Investors in Australia’s office sector—particularly in the country’s second-biggest city—need to be prepared to build out of the cities and along the fringe.
Tim Price, director of the Melbourne-based residential and commercial developer Time & Place, said workers returning to the office were looking for hospitality and a lifestyle-focused office environment.
“And that doesn’t need to be in the city,” Price said.
“We’re doing quite a bit of metropolitan office and fringe office on the basis that we see the arbitrage in rents as an option for growth.”
But Price warned the idea of leasing pre-commitments on office developments no longer existed.
“So, if you get into office, and you’re relying on a pre-commit, you’re just not going to get there,” he said.
Price made his comments at The Urban Developer and commercial real estate investment manager MaxCap’s roundtable lunch discussion in Melbourne late last month.
He said investors were looking at Six-Star Green Star ratings, among other initiatives as obligations for either investment or, ultimately, for big institutional groups to sign leases in buildings that are actually compliant.
MaxCap head of research Bruce Wan said the Melbourne CBD had yet to fully correct after the pandemic, during which the Victorian capital was in full lockdown for 262 days.
“While the CBD has not fully corrected, some will find a little bit more value, a little bit more amenity, in some of the fringe markets,” Wan said.
“In a challenging economy people are looking to economise on rents.
“And some of that is empty office space around Melbourne and for others it is moving from the city to the fringe which makes perfect sense.”
In an end-of-year office market report global real estate services company JLL found in the 12 months to December the national vacancy rate had risen 0.7 per cent to 14.9 per cent—its highest since 1995.
At 18.2 per cent, Melbourne’s vacancy rate was the highest in the country, slightly ahead of Adelaide.
MaxCap head of direct investment Simon Hulett said the Melbourne office market was “particularly challenging”.
“We absolutely believe in the office sector long term and the necessity of a collaborative workplace in driving a thriving and innovative economy, but it certainly has its challenges in the post-pandemic world, particularly in Melbourne,” he said.
“We believe there is a value bifurcation in the market between top quality office product and product that is going to struggle to compete and this presents opportunity.
“We have seen that in some recent market transactions.
“The challenge in creating more of that top quality product is activation.
“There aren’t a lot of tenants out there currently who want to pre-commit two or three years in advance and there is back-fill or sub-lease space being created through tenant contraction as a result of hybrid work.
“So then you turn to speculative development and the ultimate belief that, ‘If you build it, they will come’.
“But having a great product in a strong location isn’t enough—you need support from financiers and valuers which is a complex path to navigate in the current environment.”
