Low vacancy, a moderate development outlook and yield spreads between the CBD and suburban office market, above the long-term average, makes the Melbourne suburban office market a strong investment proposition.
According to JLL Research, non-CBD office markets were less liquid in 2013 than CBD markets accounting for only 7% of transactions by value over the past 12 months.
In periods of low liquidity, the yield spread between CBD and non-CBD office markets typically widens above historical benchmarks, and this is a feature of the current cycle.
Research Manager, Victoria, Kimberley Paterson said, “The current spread between the tighter end of the yield range in the Melbourne suburban office market and the Melbourne CBD is 150 basis points – well above the long term average of 110 basis points.
The current spread implies prime grade assets in Melbourne’s suburban market are attractively priced to the CBD, with an additional liquidity risk premium for the suburban office market of 40 basis points.”
“This, combined with low vacancy, a moderate demand outlook and further rental growth offers a strong investment proposition for the Melbourne suburban office market,” Ms Paterson said.
The Melbourne suburban market has doubled in size over the past decade and is now one of the largest monitored non-CBD office markets in Australia (by NLA) with 1.31 million sqm of office stock.
JLL has assessed the indicative market value of the suburban market at approximately $4.25 billion, accounting for 12% of market value across all non-CBD office markets in Australia.
Furthermore, physical market conditions across the Melbourne suburban office market have been relatively solid since the financial crisis of 2008.
The suburban office market was the only office market in Melbourne to record positive net absorption in 2013.
“Since JLL started detailed monitoring of the market in the early 1990’s, we have recorded twenty successive years of positive net absorption between 1994 -2013,” Ms Paterson said.
Head of Sales and Investments, Victoria, Robert Anderson said, “Vacancy rates remain low at 8.6% for the prime grade market, which is well below the long term average of 11.3% and the supply pipeline is limited.”
“The commercial investment market remains very strong and investors are becoming increasingly aware of the relative value good quality non-CBD assets can offer, as an alternative to the tightly held CBD markets”.
Only 40,700 sqm of space is currently under construction across the suburban market, equating to 3.0% of total stock. With development under-written by a high level of pre-commitment (approximately 90% of space currently under construction) supply additions will be below trend between 2014 and 2016.
Low vacancy and a stable demand environment have exerted upward pressure on rents, with JLL recording 29.0% growth in prime net face rents between Q1, 2007 and Q1, 2014.
