Rebecca: So how are the headlines going to turn for Melbourne this year? If you've had a chance to listen to the previous episode in our Melbourne short series, you'll know that while the city has had better days in terms of investment and leasing activity across many sectors, the tide is definitely turning, or some may even say it's turned. Indeed, my guests might say that.
With me today is a whip smart crop of JLL real estate professionals with their fingers firmly on the pulse of Melbourne. And we're going to get to the bottom of what we've learnt about investor and tenant activity and behaviour in 2024, and perhaps more importantly, how and why 2025 is going to look different.
So, without further ado, introducing Nick Drake, joint head of Victoria leasing at JLL, Piper Dedrick, an institutional investment expert in JLL's capital markets team, and Jessica Van Raay, joint head of tenant representation in Victoria.
All: Hello. Thanks for having us, Bec.
Rebecca: It's great to have you. And, yes, I'm Rebecca Kent, usual host of this Perspectives podcast and delighted to have you with us. We'll kick off with Piper. Tell us about some key investment deals that you've been across over the past year. Maybe deals that have defied the overall sentiment around Melbourne real estate. Which ones stand out for you? And then I'll ask you to maybe put your finger on a theme.
Piper: Yeah, so I think looking back to the start of 2024, we were very optimistic that we were going to see high transaction volumes and things were going to get moving. It actually took a while to get that happening. It wasn't until the middle of the year that we started to see transactions come through.
So I think the sort of key transaction that really defined the Melbourne market in terms of where pricing was, was 367 Collins Street. That was transacted from Mirvac to PAG. That transaction took two years-plus to get done and had different groups in DD at the time. So it took a while to get there.
It sort of demonstrated the hesitancy of capital, different groups in DD, different groups out of DD. But what it did demonstrate was pricing on Collins Street and where appetite sits for Melbourne offices. So I think that was really the turning point. And then post that we started to see transaction volumes pick up.
It really helped vendors understand where pricing was. I think before that the reason why transactions weren't getting off the ground or getting done was because groups thought the bid-ask gap, which is the difference between what the vendor's asking and where the bids are coming in, was very, very large – It's a 30 to 40 percent difference. But that expectation narrowed and then we started to see transactions happen.
I'm sure a lot of vendors probably weren't thrilled with some of the pricings that have come out of Melbourne. Some values have almost halved in some areas, but I think that really set the tone moving forward and helped get transactions out of the ground.
Rebecca: Thanks. And what was the price that 367 Collins Street went for? Has that been disclosed?
Piper: Just over $300 million, which was around a 7% cap rate. Prime office Melbourne prior to the big change, pre-2019-2020 was around 5%. So that really demonstrated how much pricing had changed in just a few years for the Melbourne office market, moving from a 5% percent cap rate to around 7%, which has quite a significant impact on pricing. Even though it doesn't sound that big, it is when you look at the numbers.
Rebecca: Absolutely. So what have we seen from follow on deals? As you say, it set the tone for pricing.
Piper: That was probably the only deal that came through from international capital for office. Foreign capital is quite hesitant to come back to Melbourne in a hurry because of certain tax regimes that make it difficult for them to see the returns and be competitive in a bid process.
Post that we saw a flurry of transactions happen that were a significant discount to peak book value, but mostly driven by domestic locals – either domestic syndicators or domestic privates. So those transactions that went through had quite a big discount, but again, they were able to use that base of 367 (Collins Street) as their understanding of where pricing sits for their assets and then taking them to market with the confidence that they could get the deal done with understanding in advance, what their asset is probably worth compared to what they thought before that.
The most recent one was 655 Collins Street and that was to a local private based in Melbourne. So, an asset that was once owned by institutional now is in the hands of a local Melbourne private. I think that sort of sends the theme of Melbourne office, particularly that investors are not coming back in a flurry from an institutional or from an offshore capital perspective.
Nick: Piper, do you think that offshore capital will start coming back? Yes, there are the taxes in play, but because of the pricing of some of these assets. If they can pick something up for a steal, then that might …
Piper: Definitely. And I think what's really interesting is that I was just speaking to my colleague who works in the living sector, so he does transactions in the living sector and he had an asset on the market in Melbourne. For that asset, the only bids that came in were from international capital. So even though there is that tax regime in place where it's not as favourable for institutional offshore investors to come into Victoria because they get negatively impacted by 4% more tax on the land, it just shows that if the underlying fundamentals of that growth story for that asset class is strong, they still really believe in Melbourne as a place to invest.
