“If Google was to land in Melbourne and want 8,000 square meters, (they would have) limited options – probably one at the moment.”
So declared Melissa Kidd, General Manger Southgate at APM Australia, at the Office Market Report lunch hosted by the Victorian Division of the Property Council of Australia in Melbourne on August 1.
Kidd’s comment reflects concern that Melbourne’s status as an employment powerhouse will be compromised by a lack office space available for new entrants to occupy.
At 6.4 percent, white collar employment growth in the Melbourne CBD during the year to March was almost twice that in any other capital city CBD, according to real-estate services firm CBRE. Indeed, the city’s CBD now accommodates 322,269 white collar workers – almost as many as those who work in Sydney’s CBD.
For the city to sustain this, however, companies need somewhere to base their operations and accommodate their workers.
Here, things are problematic. At 3.3 percent, office vacancy rates throughout the Melbourne CBD sit at levels rarely seen during the past thirty years. With no new stock slated for 2023 and beyond, where new office workers over the next decade will go remains uncertain.
This is concerning. With its population expected to increase from 4.975 million in 2018 to 6.372 million by 2028 (ABS projections), the Greater Melbourne area will need to find jobs for a large number of new working age professionals over the next decade. Unlike Sydney with its robust secondary markets such as Paramatta, Melbourne relies on its CBD for high-end professional office employment.
This raises questions about what can be done. This was one of several issues discussed at the aforementioned lunch. Along with Kidd, speakers included REA Group Chief Economist Nerida Conisbee, Charter Keck Cramer Directors – Valuations Glenn Lampard, Essendon Fields Chief Executive Officer Brendan Fields and Hub Australia CEO & Founder Brad Krauskopf.
At first glance, the situation does not seem overly bad. All up, the Melbourne CBD has almost 650,000 square meters (sqm) of stock in the pipeline – more than the pipeline of stock for the Sydney and Brisbane CBD’s put together. This includes more than 410,000 sqm slated to come online between now the and end of 2020, an amount way above levels of additions seen over similar time periods in recent history.
At the same time, demand appears to have fallen flat. All up, tenants took up a net of just 24,393 sqm over the six months to July – the lowest level of net absorption for any six month period in more than four years. For a CBD with an existing stock of more than 4.5 million sqm, absorption at these levels seems manageable.
Indeed, Conisbee expects vacancies to rise over the short term because of this. Others agree. By 2022, real-estate services firm CBRE expects vacancies to reach levels of seven percent and above.
Look closer, however, and the situation is more worrisome. Almost half of the stock of the stock in the pipeline is already pre-committed. Moreover, Lampard says, most of the stock in the pipeline is yet to receive development approval.
As for the apparent softening in demand, aforementioned commentators say current low absorption levels simply reflect a lack of tenant options for new space in a tight market.
Moreover, with little further stock on the horizon from 2023 onward, concerns about a long term supply shortage are growing.
“The elephant in the room with respect to that supply chart is not so much what is coming online in the next couple of years during 2020 and 2021,” Lampard said.
“It’s what’s beyond. There is a real dearth of supply beyond that.”
A significant problem involves a planning change known as Amendment C270, which was introduced as a temporary measure in late 2016 and adopted as a permanent measure less than twelve months later. Designed to protect streetscapes and amenity in response to rapid levels of high-rise residential development, this introduced new planning controls in respect of shadowing, wind controls, building height and setbacks in the CBD and Southbank areas. On height, the Amendment introduced a maximum base floor area of 18:1, which effectively mandated that a building’s height can be no more than eighteen times the size of its floor area on the ground floor. On setbacks, it introduced street setbacks of ten meters and side and rear setbacks equal to at least five meters for buildings of up to eighty meters in height or at least six percent of total height in the case of buildings of higher than eighty meters. (Modifications to these requirements are available in some circumstances.)
Whilst these requirements are reasonable for residential developments, aforementioned commentators say that for commercial projects, they do not enable the size of floor plates which is needed by major corporate tenants.
This, Kidd said, is restricting options for tenants in new CBD buildings. Major tenants, she said, cannot accept floor plate sizes of less than 1,000 sqm.
Cressida Wall, Victorian Executive Director for the Property Council of Australia, agrees. She points to an Urbis reported commissioned by the Property Council in late 2018 which showed that at least ten of Melbourne’s iconic buildings which have either been constructed or are currently under construction would not have been approved under current C270 controls.
Beyond C270, a further challenge is infrastructure. At the moment, the setup of Melbourne’s road and rail network revolves primarily around bringing people into the CBD. This, Kidd’s says, limits the city’s ability to create secondary office markets which are accessible to workers and necessitates reliance upon the CBD itself to deliver office space.
Conisbee agrees. She points out that Melbourne differs in this respect from Sydney, which has a strong secondary market in Paramatta and will have an expanding one where the new airport is being developed in the west.
What can be done?
One solution involves space located outside the CBD. On this score, Phian talks of business parks in precincts such as Essendon Fields in the north and Caribbean Gardens in the east. With fewer planning restrictions, these offer flexibility in design and building envelopes. As well, these precincts combine A-Grade office space with amenity desired by tenants and customers. Speaking of Essendon Fields, he says this includes transport and healthcare options along with good childcare services and high-quality open space.
For local technology companies, Conisbee says CBD fringe areas such as Richmond and Cremorne offer an alternative – albeit with global tech outfits still choosing Sydney over Melbourne. With her own employer, Conisbee says REA Group originally leased two floors when going to Cremorne but has now taken over the whole building and doubled its space.
Longer term, there are much talked about urban renewal precincts at Arden in Melbourne’s inner-north west and Fishermans Bend in the inner south-west. Here, Kidd talks of the need for traction and serious effort to plan for transport to and from these sites.
Despite all this, Kidd says major companies still wish to be centrally located in order to attract the best talent. She points to JB Hi-Fi, which took up 9,500 sqm at Southbank last September. When selecting its location, the company profiled its workforce to see where its employees were coming from. It uncovered a wide dispersion under which workers were coming from the north, south, west and south-west. It concluded that a centralised location was needed to accommodate requirements across its workforce.
Accordingly, she says Melbourne must continue to develop new CBD stock.
For this reason, there is agreement that C270 need to be addressed. At a recent Property Council lunch, Victorian Premier Daniel Andrews confirmed that changes are expected before the end of the year.
Lampard says these are needed.
“At the time C270 was introduced, Melbourne was going through a phase of quite a lot of high-rise residential development on some fairly small spots,” he said.
“I don’t think that there would be too many of us here who did not think it prudent that we took a breath and stepped back a little bit.
“It was brought in as an interim measure. I think we were all surprised when it was brought it in as a permanent measure less than a year later.
“It was effectively to stop high-rise on small sites. But it has taken away our ability to produce office space in the future. The office has been caught up in that net. C270 with respect to setbacks and height effectively restricts the amount of office you can put on the site.
“What that means for owners and developers is that they can’t build a floorplate which is big enough to accommodate a modern workplace.”
“It’s a problem. It needs to be reviewed and reviewed quickly.”