway. With the relocation of major tenant QBE into the Eclipse tower at 60 Station Street, private owners Yangdo Pty Ltd have taken the opportunity to commence refurbishment of 56 Station Street with an aim to achieve a 4.5 NABERS energy rating upon completion. While ICUC Holdings Pty Ltd and Chandru Property Investments No 1 Pty Ltd, who purchased 1-3 Fitzwilliam Street in Q2/2011, are in the process of improving their sustainability credentials after major tenant The NSW Department of Finance announced that they will relocate into 60 Station Street and 10 Smith Street over the course of 2013. Conclusion With Parramatta s forward-looking supply pipeline subdued, the best and fastest way to rejuvenate the Parramatta office precinct will be through the refurbishment of secondary grade assets. With an ageing stock profile and a tenancy mix dominated by the public sector, these are the steps to minimise the risk of tenant flight and increase attractiveness for new business. The pieces are now in place, with the NSW state government s intention for further decentralisation and with Parramatta City Council being a strong proponent of the Local Government Amendment (Environmental Upgrade Agreements) Act which
Pulse Reversing the prime-grade slide in Parramatta September 2013 5 provides lower-interest loans to commercial property owners looking to upgrade sustainability credentials. There are significant opportunities for commercial office owners in Parramatta to increase both the attractiveness of their assets to tenants while also increasing value as investors. We believe that this is the greatest opportunity to satisfy prime-grade tenant demand and fulfil Parramatta s long considered title as Sydney s second CBD. William Tong Director, Parramatta & Metropolitan Office Leasing tel: +61 2 9806 2837 william.tong@ap.jll.com Rick Warner Strategic Analyst NSW Markets tel: +61 2 9220 8450 rick.warner@ap.jll.com www.joneslanglasalle.com.au
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