So I think, yes, we'll definitely start to see more foreign capital come back to Melbourne as they start to hear stories about 655 trading and the assets now becoming more appealing where they can factor in that additional cost as well as get a good deal done.
Nick: Where's that foreign capital mainly coming from?
Piper: Yeah, the foreign capital mostly is from Singapore, Hong Kong and Japan. Okay. Yeah, yeah.
Rebecca: So how does that change the office landscape? What sort of volume of assets have we seen change hands from institutions to private capital?
Piper: Off the top of my head, probably around $700m last year from institutional through to private hands. For Melbourne, that probably isn't necessarily something that we haven't not seen before. There already is quite a lot of private ownership in Melbourne.
So if anything, that's only going to increase that aspect. Do I think that's a good thing? Both yes and no. It's good to have local owners who know Melbourne and who know the stock and know the city and believe in it. And that's why they're coming in waves at the moment. But at the same time, we do need that institutional capital to keep coming because they're the ones who can really drive the aspects of sustainability and placemaking that privates don't necessarily have the capabilities in house to do.
Rebecca: Private capital accounts for, or has accounted for, something like more than half of global investment deals over the past couple of years or so. So it's not just a Melbourne story, is it?
Piper: Exactly. And I think too, it's because they have, at the moment if you think about transactions, it's not an attractive investment market across the world with a high interest rate, high inflation environment. And they have boards and ICs and all these processes to go through to get deals done, whereas private capitals, they're more nimble and can be more flexible. So I think that's why we've seen the rise because there's not that much competition out there from institutional groups who have sort of pulled back and said, ‘Oh, we need to understand the macro implications of this first before we invest’. Whereas privates can say, ‘I like that asset, I want that asset, I'll buy that asset’.”
Nick: A really interesting one that I was looking at last year was 385 Bourke Street. Obviously an institutional owner putting that on the market. And probably testing the market. And it sounded like most of the interest in that was actually from the private market, which for something of that size, over $300m, seemed pretty significant.
Piper: Yeah, exactly. And I think that talks to what I was speaking about earlier, about that bid-ask gap. When they took that to market, it shows both things. It shows that the vendors weren't ready to accept where pricing had adjusted because deals hadn't happened yet in Melbourne when that was taken to market. And secondly, that interest is really only being driven at the moment by that private capital group where, again, they don't have to go and tick all the boxes: Is there a strong growth story? What's the cash rate outlook? What's the 10-year bond? They can just go in and make a decision fast and if they like it, then they can get the deal done.
Rebecca: It sounds like there's a little bit more clarity in the investment market.
Piper: Absolutely. We used to strongly believe that we needed a cash rate cut to get the market going. And what we learned last year was that we maybe don't need necessarily a cash rate cut to get the market going, but what we need is stability and the ability to underwrite and look forward and predict accurately.
So once you have comfort on where the interest rate's going, once you have comfort that incentives have largely topped out, what the rental growth will be, then you're able to come back to market and make a good judgment on where you think pricing sits.
So while a cash rate cut is welcomed by all, I don't think it was the be-all and end-all to get transaction done, so I think it was stability.
Piper: I think so, but we have a big factor looming over us: the US election and how that might impact the macro environment. I mean, placing tariffs on whole countries left, right and centre will only add to inflation, which means the cash rate might not come down. If inflation goes up, cash rate goes up.
So I would have said maybe a month ago, but we've got something that we need to work through and see how it pans out.
Jess: But I think as well, just to talk about the confidence. You talked about headlines, Bec, at the start of our intro here. 2024 definitely saw a lot more confidence in the way we do work and show up at work. And all these themes then filter through to that landlord and ownership sentiment and office assets and it was really great to see a lot more momentum in that return to work. Certainly the occupiers I speak to who are the customers of these buildings are showing up.
Are they introducing the full mandate? Some have made big statements around this and I think that gives other occupiers the confidence to follow suit and come back to very much a business as usual.
I think Melbournians have been quite scarred from some of those COVID years and we don't want to go there. This is all about moving forward, but I feel like a lot of that's well and truly behind us and there's good momentum for this year and beyond.
Nick: Yeah, I agree with that. And just speaking of Trump, his federal government mandate around having to be in the office five days a week, I think those in the office sector all wish that would happen in our space, but at least some direction from government, both state and federal, would be really positive for office markets.
