Office Market Dynamics in the Most Liveable City

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CBD-Offices
MELBOURNE’S IDENTITY as the World’s Most Liveable City owes much to the transformation of its Central City over the past two decades — into a series of vibrant projects, places and precincts. And these offer an interesting mix of … housing, offices, retail, entertainment, tourism, dining, civic and cultural opportunities — where there are concentrations of people wanting to live, work and play.

Whilst the development of apartments has been transformational for the Central City, this segment is about to enter a phase of historic high supply (2013-2015) as well as unprecedented levels of “internationalisation” of the product, developers and capital associated with this market.

Melbourne’s property industry has become very heavily focussed on delivering apartments — designed more often to meet investors’ financial needs. This may be ultimately detrimental to the economic vitality of Melbourne, if there is not a continuing availability of Office development opportunities.

The property industry must not forget that Melbourne’s Central City is also Australia’s second largest Office market, as well as being increasingly attractive to international property investors. For its broader benefit, Melbourne needs to ensure that its strong Central City Office market remains viable; and is not eroded by too much residential development.

Changes are occurring

The recent Metropolitan Strategic Plan discussion paper highlights an aspiration to create an Expanded Central City through the renewal of several major near-city precincts.

Melbourne’s liveability, especially across the Central City, makes it an appealing place for key workers in the high-growth knowledge industries. The ability for Melbourne to attract companies in the knowledge industries will significantly determine the CBD’s future prospects — especially given the increasing competition from other Australian and international cities.

This new strategic policy direction (in contrast to the prevailing Activity Centres based hierarchy) relies upon the property industry (and market conditions) to deliver new-generation Office floorspace within the Expanded Central City that can accommodate changing needs of businesses.

Melbourne’s Central City Offices (primarily the CBD and Docklands) have held up well in the context of the numerous headwinds buffeting the economy and global property markets.

Although CBD Office rents are not growing and vacancy rates are trending up, new supply has continued and investors have keenly sought prime assets at lower yields. The softening demand and other indicators have signalled that conditions in 2013 and 2014 will shift in favour of tenants — in an increasingly-competitive marketplace, where better-quality floorspace will become more cost-effective.

Previously …

In the last cycle (2002 to 2008), demand from anchor tenants was so strong that it was able to (almost completely) underwrite new floorspace prior to its completion — whilst other tenants were expanding to absorb much of the space being left behind, which prevented extended vacancy.

Strong market conditions also implied that it was viable for owners to withdraw vacant back-fill floorspace for upgrading and refurbishment.However, the weakening rental scenario this time around? will not afford owners the luxury of withdrawing space through 2013 and 2014 … which will leave some owners exposed to vacant floorspace.

Bottom Line: A clear window of opportunity has now opened for both Commercial property owners and tenants within the CBD to respond proactively to the reality of this emerging situation.

Owners who act early and decisively will cap their exposure to the downside risk of further weakening in the rental market. Tenants who properly understand their own requirements (and lease obligations) relating to their accommodation will be best placed to take advantage of changing market conditions, and the inevitable opportunities, as they arise.

Morton

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