As we near the end of a year which has continued to see lowering interest rates and ongoing population influx into Greater Melbourne, it is timely to consider what will be some of the important trends influencing the commercial real estate market in south-east Melbourne in 2020.
Is location still king?
It’s the age-old real estate investment mantra – location, location, location. But what does that mean for commercial real estate in a city like Melbourne? Globally, the reality is that having a CBD office location is no longer what it used to be. In this modern world of technology and high quality digital communication, commercial tenants – businesses with employees – are looking for ways in which they can attract and retain the best talent. And that no longer means expecting employees to spend an hour or more commuting to work on a crowded bus, train or tram, or battling peak hour traffic. Employers are looking for opportunities to create business ecosystems for staff – combining ease of commute with pleasant locations and flexible work spaces, close to good amenities and with high quality technological facilities.
That means that many commercial office tenants are looking for locations such as Melbourne’s south-east to provide a different experience for employees.
Population and economic growth
Melbourne has Australia’s strongest population growth, including welcoming about 35% of all overseas migrants to Australia. While many of those internal and overseas migrants might end up working in the CBD, most of them reside in Melbourne’s suburbs, including the south-east. And that means more local business requiring retail and restaurant real estate, for example. With a robust economy and strong jobs growth, this trend is not likely to abate and that bodes well for the commercial market in the south-east. Melbourne is also one of the ten fastest growing cities in the developed world.
Infrastructure and transport
The Victorian government’s infrastructure development agenda is in full swing. However there are question marks about whether it is targeted to the right places, such as south-east Melbourne, to generate increased supply of industrial land supported by effective road and rail transport, water, sewage and power infrastructure. Currently there are about 360 hectares of undeveloped, zoned industrial land in the south-east which is likely to come on stream over the next 36 months. There is also significant competition for that land which has seen prices for newly available serviced land increase by nearly double over the past two years.
Melbourne’s CBD has experienced unprecedented commercial office occupation rates over the past few years. Despite that, yields have been compressed although capital gains have grown, keeping total returns above 10%. This is expected to continue in the short term. However, there is nearly 600,000 square metres of space expected to come on stream in the Melbourne CBD over the next few years. This will put pressure on both yields and capital growth and is also likely to see vacancy rates increase substantially to around 8%.
All that suggests that now might be the time to consider investing in suburban Melbourne commercial real estate.