Jess: Last year there was probably more a focus on that efficiency and cost cutting. But I think a lot of corporates recognise the value of being in vibrant precincts. They're conscious of who is in the building, what's the vibe, you know. I think I've talked about this before, the actual lively areas of the city where people are attracted to, I think particularly the east end of Melbourne, has really seen strong recovery. That's been a very desirable core market of the city and tenants that want to go there are now … there are not a lot of options in that particular part of the city.
So, you know, as we rebalance and come back to a better normal, I think hopefully we see that absorption through the other parts of the city.
Nick: Exactly.
Jess: And I guess the new development, that's probably another really interesting one to watch and that's been really challenged. We've looked at the development pipeline for Melbourne and there's probably not a lot of confidence that what's in the pipeline and mooted as a new office building will actually eventuate.
Nick: Yeah, I totally agree with that. I think there are a number of sites at the moment that are getting converted to residential as well, so further taking away from that pipeline.
But I think the development market will really start to pick up probably at the back end of this year into 2026. I think tenants still want the best product, the new product, the sustainable product as well and there will be a drive towards that. I think we're just in an awkward period at the moment around, as you say, building construction costs, cap rates, et cetera, that are just really hampering that market.
Jess: And the owners have to give back. Previously it was just an end of trip facility or minimal. But now, there is that lettable area that’s been converted into common space. Tenants are looking for every box to be ticked and ‘where can I host my town hall so I don't necessarily have to have it in my office space?’
How are you seeing that, Nick, in your advice when you talk about the next benchmark and what does an office building look like?
Nick: It's a good question. I mean, office space is almost office space. Like, you're on level 24 and it is what it is. But it's what else does the building actually offer? It's all those additional amenities and that's just so crucial these days.
So any developer, we're advising them that the ground plane is really crucial, but then it's the end of trips, wellness, business lounges, all that flexible space that these occupiers can use, whether it's at a cost or no cost, as long as it's within the building makes a big difference, or within the immediate precinct as well.
Piper: And how's the reception to that? Because the only thing I think about is that construction costs have gone up dramatically and we're telling them they need to add all these things to get occupiers in the door and get them interested. Will the occupiers pay the rent that's now needed to get that construction out of the ground?
Do you think there's enough appetite out there from occupiers willing to pay north of a thousand dollars per square metre now for office space in Melbourne to meet the cost of development so it makes sense for them?
Nick: Yeah, I think, I'll handball this to Jess in a second. But over the last five years, if you heard of a deal over $1,000 per sqm, they were few and far between anywhere in the city, even in the best buildings. Whereas now, there are deals all through the city, east end, west end, of all shapes and sizes, where we're consistently getting not only $1,000 per sqm metre, but $1,200, $1,300, and even $1,400 per sqm in some cases as well. So we're seeing some really good rental growth. That's obviously not for everyone and not for the significant larger occupiers, but we're starting to see that solid rental growth in Melbourne. It's supported by incentives as well. But it's helping the landlord stack up all those extra facilities.
Jess: Oh, that's right. Melbourne is still affordable compared to some of the other cities. We always look at what’s going on in Sydney, and Brisbane's had an absolute run of positive rental growth. So Melbourne is still very much good value, when you look at those other markets and the story there.
Nick: Yeah, agreed. I think that'll change as well. Melbourne has always had Docklands, which has been our supply release valve effectively, where we've delivered a million square metres of space down there. That's now pretty much full. If you look at the number of office sites in the core CBD, you can probably count them on one hand, of any scale.
So the office market over time will start to tighten and then we should start seeing greater rental growth.
Piper: Yeah, I totally agree. It's just a simple supply-demand equation. We had a lot of supply at once in 2020, coupled with the effects of COVID-19. So, it hasn't necessarily led to the hottest occupier market, but that will correct itself over time.
Some of those new developments will get out, but a lot will be mooted that were once raring to be an office, but will now be converted to resi.
Nick: Yeah, exactly. And I think we're forecasting really strong population growth in Melbourne over the next five years, which translates directly into white collar employment growth, which will relate into demand and absorption through the city.
