Economic Rents: Part 2
Before the Easter break, we mentioned the future supply shortage of office buildings being reported everywhere. As a result, we touched upon economic rents in the capital cities.
Economic rent is the rent that Lessors wish to achieve for future product; new or refurbished. Fundamentally it’s the costs to deliver a product including planning, construction, finance, time and leasing risk and applying a return.
Naturally, each office market is different and therefore so are the estimated economic rents.
The one thing that appears to be a constant is the timing issue. Time to design, plan, approve, and construct a new product. It is unanimous across all markets that the timeframes need to be reduced so that new product could be brought onto the market faster.
However, our focus is not the timing. It is the gap between the economic rent and the current rent. It is difficult for 2 parties to agree a figure so far into the future. The gap varies across the markets and our view is the largest perceived gap is in Brisbane.
A rental figure so far into the future can be bridged in so many ways but there comes a point where the gap is simply too big. Sydney experienced this in the mid 1990’s and the only way the gap was bridged was by an adjustment.
If there is such a shortage of new supply, what are the alternatives?
Do we create a new sector of refurbished office product that is more affordable? A product that can be brought onto the market in half the time and significantly less cost. There are plenty of well-located older buildings needing refurbishment. Imagine well located, high amenity, excellent ESG rated buildings (because they are existing) at an affordable price point. It is more realistic than trying to convert buildings to residential.
Time will tell but certainly sounds like a more logical solution for the market.
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