Business Parks’ Future Bright Despite Economic Storm Clouds

While the CBD office property outlook remains wobbly, it’s blue skies ahead for suburban business parks as the appetite for the sector stays keen.

But, while their short-term fundamentals look extremely attractive, the question is whether business parks, which typically accommodate variations of a mix of logistics, warehouse, office and data centre assets, will continue to perform during an economic downturn.

Two recent Dexus transactions demonstrate the shifting outlook for CBD office assets versus business park properties.

On June 15, Dexus announced it had exchanged contracts on its Axxess Corporate Park business park at Mount Waverley, Victoria for $306.2 million, a 7.4 per cent premium to its December 2022 valuation.

By contrast, earlier in the month on June 9, Dexus said it had exchanged contracts on its Sydney CBD office building at 44 Market Street for $393.1 million. This represents a 17.2 per cent discount to its December 2022 valuation.

CBD office assets have been under pressure since the pandemic shut them down. Conversely, the fundamentals of suburban business parks have come into their own as many office workers now prefer to work close to home and avoid lengthy commutes.

To capitalise on this trend, asset owners such as Stockland are developing campus-style suburban business parks—its M_Park precinct in the outer Sydney suburb of Macquarie Park is a prime example.

Oracle Investment Management portfolio manager Jack Magann says e-commerce is another factor driving demand for business parks.

“Consumers expect speedy delivery of online shopping purchases, with many companies offering same-day delivery. This is where business parks come into their own,” he says. 

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▲ Dexus last month sold its Axxess Corporate Park business park in Victoria for a 7.4 per cent premium to its December, 2022 valuation. Main image: A render of M_Park stage 1 by Lendlease.

“E-commerce companies are increasingly looking to rent warehouses in metropolitan areas so they can offer a superior delivery service. Business parks located on prime land, close to main roads and within major cities, are perfectly situated to provide same-day delivery to consumers.”

Data centres winning fans

Business parks with data centres as tenants are especially attractive to investors.

A good example is Sydney’s Macquarie Park business park precinct where tenants include Macquarie Technology Group, formerly Macquarie Telecom, and NextDC, whose data centres are there.

Macquarie Technology is in the process of gaining approval to build another data centre at Macquarie Park, almost doubling its capacity.

“There is a long runway for growth in the data centre sector as businesses move to cloud computing,” says Magann.

“Data centres in prime properties like well-located business parks are going to be in high demand from the biggest tech companies in the world looking to rent space.”

David Loakes, founder and managing director of commercial property developer Sector Property Group, which operates industrial, office and warehouse properties around Melbourne, attributes growing demand for business parks to investor interest in alternative asset classes.

 “Office is off the boil,” he says. “The alternative is commercial industrial and in the current environment, investors are gravitating towards office warehouse strata units.”

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▲ A NextDC data centre at Macquarie Park, NSW.

Cap rates’ performance strong

In terms of business parks’ recent investment performance, cap rates are performing well versus traditional office assets.

There has been a 0.31 per cent rise in cap rates to 4.25 per cent for industrial and logistics assets, using Charter Hall’s long weighted average lease expiry (WALE) REIT’s data as a proxy for business parks.

This compares to Charter Hall’s cap rate figures for office property, which have grown by 0.37 per cent to 5.42 per cent. Higher cap rates reduce a property’s value and imply weaker income-generating potential.

In terms of yields, Loakes says they traditionally sit in a range from 6 per cent to 10 per cent net for business parks.

“In most cases tenants pay the outgoings, which is very attractive to investors. In my experience, once people get into these investments they stay in them. Industrial is a set and forget investment.”

He notes office parks often outperform yields versus other asset classes such as residential property.

“These units don’t require any maintenance. They are four walls and a roof.

“People continue to buy them and the supply side is getting tighter as the availability of land diminishes.

“Ten years ago, it was easy to buy and develop industrial land, but now it’s really hard.”

Leasing incentives show the way

Ben Hackworthy, director of commercial real estate firm Lemon Baxter, says with low vacancy rates and diminishing leasing incentives, investors who would normally prefer business park assets replete with carpet and air-conditioning are moving their focus to simpler properties with concrete and roller doors. Port Melbourne is his focus.

Hackworthy says the relative movement of incentives also demonstrates the strength of business parks versus other assets.

For instance, his data suggests commercial leasing incentives have risen to 50 per cent, while industrial incentives are below 8 per cent. Additionally, while commercial vacancy rates peaked at more than 30 per cent, industrial vacancy rates are below 2 per cent.

“Demand for industrial properties has remained constant even during the last year of interest rate rises. But supply is extremely low, keeping upward pressure on prices.”

Ledlin Development director of industrial property specialists Oscar Ledlin agrees there has been solid rental growth across industrial properties.

“The surge in rents has effectively balanced the increases in interest rates, ultimately protecting property values as the industry braces for expanding yields, although in some cases we are seeing yield contraction driven by investors betting on the future growth of these assets,” he says.

“This is underpinned by a significant shortage of well-located industrial property and fixed annual rental increases.”

As for the future, Magann expects demand for business park assets to remain elevated.

“Online shopping and demand for offsite data storage capabilities are two huge trends which will mean business parks are valued at a premium for some time.”

Article source: Queensland Property Investor