Suburban Melbourne’s commercial real estate fundamentals are strong

As governments around the country begin to ease social distancing rules an interesting commercial real estate trend is emerging which is set to create opportunity for investors focused on suburban and outer suburban markets.

Commercial analysts and business reporters have noted significant negative impacts on CBD commercial real estate markets, including for Melbourne’s CBD. In particular commercial office property in CBD markets looks set to take as much as a 15 per cent hit on value. The drivers for this are two-fold.

First, many businesses have been hit by the close down of the economy during the imposition of strict interpersonal isolation measures.

Second, and perhaps more importantly, the dramatic rise in work-from-home arrangements, combined with reassessment of exactly how office spaces will need to be configured to allow “safe” working environments in the future has many white collar businesses considering alternatives to cramming staff into expensive CBD office space.

There are reports that a number of large corporations are seriously considering whether to remain head-quartered in CBD offices when there are fringe CBD and suburban opportunities available that are considerably more affordable and will allow the appropriate amount of office space per worker when business and office attendance starts getting back to normal.

An additional variable is concern about the health and safety impacts of work commutes, particularly on public transport, where employees are clearly more exposed to potential infection.

Consequently, well serviced commercial real estate markets like Melbourne’s south-eastern suburbslook set to benefit from potentially major changes in office rental demand. And it’s not necessarily a short-term trend – a recent article in The Australian indicated that CBD office vacancies are not likely to peak for at least two years – investors in those spaces are likely to experience significant reductions in yield as vacancies soar and rent waivers and deferrals remain unmet by struggling businesses.

Even where businesses decide that a CBD presence is warranted or necessary, many are looking to “hub and spoke” office models, where a small CBD office presence is supported by larger back office support which is headquartered in outer suburban areas.

Many businesses will be looking for ways to maintain efficiencies, reduce the impacts on employees of difficult commuting options in the context of social distancing and deliver safe and healthy work spaces at affordable rates. Businesses are even having to consider issues such as how employees enter buildings and the efficacy of using lifts and elevators in the context of social distancing –an issue that is much more manageable in lower density suburban office space.

However the easing of social and economic restrictions plays out over the next few months, it seems clear that the commercial real estate opportunities for suburban and outer suburban areas like Melbourne’s south-east will continue to benefit from an already strong base.

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