Melbourne was recently crowned the nation’s most populous capital city, which presents an exciting opportunity to harness this growth and bring life back to its CBD.

Whilst there are signs of improvement as more people will return to the office and the impending influx of skilled migrants will create more demand for office space, the commercial property sector is still feeling the aftereffects of a few tumultuous years.

As the vacancy rates of B-grade and C-grade office space stay consistently higher than pre-pandemic numbers and housing supply remains a critical issue, perhaps it is time we reconsider how these commercial assets are being utilised.

A logical step forward would be strategically re-aligning their use with the cities’ housing supply shortages, which will undoubtedly persist as the population increases.

 

Current State of market

Recent Property Council of Australia figures show the office vacancy rate across primary and secondary space in the Melbourne CBD is sitting at 13.8% as at January 2023 which represents the highest level since January 1999.

The development pipeline and volume of office space being developed may imply an in-demand market, however the issue is that the flight to quality is creating an even greater gulf in quality between the A-grade and secondary office space.

Premium office space and new developments with attractive facilities and competitive leasing terms are great for tenants but could mean more B-grade and C-grade commercial space remains empty.

Until the prime office space is occupied or begins to increase rental rates, the demand for secondary offices would remain low.

 

The foundations are laid

Melbourne already has fantastic infrastructure and an abundance of commercial space, something other global cities are still on the ascension to. Instead of needing to create an environment for business to thrive, it has the luxury of simply needing to rejuvenate and renovate.

This is a resource to be harnessed and developed further, but in recent times the appetite to enhance the city’s commercial assets hasn’t been as strong.

The uncertainty that has crept into the market is understandable as many asset owners have had to sit tight and navigate what seemed like the demise of the CBD as lockdowns and work from home arrangements decimated the sector.

The cost of finance is another prohibitive factor that is limiting the ambition and ability of asset owners to invest in their properties. These costs have steadily increased and with a lack of clarity about the future of the sector, it is understandable that there is hesitation to finance upgrades or renovations.

 

Levers to pull

Economist, Theodore Levitt once said, “Creativity is thinking up new things. Innovation is doing new things.” This somewhat straight to the point advice is exactly what we must do as a sector to move forward.

In line with his thinking, it is time to be innovative. There are some new things we could do to improve the situation that aren’t radical or beyond immediate consideration.

As always, the government has a role to play, and can be a key contributor in steering the city back to full health by supporting these ideas that could stimulate the use of space in the CBD.

With Melbourne’s forecasted population growth and current issues around housing availability, one consideration is to repurpose commercial space to service the struggling residential sector, offering a variety of modern apartments to boost the residential vacancy rate in Melbourne which currently sits just above 1%.

This conversion can be costly which will deter landlords, but it has been done successfully in the past and with the right backing from government it could be a mechanism that alleviates strain from both the residential sector and commercial sector.

Providing well-located residential space in the heart of the CBD will stimulate activity in the city and offers prime location for those occupying the space.

Many landlords are weighing up the risk vs. reward of renovating to attract tenants in an extremely competitive space, ready to capitalise on the overflow of tenants when A-grade space fills up and more people begin working more centrally again.

Subsidising these renovations is key to ensuring the secondary office space is ready to rebound and isn’t left scrambling or missing out on the resurgence of the sector in the months or years to come.

Another option is to launch some form of ‘Green Grant’ or similar initiative that would provide B-grade and C-grade commercial space landowners the opportunity to ‘green up’ their space to make up ground on the newer A-Grade buildings which are known to be more environmentally sound and sustainable.

The increased relevance of ESG policies and environmental focus of organisations has put the environmental capabilities of a building or space close to the top of the qualifying criteria when tenants are selecting an office.

 

The time is now

Whether the answer is to reposition, to renovate, or re-energise, the time is now. Melbourne will continue to attract people and companies from around the world for as long as there is space to work, live and play.

The ball really is in our court, we must do all that we can to ensure the longevity and prosperity of our storied and resilient city.

 

By Jason Stevens, Director of Commercial Office Valuations for Herron Todd White.

 

Jason has worked in the commercial property sector for over 15 years and specialises in valuation of office space within the CBD and broader metropolitan area.