2023 Melbourne commercial leasing trends

03 February 2023

After a tumultuous few years, there is a lot of speculation about what 2023 will have in store for the commercial property sector. One recent report from Barrenjoey forecasts that office vacancy rates in Melbourne CBD could rise to as much as 20 per cent, while analysts are forecasting an average 10 per cent fall in direct prices of office, retail and industrial property.

At Riverlee, we are continually evolving to meet the needs of our tenants and the wider market and have witnessed some major shifts in what a variety of businesses want out of their office space in recent years.

Flexibility, stability and an ability to move quickly are core competencies to the team at Riverlee and traits that have enabled us to respond to changing market demands and deal flows, responding quickly to enquiry and supporting with custom fit-outs. In all situations, our goal is to be an active partner to our tenants by working with them to find mutually beneficial outcomes that foster trust.

In all of our business dealings, Riverlee’s goal is to always think long-term. We build commercial assets with the intention to hold them and re-invest capital to improve amenity and function, ensuring they support our tenants’ needs. This, in conjunction with our relationship-driven approach to property management, ensures we experience low vacancy rates, currently sitting at 8 per cent — well below the industry average.

With volatility and market uncertainty expected to continue well into 2023, there are three trends we are most focused on.

 

Flight to quality

In 2022, many asset managers have been compelled by the industry-wide “flight to quality”.

When it comes to building occupancy, it’s our experience that SMEs have been leaders in recovery, due to their tighter-knit internal cultures and the perception that there is more to gain professionally with a physical presence among colleagues. Meanwhile, larger corporations have had to work harder to bring employees back to the office, looking to buildings with premium facilities and shared working spaces to support this push.

This flight to quality has created a glut at the lower end of the B- and C-grade market, which has pushed asset managers to rethink the facilities on offer and create more value for their tenants. In 2022, Riverlee conducted an engagement survey across our buildings that explored how the pandemic had shifted the needs and priorities of these businesses. While location and cleanliness remained of high importance, tenants told us they are also looking for new, quality fit-outs and building facilities that better align with the competitively priced market and help lure their teams back to the city.

To support our tenants with the return to the office, and in response to the survey results, 2022 saw major upgrades across Riverlee’s asset management portfolio. These included end-of-trip facilities completed at 179 Queen Street and 379 Collins Street, as well as lobby works at 369 Royal Parade. Internally, we also relocated our own headquarters to support our team with the transition back to the office.

Across all market segments, there is a newfound emphasis on amenity over floorspace, and asset managers will need to continue to upgrade their buildings to meet the needs of their tenants and retain them in future.

 

Agile leasing agreements

It’s widely recognised in asset management that fostering loyalty among tenants is essential to maintaining low vacancy rates. And, while building upgrades can help incentivise a tenant to stay longer, there is still a need in this hyper-competitive market to adopt new approaches to encourage new businesses to move into the building.

During the pandemic, Riverlee was fast to respond to changing market demands and recognised a need to be agile in our lease terms, a condition we expect will continue in 2023. In recent months, we have seen an increase in businesses looking for three-year arrangements, rather than the standard five-year minimum. In fact, in the last 12 months, 27 per cent of our lease terms were for less than five years.

In an inflationary environment, annual increases have also had to be re-evaluated. Industry-wide, many lease structures have now been tailored to factor in a CPI increase in addition to the standard fixed-rate rental increases.

Office design has become another major part of negotiations. To incentivise tenants, asset managers are now packaging up deals to include fit-outs, such as ‘plug and play’ arrangements, where all that’s required for the tenant is to move in and bring along their IT.

Whatever the leasing agreement, we believe it is essential to provide some flexibility and go to greater lengths to come up with a deal that works for our business model and the new tenant.

 

Sustainability

One of the most positive trends we are seeing in commercial leasing is the increased demand for buildings that support our tenant’s ESG objectives. And, as asset managers look to upgrade their buildings, everyone is finding new ways to improve the sustainability of their offering.

Riverlee is proactively working with our partners to oversee the retrofit of our four major CBD assets to achieve a carbon net zero future because it’s important to our business, and it’s important to our tenants. In the last 12 months, we have had our four primary CBD assets rerated under NABERS. This has provided us with a baseline metric to guide us and measure up future works, and it’s positive to report that we have achieved four to five stars in all buildings.

In 2023, it’s likely government will start to incorporate new guidelines and mandates that encourage more asset managers to retrofit their buildings to be sustainable. This could take the form of either ‘the stick or the carrot’, but most likely both; penalising those who don’t do the right thing with higher rates, while providing grants and incentives to encourage asset managers to improve the energy efficiency in their buildings.

Meanwhile, in their mission to manage their financed emissions and support the net-zero transition, banks are also incentivising asset managers to clean up their buildings.

With demand coming from government, businesses and the financial sector, this trend is an important shift that will play a huge role in helping the city reach its goal of net zero emissions by 2050, and we are glad to play our role in supporting it.

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