Victorian Commercial Property Market Update – November 2023
Article | 3min read
by JONES REAL ESTATE on November 15, 2023
The Victorian commercial real estate market is a complex, dynamic and cyclical sector. A broad range of factors act as levers for change in the marketplace, all of which can trigger acquisition and liquidation activity, or influence sentiment and even valuations.
During our time working as property professionals, the market cycles we have observed – while volatile at times – have all comprised growth and correctional phases across an approximate seven-to-nine-year period.
As we embark further into the final quarter of 2023 and edge closer to the end of the year, here is our take on the state of the market:
Victorian Premium/A-Grade Office Market
This sector continues to perform strongly as the ‘flight-to-quality’ trend progresses and is leveraged by employers as a drawcard to entice workers back into the office, with a view to creating a more desired in-office and WFH balance.
From a valuations-perspective, these have been particularly favourable for well-positioned assets with excellent working and social amenity, coupled with robust sustainability credentials – which the next generation workforce (Millennials and Gen Zs) considers deeply when hunting for employment.
A great case study for this is the recent sale of the Orica building – Melbourne’s first skyscraper – at 1 Nicholson Street, East Melbourne, which was purchased for $155 million.
Victorian B/C-Grade Office Verticals
The B/C-Grade office verticals have experienced a unique set of challenges recently, however opportunities to innovate and reposition these assets have also intensified.
While many of these properties are experiencing increased vacancies or dropping valuations, this is creating excellent acquisition opportunities for private sector investors.
Over the next 24-months, we expect to see a flurry of sales activity and adaptive reuse projects get underway in the CBD market, as savvy investors make more moves on discounted well-positioned properties, then update them with high-quality amenity to pique the interest of small business tenants.
Furthermore, Melbourne’s housing and rental crisis could drive added opportunities for this space, with vacant subprime CBD buildings estimated to create 12,000 new homes. This is according to research from the Property Council of Australia, which also encouraged the State Government to seriously examine creative solutions to unlock more dwellings.
Industrial Market Analysis
The industrial market in Victoria has undoubtedly been the highest-performing vertical during 2023.
Thanks to record low vacancies (circa 1.1 per cent), rental growth in Melbourne’s industrial market surged in all areas, with 32 per cent annual growth rates recorded in prime Melbourne industrial assets over the past year, Urban Property Australia data revealed.
We expect this sector to double-down on its performance as the local e-commerce and logistics segments boom and a lack of supply continues to drive up leases.
Small and medium-sized completed industrial warehouses with good accessibility to key arterials, like the CooperRex Business Park we are representing on, will be hotly contested as they inject limited opportunities for businesses and brands to enter the market.
Significant industrial development activity will also surge into next year, as the race for space intensifies further. One example of this is Amazon’s planned warehouse project in the Craigieburn Logistics Estate being developed by Logos – a multi-storey 209,000 square metre fulfilment centre the equivalent of 11 MCGs (the biggest in Australia).
Strip / High Street Retail Properties
Off-the-back of the pandemic, the strip retail sector has rebounded remarkably well, with sales stable as people keep working from home, supporting a low 6.2 per cent vacancy across Melbourne – down from 10.3 per cent during lockdown.
Retail precincts with solid connections to residential catchments curtailed vacancy rates, while the return of international students and summer tourism will inject more value into the market and stimulate the CBD economy.
See below for a snapshot of vacancies across some of Melbourne’s landmark retail strips:
Bridge Road, Richmond – currently at 10.7 per cent vacancy, down significantly from 15.4 per cent in 2022. Allied health amenity like Epworth Hospital and new developments like Grocon and Richmond Traders, coupled with specialty eateries Bissel B and TODCO are key drawcards for the area.
Burke Road, Camberwell – vacancies have halved since COVID lockdowns to 5.4 per cent. The area is supported by an expansive and affluent residential demographic, with everyday amenity at The Well and planned projects like the Sofia’s site development and Victoria Hill to drive further interest for retail assets in Camberwell.
Chapel Street Precinct – vacancies across each of its suburban segments have all returned to single digits (South Yarra – 7.9 per cent, Prahran – 7.4 per cent, Windsor – 4.6 per cent). An uplift in specialty and food retailers and overhauls to key infrastructure like the Jam Factory will continue enticing people back into the dining and shopping hotspot.
Toorak Road, South Yarra – on a downward trend, dropping to 5.6 per cent vacancy with planned developments at South Yarra Square and Hotel Claremont set to reduce this further.
At Toorak Village in Toorak, newly delivered mixed-use projects like Vicland’s 489-505 Toorak Road and ‘Toorak Village’ by Orchard Piper have also injected fresh supply of luxury office space. These landmark corporate offerings, coupled with the $400m revitalisation of the nearby Mercedes Benz dealership, will further benefit the surrounding retail tenant mix.
Church Street, Brighton – currently enjoying Melbourne’s lowest vacancy rate at 1.1 per cent. It is an exceptionally located specialty retail and hospitality juncture surrounded by an affluent residential demographic, underpinning strong demand for tenancies.
Carlisle Street, Balaclava – experienced one of the greatest reductions in vacancies, tightening from 11.6 per cent to 7.9 per cent. In March, Coles Group acquired a significant land parcel bordered by Carlisle, Camden and Alfred Streets for $100m, with a brand-new mixed-use project earmarked for the site which will bolster conveniences at the strip for shoppers in the coming years.
High Street, Armadale – has one of Melbourne’s lowest vacancy rates at 2.3 per cent. New developments such as Heirloom by Urban DC and GLG, as well as The Carlile by Hub Property Group, will feed new well-established buyers into the area, while the launches of high-profile labels including Bassike, Lululemon and Sener Besim fuel the growth of the premium brand network the Street is revered for.
Through integrating immersive brand experiences that cannot be replicated by e-commerce, this will bring more people back into stores into these iconic locations, lifting both sales and the investment performance of strip retail sites in the next 12 months.
Large Format Retail Assets
We expect the Large Format Retail asset class will maintain its positive incremental growth, especially in suburban and regional areas. This is due to several drivers, with perhaps the most significant been the varying size and value of these types of properties.
Opportunities valued between $2m – $4m will continue to draw activity and fuel private investor demand, while transaction volumes led by the institutional sector for properties over $15m should also lift.
Interest rates remain a crucial driver of sentiment and transaction activity in the commercial real estate arena. Off-the-back of the RBA’s increase from 4.1 to 4.35 per cent, this places extra pressure on institutional investors requiring borrowed capital to fund acquisitions.
To that end, this presents more opportunities for the well-established private sector which have remained active during 2023, as bidding competition from the institutions could remain stagnant until there is more certainty around financing with lent cash.
General Outlook for Q4 2023
If past cycles have taught us anything, it is that the Victorian commercial property sector has the ability to adapt and rebound even stronger following periods of adversity.
The continued growth of Melbourne as a business hub, coupled with macroeconomic factors like population growth and limited new supply in certain sectors, will underpin the resilience of our local commercial real estate landscape.
If you would like to discuss our take on the local commercial property market, current real estate opportunities available through Jones Real Estate, or discuss a separate property matter, please reach out to us at email@example.com.
This article was authored by the below commercial property specialists at Jones Real Estate: