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Closing the gap on suburban commercial property

As the world’s most liveable city, Melbourne has so much to offer. Opportunities await on every corner. In commercial property investment, this has seen the spotlight planted firmly on the CBD.

But the tide is steadily shifting. CBD office space in Melbourne is being squeezed by a growing preference for residential development, prompting tenants and investors to look further afield and pushing cap rate compression well beyond expert predictions.

This has created a groundswell of activity in Melbourne’s suburbs, particularly the city fringe and eastern corridor. Over the last 18 months, the suburbs have delivered consistently high and even record-breaking results, particularly in the sub-$50m office space market. This is the biggest market shift of recent years, in close to two decades working Melbourne’s eastern corridor, I’ve never seen anything like it. Melbourne’s suburban commercial property sector is definitively closing the gap on its CBD rival.

The impact of this shift has been a hotbed of investment activity and rising rental returns in locations such as Richmond, Hawthorn and Box Hill, where median residential prices continue to outpace much of the metropolitan area, and government resources are being increasing directed. Hawthorn in particular has shown unparalleled growth for the last decade, with values doubling during the period 2008 to 2016 and a median price now exceeding the metropolitan average by more than 60%.

State and Federal government response to Melbourne’s urban sprawl has been concentrated infrastructure support in new suburban hubs like Box Hill, where the Australian Taxation Office recently added a 19 storey office tower and a $447.5m has been committed to the redevelopment of Box Hill Hospital. This has helped commercial centres to thrive and opened up a swathe of opportunities for investment. As the population continues to extend far beyond the CBD where commercial vacancies are scarce, investors and developers are finding there’s little value trying to squeeze more out of it.

In the late 1990s more than 70% of business was based in the CBD, with over half of Melbournians commuting there each day from the suburbs. But in the last 20 years, Melbourne’s commercial district has become greatly decentralised. The proliferation of suburban business parks has significantly boosted opportunities for Melbournians to work closer to home, with many large national and international companies opting to headquarter their operations in locations such as Mulgrave, Narre Warren and Ringwood.

Foreign investment in Melbourne’s suburban office market has also soared in recent years, driven by skyrocketing CBD prices and rapidly appreciating land values. Director of CBRE Melbourne Middle Markets Lewis Tong notes a key subgroup in this wave of foreign investors is China. “We’ve seen a significant wave of business investors and high net worth individuals, but also a considerable number of retired generational investors looking to build their children’s nest egg”, he said.

Increased competition from offshore buyers, along with shrinking CBD vacancy rates, has driven 30% uplift in Melbourne’s suburban commercial property values over the last two years. This trend looks set to continue, with yields expected to keep firming at least until there is a significant rise in interest rates. Suburban hubs will continue to improve and expand in line with infrastructure growth, while consistently high performing inner eastern locations will continue to be highly sought after. All in all, it’s safe to say the suburbs will give Melbourne’s CBD a run for its money.

Sandro Peluso is a Director at CBRE.

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