Finding Room for New Set of Skyscrapers

Something very interesting happened about six years ago in the Melbourne CBD: developers started running out of major sites to build the next generation of skyscrapers.

In a landmark sale which started in 1999, the City of Melbourne council offloaded an entire city block once occupied by the Queen Victoria Hospital (developer Grocon has filled the site with a swag of skyscrapers). A few years later, the state government sold large properties in Collins Street and other exclusive city addresses, mostly to developers. Some blocks were sliced into smaller pieces.

At the point where the CBD meets Carlton, the Royal Melbourne Institute of Technology sold the 1.6 hectare former Carlton & United Brewery, another site now earmarked for a skyscraper compound. The former Spencer Street Power Station in Spencer Street later sold to a residential developer – a $1-billion-plus urban village, Upper West Side, is currently under construction there.

In 2007, developers paid Fairfax Media $66 million for a mammoth 1.5 hectare site at 250 Spencer Street, which had been home to The Age since 1969. A village with eight skyscrapers rising up to 63-levels has since been permitted. The land shortage has changed how investors view Melbourne’s CBD office buildings. Many in the industry were surprised when Singapore-based developer CEL paid $25.5 million for a 14-level office at 150 Queen Street only to announce a year later plans to replace the building with a 71-level residential skyscraper, being marketed now as Tower Melbourne.

Another major building at 199 William Street – an office infamous for being shut and unavailable for lease for decades – will be refitted as a 547-unit apartment complex.

In Russell Street, a 4-level office on a 381 square metre block near the city library was permitted to become a 36-level residential building.

Office occupants are increasingly competing with residential users for prime Melbourne CBD stock – but not all building owners are being tempted.

Bucking the trend, the owners of a 14-level office building with spectacular views of the Yarra River and Southbank over the Flinders Street train station, undertook a major refurbishment after ASX-listed tenant Commonwealth Bank of Australia recently vacated.

At the north east corner of Elizabeth Street, 276 Flinders Street has been relaunched as a high quality new office complex, Melbourne Square. Some 8882 square metres of office space is available in the building with net rents starting at $350 per square metre, per annum, according to leasing agent Matthew Kent from Savills who is marketing the space with colleague Nick Farley and Jones Lang LaSalle’s William McLaughlin and James Palmer.

Mr Kent says it’s not surprising Melbourne’s best sites have been developed adding that the loss of city office space to residential users in recent years has contributed to commercial space becoming more valuable to buy and rent.

Owners who renovate well-located offices to suit tenant demands have recently reaped rewards, Mr Kent said.

Not far away at 357 Collins, a rundown but prominent 30,000 square metre office building, formerly occupied by the Australian Stock Exchange, is undergoing a major renovation. The move reverses high-profile plans by the building’s previous owner to convert the office into a residential tower.

Sydney-based developer Charter Hall has progressively refurbished an office it co-owns at 570 Bourke Street, between King and William Streets. The 31-level building, Marland House, has a particularly large car park with 522 bays over five levels.

Office areas are set to be refurbished at 120 Spencer Street when NAB leaves later this year and electricity company AGL quits in 2014. Mr Kent said renovated older buildings often had the same quality high-end space offered in the city’s new towers “but are in locations you can’t beat”.

He said many investors who buy old Melbourne CBD offices do so with the intention of repositioning them once a tenant vacates.

Mr Kent said the changing way people come to work is a contributing factor for prospective tenants, with the role of public transport expected to increase even more over the medium and long term.

He said this coincides with government efforts to reduce the number of cars in the city by recently increasing a controversial congestion tax. CBRE office services director, Shane Burns, said refurbishments to buildings can be many things, some to re-position the asset and look for a higher rental rate.

“Other works are often done to existing A-grade office and premium (highest quality grade) buildings to ensure they remain relevant against new buildings and their peers,” he said.

End-of trip facilities including showers, lockers and sometimes a towel service are now seen as must-haves, not nice-to-haves.

“We have also seen most major institutional owners with vacancy issues inject significant capital into services upgrades, lobby and foyer refurbishments and improvements to tenant amenities to ensure their assets can offer comparable space to new buildings,” Mr Burns said.

Knight Frank Victorian research director, Richard Jenkins, said the CBD office vacancy rate is forecast to rise from a current level of 6.9% to 9.6% by July this year before experiencing a drop down to 6.9% in July 2015.

“As a result of the uncertain economic conditions stemming from the global financial crisis, the average incentive level has been 19% over the past four years; whereas the vacancy rate has averaged 5%. The subdued confidence levels and tighter funding conditions have led to incentive levels and the vacancy levels being misaligned since late 2008 compared to the long term correlation.”

The Age    Wednesday 15 May 2013