Pent up demand for high quality commercial property has seen the office middle markets ($10 million to $150 million) perform strongly through 2021 despite many cities still being plagued by lockdowns.

Overall, 137 assets in the office middle markets sold across Australia at a total sales value of $4.78 billion, compared to the 103 assets sold in 2020 for $3.59 billion. Colliers’ agents transacted nationally on $2.39 billion worth of property over the past 12 months, as assets traded at a rapid pace thanks largely to the low interest rate environment.

Colliers Head of Investment Services Australia Matthew Meynell said the past year had been a period of major growth, with each state recording considerable yield compression and an increase in sales volumes compared to 2020.

“The demand for such assets is directly attributed to the low interest rate environment, coupled in with investors’ ability to take on riskier projects to seek a more favourable return,” he said. “We are particularly seeing assets within the $20 million-$40 million range being the most competitive and sought after as they accommodate for the widest buyer pool allowing for high net worth’s, privates, syndicators, and rapid growing competition from institutional investors.”

Unsurprisingly, offshore capital remained muted for the office middle market, accounting for just 11 acquisitions. This sits at roughly 67.64 per cent under levels seen pre-pandemic in 2019. Asia is still the key offshore purchaser, with around 63 per cent coming from the region. More specifically, China totalled 36.36 per cent of offshore purchases within the sector in 2021.

There was a noticeable geographic move as purchasers shift their risk appetite to focus on other regions, particularly in the metro and regional space. As a result, 88 metro and regional office assets within the office middle markets traded over the year, compared to 49 assets in the CBD. Such demand for metro assets resulted in the average metro capital value of $7,190 per sqm surpassing the 2020 average for CBD assets of $6,174 per sqm, a sign that values could further strengthen in 2022. This capital value growth was underpinned by the VIC and SA Metro markets with both increasing by over 20 per cent.

Metro NSW continues to be the strongest performer across the nation accounting for 22 per cent of all transactions with a total value of $1.342 billion. Most notable is the continued yield compression within Metro NSW, decreasing by 52 basis points from 4.84 per cent in 2020 to 4.32 per cent in 2021. This shift is a direct result of the significant demand for office properties within the Sydney CBD fringe markets, including the Eastern Suburbs, Parramatta, and North Sydney. As a result, NSW Metro markets now have the third lowest yield across Australia, behind the NSW and Victorian CBD.

“One of the dominant themes in 2021 was the continuation of the trend of capital flowing into metro and regional office markets, as 2021 transaction volumes outperformed CBD markets with an extra 39 sales nationally,” Colliers Queensland Director of Investment Services Samuel Biggins said. “Traditionally these markets have offered a yield premium to reflect perceptions of higher leasing and liquidity risk.” 

The $146 million sale of 6 Stewart Avenue in Newcastle to Charter Hall highlights this regional focus, with the site offering a strong 5.2 per cent yield and a long-term government tenant.

Queensland experienced a similar dynamic with the regional and metro market average yield compressing by 102 basis points year-on-year, creating an ideal exit environment for investors.  One example of a recently acquired asset being re-traded is 55 Russell Street in South Brisbane, acquired in 2019 on a 6.78 per cent initial yield, 3.37-Year WALE and a rental guarantee over 35 per cent of the NLA.  This property has since been re-traded in late 2021 with 100% occupancy and a 6-year WALE now in place, achieving a 5 per cent exit cap rate.

On top of this, the Australian Capital Territory CBD recorded their strongest growth period with a 350 per cent increase in terms of transactions and a 2,164 per cent rise in total sales from $26.5 million in 2020 to over $600 million in 2021. As a result, capital values have boomed from $4,106 per sqm in 2020 to $7,244 per sqm in 2021.

“The ACT experienced a record year, with investor appetite deriving from institutional investor’s continued faith in the comparatively low incentive environment and comparatively higher yields to that of Sydney and Melbourne. This was further enhanced by the quality of government tenants on long lease terms being highly sought after from both local and interstate purchasers,” Director of Capital Markets and Investment Services Canberra, Matthew Winter said.