Occupancy Costs Analysis

Transcription

1 September 2016 Occupancy Costs Analysis Commonwealth of Australia Office Relocation Analysis Prepared for: The Property Council of Australia

2 Table of Contents 1 Executive Summary 2 2 Rental Analysis Competitive rental level Stable through the cycle 3 3 Office Market Characteristics Modern office stock 5 4 Occupancy Scale and Benefits Significant office footprint Benefits of scale and size 6 5 Relocation Cost Considerations 7 Page 1

3 1 Executive Summary JLL was commissioned by the Property Council of Australia to undertake an analysis of Commonwealth agency relocation costs. The report we prepared utilises JLL s historical data on rents and incentives to provide an insight into real estate occupancy costs. Specifically, we have examined tenant occupancy costs in Canberra and assessed those costs against the Sydney CBD, Melbourne CBD, Brisbane CBD, Perth CBD and Parramatta. The key findings of the report were: People, technology and real estate are typically the largest costs for an organisation. Our analysis shows that Canberra has the lowest real estate occupancy costs for tenants across all of the analysed office markets. Organisations seek visibility of long-term occupancy costs. While market rents are determined by the interaction of demand and supply, rental volatility is lower in Canberra than other assessed office markets. Lower volatility enables more transparent and accurate operating cost forecasts, revenue projections, and operational planning measures. Based on our assessment of average prime gross effective rents, outgoings and car park costs, the typical cost for a 10,000 sqm department in Canberra would be $3.4 million. The cost of occupancy in the Sydney CBD would be 2.3 times of Canberra, while the Melbourne CBD would be 1.4 times more expensive. The affordability of Canberra extends to the comparison with Parramatta. JLL has assessed the occupancy cost of Parramatta at $3.9 million 15% higher than Canberra. Canberra has the newest office stock of all the analysed office markets, with around 44% of total stock 10 years old or younger. In comparison, only 17% of stock in the Sydney CBD is within this age cohort. Thus, in addition to a greater rental value proposition, Canberra also provides comparatively newer, modern, and more sustainable office space. The Commonwealth of Australia is the single largest occupier cohort in Canberra. The scale of the Commonwealth of Australia s footprint allows for the adoption of a strategic approach to real estate portfolio management. Furthermore, the scale of the portfolio allows for the benefits of clustering (knowledge spill-overs) and economies of scale in portfolio management. Page 2

4 2 Rental Analysis 2.1 Competitive rental level JLL undertakes a quarterly exercise to assess market rents and incentives across nineteen office markets in Australia. We have a representative sample of office buildings in a basket of properties and work with our leasing, corporate solutions, property management and advisory business units to assess the lower and upper market rent for each of these assets. Our analysis shows that average prime rents in Canberra are lower than other office markets in the scope of this study. Table 1 highlights average prime rents across a number of office markets. The office markets analysed for this study are: Sydney CBD, Melbourne CBD, Brisbane CBD, Perth CBD, and Parramatta. The analysis shows that Canberra is positioned competitively from an occupier standpoint, with rents significantly lower when compared with other markets nationally. Prime net face rents in Canberra averaged AUD 348 per sqm p.a. in 1Q16, while outgoings (statutory and operating expenses) were AUD 75 per sqm p.a.. In comparison, prime net face rents in the Sydney CBD were 158% greater, with an average of AUD 898 per sqm p.a. recorded in 1Q16. Average rents in Canberra are also significantly lower than other selected markets, with rents 82% lower than in the Perth CBD, 65% in the Brisbane CBD, 34% in the Melbourne CBD, and 17% lower than in Parramatta. Leasing incentives in Canberra are typically lower than other office markets in Australia. To make a more accurate market-by-market comparison, it is important to make an adjustment for the level of incentive provided. Nevertheless, the adjustment only narrows the rental spread between Canberra and the other markets. The relative value proposition of Canberra remains. Canberra recorded an average prime gross effective rent of AUD 308 per sqm p.a. in 1Q16, less than half of the AUD 699 per sqm p.a. recorded in the Sydney CBD. Table 1: Prime Rental Indicators, 1Q16 Market Prime net face Outgoings rent (AUD/sqm) (AUD/sqm) Incentive (%)* Prime gross effective rent (AUD/sqm) Sydney CBD % 699 Perth CBD % 466 Brisbane CBD % 394 Melbourne CBD % 409 Parramatta % 362 Canberra % 308 *Based on a 10 year lease 2.2 Stable through the cycle The relative affordability of Canberra has been evident over the past 10 years. However, the affordability of Canberra has become more pronounced with strong rental growth in the Sydney CBD, Melbourne CBD and Parramatta impacting the affordability of these markets. Figure 1 provides a historical comparison between Canberra and the other office markets. There is a clear spread evident over time. However, the spread has narrowed between Canberra and Brisbane / Perth as the resource investment cycle has transitioned from investment to production and vacancy has increased. Nevertheless, average prime gross effective rents in Canberra still remain lower than the Brisbane CBD and the Perth CBD. Page 3

