Why South Melbourne is gaining popularity with office workers
Sky-high rents and historically tight vacancy rates in the Melbourne CBD are forcing companies to look further afield in their search for office space, with major developers banking on the fact that this trend will continue for years to come by investing in speculative developments in the city’s fringe suburbs.
The CBD office vacancy rate fell to a 10-year low of 3.6 per cent in the six months to August – the lowest vacancy rate of all Australian CBDs – according to the Property Council of Australia.
“The current low vacancy in the CBD is driving rents upwards and tenants are looking for value propositions close to the CBD,” said Grant Tinker, director of office leasing Victoria, at Cushman and Wakefield.
One fringe office market that has been grabbing all the headlines in recent years has been Cremorne.
The suburb, wedged between Richmond and South Yarra, has seen high-profile tenants such as electric car manufacturer Tesla move in and a number of pre-commitments for new developments.
Earlier this year Knight Frank reported that Cremorne and neighbouring Richmond had seen office rents virtually double in the past five years.
But the squeeze on office space in the city is starting to have a flow-on impact in other fringe suburbs too, enough for some of the city’s biggest developers to take a gamble on future demand.
“Not everyone wants to be in Cremorne,” Mr Tinker said.
One suburb gaining popularity is South Melbourne.
“South Melbourne is extremely close to the CBD and is serviced by four tram routes. It provides an attractive alternative, particularly for the workforce who reside in the Bayside area and do not necessarily wish to travel to the eastern suburbs,” Mr Tinker said.
At least two speculative developments are slated for completion in South Melbourne within the next year and the suburb is currently has a dearth of listings of more than 2000 square metres.
Speculative development is when buildings are constructed before there is a tenant locked in place, typically because a developer is predicting there will be strong demand in the area.
“South Melbourne is maturing as a corporate office destination. Recent development activity includes 101 Moray Street which is 15,000 square metres of office space being speculatively built by the Deague Group and due for completion Q3 2020, along with 10,000 square metres also being speculatively built in Clarke Street. There are several other developments either approved or seeking a pre-commitment before starting construction,” Mr Tinker said.
The Deague Group is predicting a continuation of tight supply in the South Melbourne market for years to come.
“[Fringe office] rents are at record highs and rising. There is no stock coming and yields are at record lows. It’s good times for office development in an uncertain property market,” Deague Group chief executive Will Deague told The Australian Financial Review in December when the group announced the 101 Moray Street site acquisition.
It’s not just high city prices that are pushing companies to look to Melbourne’s inner suburbs for office space.
Vincent Tran, Cushman & Wakefield’s Victorian associate director of metropolitan office leasing, said the increasing preference of the millennial workforce for the city fringe environment also helps.
“We are seeing businesses seek a move away from traditional corporate locations or business parks, to areas that are a formed precinct. These are areas that not only provide food-and-beverage retail during the day, but also at night. With a greater focus on staff retention and employee satisfaction, the demand for office accommodation in Melbourne’s fringe has exploded, with the need to accommodate a younger workforce becoming increasingly relevant,” Mr Tran said.
“The area’s high level of retail amenity offering [particularly around the iconic South Melbourne Market] is highly attractive for businesses wanting to be in the southern city fringe. On market days there is quite the buzz around particularly as we come into the warmer months of the year, with live music and events on during the day and night.”
Major leasing deals in South Melbourne include the recent move of the Creative Cubes coworking space into the Asahi back-fill space at 111 Cecil Street, while travel website Luxury Escapes has signed a five-year lease at 68 Clarke Street for 1590 square metres of space.
But until new developments like those at 101 Moray Street and 66 Clarke Street come online, medium-to-large companies seeking space in the suburb are a little stuck for choice.
Of the listings in South Melbourne above 2000 square metres currently on commercialrealestate.com.au, only one was available for occupation in the next six months, with the remainder currently in the construction stage.
Mr Tran and Mr Tinker are currently leasing 380 City Road, on the South Melbourne border. The 2800-square-metre building – currently home to Domain Group (publisher of this website) – is available as a whole, or part, lease with office areas from 1000 square metres.
Domain Group is relocating to Cremorne next year.
Mr Tran said the red brick building includes the existing modern, functional fit-out of more than 170 desks with room for more.
“The building has excellent signage exposure over one of Melbourne’s busiest roads – City Road – with plenty of passing traffic,” he said, adding that the property was a “short walk to South Melbourne Market and the South Melbourne light rail”.
Get a weekly roundup of the latest news from Commercial Real Estate, delivered straight to your inbox!
