Government planning key to evolution of metropolitan office markets

Posted On October 3, 2013

Colleirs International

Government decentralisation, CBD supply constraints, infrastructure spending and urban regeneration hold the key to the growth of Australia’s metropolitan office markets, according to new Colliers International research.

Colliers International’s latest Metropolitan Office Research & Forecast Report has found that while Australia’s CBDs still contain the majority of the country’s office space, the metropolitan markets represent a large and growing proportion.

Going forward, urban regeneration precincts and those with solid public transport access would continue to offer best prospects for growth. Precincts to watch included Parramatta and North Sydney in NSW and the Northshore Hamilton precinct in Queensland.

“In terms of investor demand, as the focus of the major domestic and offshore pension and sovereign wealth funds continues to be on CBDs, other listed and unlisted institutions will create funds specifically to target metropolitan office markets, as their capital looks for new and expanded markets,” John Marasco, Colliers International Managing Director of Capital Markets & Investment Services, said.

“A number of major Australian institutions are believed to be creating these kind of funds as they seek to diversify their portfolios and target higher yielding assets.”

The cities monitored as part of the report – Sydney, Melbourne, Brisbane and Adelaide – have a combined total of almost 10.5 million sqm of office space in their metropolitan markets. In contrast, those four capital city CBDs have 12.8 million sqm of office space.

“Our metropolitan markets have seen significant supply growth in recent years, but the extent depends on their CBD counterparts,” Mr Marasco said.

“In Sydney, the metro market is actually bigger than the CBD market, while Melbourne’s CBD is slightly larger than its metro market, due to the fact that the urban regeneration program at Docklands has allowed for an unusual amount of large scale CBD development over recent years.”

The Sydney and Brisbane Metro markets have seen significant growth in NLA over the last 10 years, growing by 79 per cent and 62 per cent respectively. Melbourne and Adelaide, on the other hand, have seen respective growth of 24 per cent and 14 per cent, and have been outperformed by their CBD markets.

“The strong growth in the metropolitan markets of Sydney and Brisbane, as well as the good tenant covenants provided by the private sector as well as government (particularly in Sydney) means that institutional investment in the Australian metropolitan market has been concentrated in Sydney and Brisbane,” Mr Marasco said.

“While Melbourne is the second largest office market in the country, the dominance of the CBD in terms of both development and tenant demand has meant that institutions have had fewer institutional grade buildings with strong leasing covenants available to them for purchase.

"Melbourne, on the other hand, has had a keen focus from private investors and syndicates, some of whom are investing offshore funds from smaller investors.”

According to the report, Australia’s metropolitan office markets form a significant part of white collar employment activity in each of Australia’s capital cities, and the nation’s high levels of urbanisation significantly contribute to this.

The report found most State Governments around the country have implemented policies to decentralise some of their office space out of CBD areas and into metropolitan and regional areas, with the direct aim to create white collar employment in suburban and regional areas.

The city that has had the most success in decentralising government services to suburban areas is Sydney, with the State Government workforce growing more in Parramatta and North Sydney than in the CBD. In Melbourne and Brisbane, the State Government workforce concentration in the CBD markets has continued to grow.

Going forward, urban regeneration precincts and those with solid public transport access would continue to offer best prospects for growth.

“As in the CBD markets, existing metropolitan precincts will have to compete with increased demand from residential developers, and masterplanned urban redevelopment sites offer the best opportunities for large scale office development,” Mr Marasco said.

“Good public transport access will also be key, particularly in attracting government tenants, and also in order to lure key private occupiers out of the CBD. As the supply cycle in the CBD markets dries up over the next three or four years, the metro markets should become more affordable, relative to their CBD counterparts.

“Large urban renewal precincts that are able to accommodate major campus-style office development are attractive to the private sector, and precincts with good public transport are essential for the public sector.

“In Sydney, the construction of the North West Rail Link will open up the Norwest precinct to further office development, and will be attractive to government tenants, as the NSW State government continues its decentralisation drive.”

In Brisbane, the Northshore Hamilton precinct is a 304ha riverfront site that is located only 6km from the CBD. It will be the next focus of major campus style office development in Brisbane, and will also be home to around 15,000 residents.

In Melbourne, the Fishermans Bend precinct is a 240ha precinct on the edge of the CBD that has recently been rezoned to Capital City use. Whilst planning for the precinct is in its very early stages, the Victorian State Government has plans for up to 40,000 jobs in the area.

According to the report, even if only half of these jobs are office-based, as many are expected to be retail, this equates to around 280,000sq m of office development in the area – that’s more than three Rialto towers.

“This precinct will be able to accommodate large scale developments, is on the border of the CBD, and also has reasonably good public transport access via the light rail that runs from the CBD to both St Kilda and Port Melbourne,” Mr Marasco said. “Once Docklands nears the end of its development life, the Fishermans Bend precinct could be the next precinct to see major office development.”