5 Figure 1: Historic Prime Gross Effective Rents, 1Q Q , AUD / sqm Canberra is a stable office market and less exposed to private sector tenants. Economic growth stimulates the labour market and the demand for office space. The cyclicality in demand is reflected in net absorption over the long-term. Canberra has recorded only three calendar years of negative net absorption between 1978 and To put the stability of Canberra in context, Perth (14 years), Sydney (11 years), Melbourne (9 years) and Brisbane (7 years) have recorded negative net absorption on a more frequent basis. Stability in the occupier market is reflected in market rents. In the cycle upswing, prime gross effective rents in the Sydney CBD (+43%), Brisbane CBD (+124%), and Perth CBD (+158%) increased significantly between 1Q06 and 2Q08. By comparison, the average rent in Canberra rose by just 20% during this same period. The stability in Canberra rents can be proven through statistical analysis. JLL has calculated the standard deviation of the quarterly prime gross effective rental change. A low standard deviation indicates that the data points are close to the mean, while a high standard deviation indicates that the data points are spread out over a wider range of values. Table 2 shows the standard deviation of the rental series of each analysed office market and highlights that Canberra recorded the lowest standard deviation in rents (quarter on quarter) between 1Q06 and 1Q16. Our analysis supports the proposition that the volatility of Canberra rents is less than other office markets. Lower rental volatility enables more transparent and accurate operating costs forecasts, revenue projections, and operational planning. Table 2: Gross Effective Rents Standard Deviation (quarter on quarter), 1Q Q 2016 Market Standard deviation Perth CBD 7.7 Brisbane CBD 7.0 Sydney CBD 3.8 Parramatta 2.2 Melbourne CBD 2.2 Canberra 1.6 Canberra Sydney CBD Melbourne CBD Brisbane CBD Perth CBD Parramatta Page 4

6 3 Office Market Characteristics 3.1 Modern office stock In addition to monitoring market rental changes, JLL also tracks the total office stock for the nineteen monitored office markets nationally. New construction and refurbishments projects, as well as withdrawals, are updated on a quarterly basis. Analysis of this data shows that the Canberra office market has the newest office stock when compared to the other office markets in the scope of this study. As Figure 2 shows, around 45% of total stock in the Canberra office market was completed between 2006 and 2016 (as at 1Q16). This equates to around 965,100 sqm of stock being 10 years old or younger, making Canberra the youngest CBD office market nationally by a significant margin. This in part reflects the higher sustainability requirements of assets occupied by the Commonwealth of Australia, the largest occupier group in the Canberra office market. Newer office stock reflects more modern design characteristics. This generally allows for more productive floorspace, greater sustainability credentials, occupancy cost minimisation, and greater flexibility. Newer stock is also more aesthetic and contemporary, making newer space an attractive option of many occupiers. Figure 2: Age Profile of Canberra Office Stock* 8% 27% 44% 0-10 years years years 30+ years 21% *% may not add to 100% due to rounding In comparison, the Sydney CBD possesses the oldest stock nationally (Table 3). Only 17% of total stock in the Sydney CBD office market completed between 2006 and 2016 (as at 1Q16). The majority of Sydney CBD stock is 21 years or older (61%). Thus, the majority of stock in the Sydney CBD may reflect the dated design characteristics of the 1980 s and 1990 s. After Canberra, Brisbane CBD has the second newest stock profile. Table 3: Office Stock Age Profile* Age cohort (years) Canberra Brisbane CBD Perth CBD Melbourne CBD Parramatta Sydney CBD % 32% 30% 25% 19% 17% % 9% 7% 12% 17% 22% % 30% 33% 35% 44% 34% 30+ 8% 29% 30% 29% 21% 27% *% may not add to 100% due to rounding Page 5