I think the other big factor for the CBD is that centralisation piece. So tenants coming from the southeast and the fringe and moving into the city. The big one, and really the needle mover, I think, was pre-Christmas with Coles making a commitment to 720 Bourke Street in Docklands for about just under 30,000 sqm. They're coming from the inner eastern suburbs, I guess you'd call it, and moving into Docklands, taking out a big chunk of space.
I think others will follow off the back of that, and there's already some conversations with other occupiers in that market that are looking to move into the city. And that's all about attraction and retention of staff, opening themselves up to the biggest talent pool and there's obviously some great quality options for them in the city.
Piper: I think what that will also mean is that while that move will happen and create a new vacancy in that area where they're leaving from, we still might see this elevated headline vacancy figure for a while. But if you look down into the grade of stock, the location, you'll start to see that pockets fill up faster, grades fill up faster.
And then we're left with the secondary stock in the market that isn't necessarily performing. And then the question will be ‘what's its highest and best use?’ and then that will be decided. And they'll move forward with what the outcome of that will be.
Nick: Absolutely. And we're already seeing that, to Jess's point earlier, in pockets in the city.
So we've obviously got 19.8% vacancy across the CBD. But if you look at the Paris End of Collins Street, premium grade is getting really tight and there aren't many options. And that will slowly flow through the remainder of the market as well. And I think headline vacancy we're expecting to stay in the mid to high teens for the remainder of the decade. If you're just looking at high level numbers, you might think, ‘oh, that's not very positive, it's not going to be a strong market’, but we'll see real differentiation between prime grade and secondary grade. I think.
Rebecca: And Nick, just jumping right back to Coles and the Docklands. How much did the Docklands need that Coles deal?
Nick: Um, I don't think the Docklands needed it, but it certainly helped, obviously, not just from a square metreage point of view, but it's a big corporate that's effectively putting their stamp of approval on Docklands as a precinct.
There are different parts of Docklands too. Docklands around Southern Cross and the Collins Street spine especially is seeing some really strong levels of activity at the moment. You look at a building like Melbourne Quarter Tower, which is a brand new Lendlease development completed in mid 2024, and there's some really good activity in that and tenants coming from the east end of Melbourne because it's a brand new product, a great product located across from Southern Cross Station. So it ticks a lot of boxes for tenants.
It is harder because I think a lot of people have still have a preconceived view of Docklands. Often when we go down there and sometimes we'll drag tenants and tenant reps down to Docklands who might not have been to some of these buildings for a long time, they're quite surprised by the level of activity, the quality of the retail, the accessibility. It ticks a lot of boxes for these occupiers.
Piper: I also think for the decision makers of those occupiers in terms of accessing staff, the West of Melbourne is going to have the biggest population growth, and the Southern Cross station is the main, uh, stop for them so it makes sense to move down to the Docklands area to capture more people who want to live west and then come into the office from the west, and their first stop is Southern Cross.
Annabelle: And regionally as well.
Piper: Exactly, and the regional train. So there is definitely a strong [00:38:00] case for Docklands when you want to attract a certain type of tenant profile.
Nick: Exactly. And a lot of these buildings are near new or less than 10 years old. And that's compared to the traditional core CBD and you look at some of these existing prime grade assets that are getting a little bit older. These new buildings, side cores, really efficient floor plates, really good quality amenity.
I think now that the market's really starting to recover that precinct will perform pretty well over the next 12 to 18 months.
Piper: Something which goes back to what we were talking about in the beginning about investor and capital appetite is that offshore people don't have groups on the ground. They see those headline figures and they say ‘absolutely not. I'm not going to invest in Melbourne’.
But once you look down into it you can see that it is sector by sector, area by area and it's the same with why privates are more active because they know that this building will start performing in a year or two if It's not today because of the location and they understand the micro area that it sits. And it's also the same for domestic institutional groups that are headquartered in Sydney that might not necessarily understand the market here.
Jess: I think what we'll find with secondary stock is it still becomes a really great value proposition for fringe and metro tenants a lot. Talking to the centralisation piece, a suburban tenant out in Mulgrave may now consider a Richmond, Cremorne or a secondary CBD location all of a sudden.
We’ve seen a huge shift out in the metro market. We've seen business parks that will definitely have an alternative use, Piper. Their heyday may be over and then you've seen others where, like the Morris Moor site out in Moorabbin that was previously a cigarette manufacturing factory and that's been repurposed into an almost seven-day-a-week operation of mixed use office, coffee roasteries, breweries, kids parties on a weekend. All of a sudden that has become something that was of a yesteryear era and has been repurposed and brought back to life and given back to the community.
