Colliers International predicts rental growth, tightening vacancy to drive commercial development
Melbourne’s city fringe office market is on the cusp of a new development cycle driven by strong tenant demand, rental growth and tightening vacancy rates.
According to Colliers International’s Rob Joyes, the city fringe market overall has tightened considerably from a vacancy point of view over the last 12 months.
One of the major vacancies in the fringe market – around 7,000sqm of backfill space over three floors at South Wharf Tower vacated by Mondelez – has been snapped up by Philip Morris on a new 10-year lease negotiated by Colliers International’s Ben McKendry and Mr Joyes.
Philip Morris will move its Melbourne workforce from Moorabbin to its new national headquarters at 30 Convention Centre Place, South Wharf in one of the first major leasing deals for the year.
“On the tenant demand side, enquiry in early 2016 has increased dramatically,” Mr Joyes said. “There are currently around 87,000sqm of tenant briefs in the market for city fringe space, including the likes of Just Group (7,000sqm), Seek (15,000sqm) and HWT (15,000sqm) and potential requirements from major occupiers including Ericsson and Accenture.
“As the city fringe vacancy rate tightens for large areas greater than 5000sqm, it is likely to stimulate a new development cycle which has not been seen for the last 10 years.
“While the focus in recent years has been firmly on Melbourne’s booming residential development pipeline, we anticipate new opportunities will begin to arise.
“With an uplift in rents, commercial development is becoming just as appealing to developers as residential development. Developers now have another enticing option to consider – it’s not just residential development that stacks up in the current market."
A prime example was Red Energy’s commitment to 570 Church Street, Richmond at a rent of mid-$400/sqm.
“This is the level that rents need to reach to stimulate new development and we are on the cusp of that now,” Mr Joyes said.
According to Colliers International research, A Grade net effective rents have increased over the past year by 7.82% in the St Kilda Road market, 8.53% in the city fringe market and 2.86% in the inner east office market.
This is a 10-year average increase of 1.7% for St Kilda Road, 3.2% for the city fringe and 3.4% for the inner east.
Mr McKendry said despite a well documented trend that had seen a growing number of suburban tenants relocating to the CBD over the past year, there was still a significant proportion who were committed to their fringe locations.
“There are many larger occupiers who are very happy in fringe locations such as Richmond, South Melbourne, Collingwood and St Kilda Road,” he said. “These markets are very tightly held when it comes to available options for larger tenants and we are seeing the lack of options pushing up rents.
“Councils overseeing these suburbs are keenly aware of protecting the mixed use nature of these areas, ensuring the suburbs are not all converted completely to residential use. They are showing a belief in retaining the character and style of these areas by ensuring commercial zones remain in tact to uphold the diversity of the area.
“We are finding people with land in these commercially zoned areas are far more confident now than they have been in recent years when it comes to making plans to undertake commercial development.”