Melbourne’s looming office crisis

Melbourne’s looming office crisis

29 September 2017

Melbourne’s city-shaping strategies have attracted 30,000 residents and created one of the world’s most liveable places. But does a potential shortfall in office space send warning signs to Australia’s planners and policy-makers?

This is the question keeping Lendlease’s Head of Markets in Victoria and Victorian Property Council President, Roger Teale, awake at night.

“By 2030, we might need one million sqm more commercial space, as well as homes for 15,000 more people living in the city. How do we plan for that?” he muses.

“One million sqm is around the same amount of office space as that built in the Docklands over the last 10 years.”

According to the Australian Bureau of Statistics, Victoria’s population is growing well above its 10-year average, with 127,500 people added in 2016, and 6.1 million now calling the state home.

Melbourne accommodated the bulk of this growth, and the ABS projects the city could double to 7.95 million by 2046 and top 9 million by 2056.

Population growth in Victoria is driving white collar job creation—workers who tend to congregate in office towers and technology parks close to the city.

“Our challenge is to ensure our planning processes can cope. I don’t think they are adequate to the task at the moment, and we need planning reform,” Teale says.

More than 30,000 people now live in the CBD, and more pedestrians walk along Bourke Street each day than they do London’s Oxford Street.

But with only a finite amount of space in the CBD, residential and commercial development compete for space.

The latest Office Market Report, published by the Property Council in August, found that Melbourne’s vacancy rate of 6.5 per cent is the second lowest in the country.

The 30,606 sqm of new supply was matched by 21,430 sqm of net absorption and 7,183 sqm of withdrawals in the six months to July 2017.

In a climate of reducing availability of stock, the simple law of supply and demand tells us that the result must be an increase in prices.

Over the year to June 2017, prime grade face rents grew by 14 per cent in Melbourne, well above ten-year averages. The outlook for growth is over the next 12 months is also very strong.

Colliers Office Research and Forecast Report Q2 2017 expects Melbourne CBD office supply for the next 12 months to contract by 7,000sqm.

During the same period, an estimated 6,121 office based workers will require space in the Melbourne CBD.

Based on a conservative estimate of 11sqm per office employee, this is about 65,000sqm of demand in Melbourne.

What policies, then, might ensure a steady supply of high quality commercial office space?

Decentralising growth can ease the pressure on supply, and Teale points to the relocation of the Transport Accident Commission to Geelong as a good example of this strategy.

“But the simple fact is that 70 per cent of people moving to Victoria each year want to live in metropolitan Melbourne—and at least half of those want to live in the CBD,” he says.

The planning scheme amendment C270, introduced in November 2016, introduces controls to the Hoddle grid in the CBD and Southbank. Among the amendments are mandatory plot ratios, building set-backs and height restrictions.

“We don’t have all the answers yet, but we do know that people moving to Melbourne want to work in the city. That’s where the jobs are,” says Teale.

“It’s a joint challenge for government and industry, and we need to work together to develop long-term, strategic solutions,” he concludes.