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CO-WORKING has quickly moved from just a new buzzword to becoming serious players playing a key role in the Melbourne CBD office market.
JLL director & head of research Annabel McFarlane said the expansion of smaller office tenants – those looking for spaces of under 1,000sqm – is driving strong net absorption in the CBD, and this is led by co-working tenants.
Melbourne now houses co-working tenants such as WeWork, Compass Offices, Regus, The Cluster, VCSO, Liberty Executive Offices, Melbourne Business Centre and Barristers Chambers.
And these co-working companies are as important to the office market as the major firms like Deloitte, Arup, Minter Ellison, Pitcher Partner and King & Wood Mallesons.
“Melbourne has more co-working tenants than Sydney and has become the co-working capital of Australia,” McFarlane told the Australian Property Institute and REIV 2017 State of the Market event last Friday.
McFarlane said co-working has become a feature of the Melbourne office market, driven by an increase in businesses wanting to offer the best office accommodation for their staff, track talent and collaborate.
“The internet and what we’ve been able to do with innovation has allowed that,” she said.
McFarlane said JLL predicts another trend, pro-working, to also play a role in the office market.
“Pro-working is where companies and clients decide to work out of the same office rather than be apart on specific projects, rather than send emails back and forth” she explained.
Between 2017 and 2021 there is underlying demand for 496,247sqm of office space, led by food and accommodation accounting for 119,365sqm; professional services with 96,575sqm; financial services with 78,116sqm and others making up for 80,323sqm, amongst others.
McFarlane said the key trend is smaller tenants’ expansion driving strong net absorption. Between 2011 and 2016, the Melbourne CBD recorded 27,940sqm and in 2016 alone it recorded 11,340sqm, compared to Sydney’s CBD with 13,800sqm and 5,430sqm over the same periods.
“It’s a really good sign that there’s business confidence, business are expanding,”
She said total net absorption in the Melbourne CBD last year was 188,672sqm, the highest rate since 1978, and well above the 10-year average of 88,600sqm.
In comparison, Sydney’s CBD recorded 81,570sqm, Brisbane’s 41,543sqm, and Perth’s negative 12,746sqm in 2016.
“This is reflected in the employment numbers, with Victoria having 118,000 jobs created and over 40,000 job vacancies compared to New South Wales, with 1,000 jobs created and over 50,000 vacancies; Queensland negative 31,000 jobs created and approximately 30,000 vacancies; South Australia (has had) 7,000 jobs created and Western Australia negative 20,000.
“The Victorian employment sector is expanding and remains very diverse, protecting it from economic shock,”
Centralisation from fringe markets has also been a big contributor to the record take up of space, due to the withdrawals of office assets to some extent, but also because people of the growing hunt for collaborative space.
McFarlane told the attendees that the suburban markets have not seen as much rental growth and incentives have been rising because there’s of supply.
“Going forward, 2017 should be a very good year for landlords in terms of rental growth because of the relative lack of supply in office stock in the CBD and fringe markets.
“Relatively speaking, in 2016 we had limited supply – just the two Collins Street buildings were built this year, but demand massively exceeded supply this year so as a result, vacancies are on the way down. We’ve got nothing much in the forecast for 2017, so vacancies are going to get really tight in 2017, to a sub-7% level.
“Thereafter, that strong demand has translated also into big businesses kicking off new construction projects and you know, Deloitte, a number of the lawyers, these are the companies that have been able to create the anchor for big projects going forward. So, by 2020 we could see a supply spike in the CBD and that will alter the metrics a little bit, and that’s something to watch going forward.
“Mid-point yields in Melbourne CBD are now sharper than they were pre-GFC in 2007, between 5.5% and 6% in Q4 of 2016 compared to 6.5% in 2007. It is also the same for both prime fringe and prime south-east suburban, at 6.5% in Q4 2016 compared to 7.5% in 2007,”
She expects vacancies in the fringe market to tighten with 11 buildings in the fringe markets totalling 102,640sqm to be withdrawn, slated for residential conversion, in a sector that has seen nothing new built since 2009.
She said incentives are “definitely here to stay”, but have started to come off their peak of one year ago.
The fringe office market cycle is about to start again, with the strongest rental growth anticipated in the fringe secondary markets due to withdrawals of offices for residential development, displacing tenants who have to find alternative location.
A positive outlook has been created for investors, who McFarlane said can see the rental growth coming forward and are buying into it.
“So 2016, across all sectors actually, it’s not just the office sector, has seen yields sharpen and decline. So we’re at a very strong point in the cycle. We think we’re just about at that yield trough now. We don’t think we’re going to see it go any further.
Demand is still expected, however, with offshore investors a key driver. Last year 56% of investment in the CBD office market was from offshore groups, and in the fringe market it was 29%.
“What’s interesting is that offshore groups are starting to look at the suburban market. That’s a new thing, and that’s a sign that Melbourne has become well-known enough to those offshore groups; it’s being treated like a Tier-1 city like Sydney and I think that’s a very interesting thing to look at going forward,” McFarlane said.
Australian Property Journal
