Expect tightening office yields, an uptick in commercial construction and the launch of new retail concepts
Melbourne’s prime office yields will compress further in 2020 buoyed by continued buyer demand and limited investment opportunities.
This is one of the key Melbourne take-outs from CBRE’s new 2020 Market Outlook report, which examines the outlook for the key property sectors and geographies across Australia.
CBRE Senior Director, Capital Markets, Kiran Pillai said Melbourne’s average prime office yields were expected to decline by some 25bps this year to a new low of around 4.50%.
“Strong investor demand, combined with declining bond rates, should drive further yield compression over 2020. Melbourne's office market is expected to remain tightly held, which will drive further convergence in prime and secondary yields as investors demonstrate a preparedness to absorb more risk in order to get access to Melbourne office stock,” Mr Pillai said.
The continued tightening in the market will coincide with the largest boost to new office supply in Melbourne in over 25 years, with eight new office buildings totaling 338,000sqm (representing approximately 7.3% of the total size of Melbourne’s CBD) due to reach completion in late 2020.
This will lead to a in rent growth as a result of increased vacancy, which will see incentives increase over the short term.
However, Mr Pillai noted that Melbourne’s long-term rent prospects remained strong, which would continue to underpin interest in office investment opportunities, with the city’s yields still considered attractive when compared to other major global markets.
“In the mid-to-long term, Melbourne’s prospects for rent growth are strong as very few development sites will remain at the end of this current supply cycle and developers will increasingly need to withdraw or amalgamate existing office buildings to create new office product, Mr Pillai said.
Other key takeouts from the report include the outlook for new retail supply, with 408,000sqm of new space set to enter the Melbourne market in 2020 - an increase of 84% on 2019.
CBRE Associate Director, Research, Kate Bailey said most of the new space would involve neighbourhood projects (125,500sqm) and large format centres (98,600sqm), being developed as a direct result of strong population growth.
At the same time, structural changes to the retail sector will drive the ongoing transformation of the shopping centre sector.
“2019 was a difficult year for the retail sector, with a several national retailers entering insolvency, particularly those with a limited online presence,” Ms Bailey said.
“As a result, a range of non-traditional retail uses have popped up, including Catch of the Day opening a physical retail presence in Target at Highpoint Shopping Centre and Australia’s first Esports arena filling the vacated Topshop box at Emporium, offering more than 10 screens broadcasting live tournaments, 160 esport gaming PCs and a tavern.
“As retailers continue to rationalise their physical store footprint, it is expected 2020 will see more unique retail spaces open that will provide increased foot traffic, especially from younger, tech savvy consumers. Increased pressure on household incomes may see retailers reduce their reliance on food and beverage retailers and instead look to online retailer pop ups and entertainment.”
On the industrial front, CBRE’s Market Outlook report forecasts that Melbourne rents will continue to grow in 2020, albeit at a slower pace, with the super prime rents forecast to increase by 2%-3% this year.
CBRE’s Victorian head of Industrial & Logistics, James Jorgensen, said it was important to note that the slowing in rental growth was due to an increase in development and not a slowing of demand which is at unprecedented levels in the West market and has picked up significantly in the South East and North. Supply is tipped to increase by 140% in 2020 when compared to 2019 to meet demand.
Mr Jorgensen also noted that e-commerce was underpinning demand and forecast that growth in demand for same day delivery could lead to the development of last mile warehouse facilities in inner and middle ring suburbs.
“According to Australia Post, Victoria saw online shopping growth increase by 22.2% in 2019, above the Australian average of 20.2%. This trend is expected to continue in 2020 placing increased demand on supply chain and increasing the need for distribution networks that can facilitate fast delivery,” Mr Jorgensen said.
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CBRE Group, Inc. (NYSE:CBRE), a Fortune 500 and S&P 500 company headquartered in Los Angeles, is the world’s largest commercial real estate services and investment firm (based on 2019 revenue). The company has more than 100,000 employees (excluding affiliates) and serves real estate investors and occupiers through more than 530 offices (excluding affiliates) worldwide. CBRE offers a broad range of integrated services, including facilities, transaction and project management; property management; investment management; appraisal and valuation; property leasing; strategic consulting; property sales; mortgage services and development services. Please visit our website at www.cbre.com.