OPINION: THE anticipation and sense of optimism that preceded the State Budget fell flat for those in the commercial property sector late on Tuesday evening.
Following the announcement of Victoria’s State Budget, the commercial property sector will be left frustrated at the missed opportunity to stimulate the CBD population and revitalise the C-grade and B-grade office space in the city.
It is difficult not to feel that the state government has missed the mark for the commercial property sector which will continue to feel aftereffects of post-pandemic CBD population and in-office workforce.
A budget will always have winners and losers, as evidenced by the media headlines and radio segments the days following budget announcement, and sometimes there are clear areas of need that inexplicably go unaddressed.
This year, it is undoubtedly the commercial property sector which is continuing to grapple with the ongoing impacts of the pandemic and work-from-home arrangements.
Stamp Duty Changes Welcomed
One clear positive from the budget was the removal of stamp duty for commercial and industrial properties. This is of course a win for the sector, however it feels as though the more strategic allocation of funds to boost the CBD, in particular commercial occupancy rates, weren’t exercised meaning many in the sector will be left feeling a little underwhelmed.
It is a welcome relief to some and will stimulate some activity in the market, but it doesn’t immediately or directly impact the main pressure points identified pre-budget.
The introduction of the annual property tax in its place will see holding costs rise which will only increase obsolete stock in the market. Without government grants or funding, we could see more property owners moving on.
Where owners were keeping afloat with the income from rent, the additional tax could be the tipping point that sees the property repositioning accelerate.
The Need for a Clear Path Forward
Lord Mayor, Sally Capp recently said, “We want Melbourne to be world-renowned as a vibrant place for business and innovation, a place where people want to work, invest and establish their business.
This is the ambition and intention shared by the sector but there must be a clear vision for how we achieve this.
Melbourne will soon become the countries’ most populous capital city and it is critical to the cities’ vibrancy, and longevity that there is a clear plan to utilise the space that we have in a way which benefits all stakeholders involved.
Further exacerbating this issue, is the budget’s failure to provide adequate support to tenants and landlords, creating a sense of unease and uncertainty. Neither of these feelings are conducive to a prosperous property market, nor the revival of a capital city post-pandemic.
This is a major oversight by the state government which will undoubtedly hinder the sector’s capacity to expand and evolve in the short-term, which poses bigger questions for the longer-term state of the market.
Practical Solutions the Budget Missed
What we do with our abundance of office space and how we utilise or reposition these assets will be key to the sector’s future and that of the office space in Melbourne’s CBD.
Responding to the environmental requirements, high tenant expectation and being creative with the use of space are important considerations in our path forward.
‘Greening up’, renovating and repositioning are key elements in the formula for the future success of the city’s commercial property.
More and more, we are seeing companies seeking office space that aligns with ESG principles and applying a ‘Green Grant’ to assist landlords to bring their premises up to environmental standards should be considered. The proposed measures to promote energy efficiency and renewable energy aligns with this growing trend in the sector and may assist landlords in attracting tenants.
Subsidising the necessary renovations to bring B and C-Grade office space back to the fore as a viable office accommodation option. Right now, some landlords are caught between a rock and a hard place as to whether they renovate to attract new tenants or attract new tenants to afford renovations. Taking the weight off their shoulders and subsiding the cost behind these renovations would provide a clear path toward a prosperous future for commercial property space.
Another option, most relevant to our headline issues around housing availability and impending immigration is to strongly consider repositioning these spaces, pivoting them to service the residential demand. The cost of this conversion can be a deterrent for property owners hence the hesitation to do so unsupported, however it is presenting itself as an increasingly sensible option.
Future-proofing for Prosperity
Ultimately, we need action – and we need it soon. Populating the cities’ CBD, whether it be for work, to live, or a combination of both, is integral to its economic prosperity and longevity.
Melbourne already has a strong core, great infrastructure and an abundance of commercial space. This needs to be treated as the resource and vehicle it can be to revive the city, enhance the city’s ability to harness the growing population and attract people back to the CBD.
We need to see action from government, or we risk vacancy rates rising for years to come.
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.