7 4 Occupancy Scale and Benefits 4.1 Significant office footprint The Commonwealth of Australia is the single largest occupier group in the Canberra office market. Information provided by the Property Council of Australia suggests that the Commonwealth of Australia has a total office footprint in Canberra of around 1.2 million sqm, with most major departments having a large presence in the market. Based on JLL s monitoring of the Canberra office market, an occupancy of 1.2 million sqm would imply that the Commonwealth of Australia occupies approximately 55% of the total Canberra office market. 4.2 Benefits of scale and size The proportional scale and the total size of the Commonwealth of Australia s office footprint can provide them with considerable benefits in regards to their property portfolio strategy. There are three key areas where the Commonwealth of Australia can benefit from its large office footprint in Canberra. 1) Competitive advantage The Commonwealth of Australia has the power of a monopoly occupier. Given that it accounts for the majority of the occupier market, the Commonwealth of Australia should be able to negotiate more favourable leasing transactions and achieve a better leasing outcome. Clearly, this will be more difficult to achieve if Commonwealth of Australia departments were dispersed between different markets, or if they were no longer the major occupier group. In effect, they would lose their monopoly occupier status and the competitive advantage that this provides. 2) Economies of scale and clustering The benefits of achieving economies of scale and clustering are well known. Economies of scale can be reached in the Commonwealth of Australia s property portfolio through competitive rents and rental reductions (given the generally larger office footprint), and costs savings through operational efficiency, synergies, and the reduction of project/tasks/administration duplication between departments. Furthermore, clustering enables knowledge spill-over that otherwise would otherwise not occur if the Commonwealth of Australia s departments were dispersed across different markets. 3) Occupancy efficiency and flexibility Maintaining a large office footprint in one market enables the Commonwealth of Australia to maximise space utilisation. Department headcounts are constantly changing, and are subject to a number of factors that are generally hard to predict. For instance, new policy directions could have a significant impact on a department s size, and may require the need for additional workers/reduction in workers within a limited time period. Thus, flexibility should be a key requirement for the Commonwealth of Australia in their property strategy. Having a large office footprint in one market will allow the Commonwealth of Australia to quickly expand and absorb space as required. It will enable it to expand growing departments into under-utilised office space, or space previously occupied by a department that is shrinking its headcount. Page 6

8 5 Relocation Cost Considerations Section Four analyses typical costs associated with occupying office space in office markets around Australia. People, technology and real estate costs are typically the largest costs for an organisation, with office rent the highest proportion of real estate occupancy cost. However, other costs related to real estate include the cost to fit-out the tenancy and car parking. The spread in rents, therefore, between office markets will have a large impact on differences in occupancy costs. Figure 3 shows the current spread in prime gross effective rents between Canberra and the other analysed office markets nationally. The widest spread is with the Sydney CBD, with the average rent AUD 391 per sqm p.a. more than in Canberra. The narrowest spread is with the Parramatta office market (AUD 54 per sqm p.a.). Figure 3: Prime Gross Effective Rental Spread Between Canberra and Analysed Office Markets AUD / sqm Sydney CBD Perth CBD Melbourne CBD Brisbane CBD Parramatta However, in order to accurately compare occupancy costs by market, other costs apart from rental payments will also need to be considered. As such, car-parking costs have also been included in the analysis. For the purpose of the analysis, we have excluded fit-out costs. We have assumed that fit-out costs are comparable between markets and the cost of fit-out does, therefore, not contribute to the relative affordability discussion. We have undertaken an assessment on a hypothetical Commonwealth of Australia department occupying 10,000 sqm of office space in the selected office markets. Given the average rent and total NLA occupied, the total typical annual rental bill for an occupier in Canberra would be AUD 3.1 million. Indicative car park costs, which for Canberra was estimated to be AUD 335 per car space / month, total AUD 281,400 annually (assuming there are 70 car spaces). The addition of these two items provides the total occupancy costs. Thus, assuming these metrics, a tenant in Canberra occupying prime space would expect to pay around AUD 3.4 million in total occupancy costs p.a. Table 4: Occupancy Costs by Market Net Typical face department Outgoings rent size (sqm) p.a. Gross face rent p.a. Incentive Gross effective rent p.a. Car park cost p.a.* Number of cars spaces** Total occupancy cost p.a. Sydney 10, % , $7,708,400 Perth 10, % 466 9, $5,329,700 Brisbane 10, % 394 9, $4,615,700 Melbourne 10, % 409 7, $4,591,900 Parramatta 10, % 362 3, $3,850,100 Canberra 10, % 308 4, $3,361,900 *Based on a survey of JLL valuers **Assumption was made that there would be 70 car spaces Page 7

9 In comparison, the market with the highest total occupancy costs would be the Sydney CBD. Occupiers in this market would expect to pay AUD 7.7 million p.a. in total costs, or more than double a tenant would expect to pay in Canberra. This is due to a combination of both very high rents and car parking costs, which are both the highest nationally. An occupier could also expect to incur greater costs in the non-cbd market of Parramatta, situated in Sydney s western suburbs. While car parking rates are generally lower in Parramatta, average rents are higher. Subsequently, tenants in Parramatta would still be expected to pay more in occupancy costs (AUD 3.9 million) than tenants in Canberra. Page 8

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