Rebecca: Jess, what sort of corporate clients are we seeing come out with requirements? You know, these are the big ticket clients.
Jess: Yeah, look, I think some of our research talked around the top 15 Melbourne occupiers. A lot of them had largely reset their strategies in recent years, but everybody is still expiry driven. Whether they've got something two years out, four years out, six months out, we talk to everybody depending on [00:29:00] where they're at with their lease expiry.
The market in Melbourne has created a really great opportunity for tenants to evaluate ‘stay versus go’. We've seen, I guess traditionally, and Nick would see this too, but most tenants who take their first term of lease, if it’s five, seven, or 10 years, there's probably some odds around the likelihood that they will renew. But this market has created a case for potentially that move, rather than just be a first generation lease and roll into the next, they're actually doing something with the opportunity that's at hand here, with the value that Melbourne's created. Can they move from a metro location if they're not getting their people in, they want to attract and retain talent moving forward.
But we also talk to a number of occupiers that want to look at an early restructure or regear. So it's been busy times for us as tenant reps because everyone wants to do more with less or be really efficient and smart and responsible with their leased footprint. So yeah, we've talked to people at all different stages of the lease lifecycle.
Um, lease lifecycle. That's a hard one to say, lease lifecycle.
Rebecca: And if they're coming into secondary assets, say from metro locations, what sort of demands are those tenants, putting in front of landlords? Are there refurbishment requirements? Or
Jess: Some might have the gold standard of everything that you would see in the city, but when a tenant's going to a B-grade or a secondary asset in Melbourne there are quite a number of owners that have done a lot of that upgrading. I think of 150 Lonsdale Street, right, Nick? Solid bones, Charter Hall went through, great refurbishment, and I think you've had really good leasing success there. But not every landlord's at the forefront of that proactive upgrade and refurbishment.
Nick: Yeah. And I think 150 Lonsdale is a really good example. It's a 1970s building yet they've gutted the whole thing, redone it. It's on Lonsdale Street. It's not prime Collins Street, but it's a really cool precinct in Wesley, leveraging off 130, the new tower that they've built there. And, it's received interest from Collins Street tenants, fringe tenants, suburban tenants, Docklands tenants. They've sort of converged from everywhere. It's a great showpiece example of if you do the works and you tick all the boxes, it's going to get results.
And I, I feel like a lot of the fringe and metro tenants we've done deals with often come to a building like that and they see the landlord and see how proactive they are and they go, ‘these guys are actually going to care about us and keep investing in their asset moving forward where they need to’. Whereas sometimes in the past and historically they've been potentially burnt by a landlord that spent no money on their asset as well. So that, I think that's a really big factor, just showing these tenants that you care.
Jess: Yep, yep.
Nick: Um, and that, I feel like in the last probably two or three years that's really come up the list of um .. who is the landlord?
Jess: Oh, 100% Who is this partnership that I'm entering into for the next five to ten years? What's that going to look like?
Rebecca: Yeah, excellent. All right. That's great. Look, I'm going to ask you one more question each, and that is I want you to jump in a time machine right to the end of this year, 2025. We were talking about headlines earlier in the intro. I'd like you all to create a headline that's going to sum up the year that's been.
Piper: Labor government requires staff to be back in the office [00:39:00] 50% of the time. It won't be so brutal to say 100%. 50! Is that too little? No, okay, 75% of the time.
Rebecca: Is this based in reality, Piper?
Piper: Something other than zero is what we're getting to. Isn't there policy that you can work from home full time? So basically anything other than that. That's what I would hope to see as a headline.
Rebecca: Nick, over to you.
Nick: Um, I think it'll be something along the lines of that we’ve seen a really strong Melbourne office market recovery. I think Melbourne has been canned by almost everyone over the last few years from an office perspective. There has been a lot of negativity out there. But from what we've seen late last year and already the first few weeks of this year, I genuinely think it's going to be a really strong year. I think occupiers will be committing. I think the city will tighten in the core areas. The good quality stock is going to lease. And I feel like it'll be a really strong positive year for office leasing and demand.
Piper: Yeah, I also would second that too from a capital markets point of view. I think there's going to be quite a lot of activity this year off the back of an already increasing last year from 2023.
Rebecca: With more institutional capital, presumably you would say, Piper?
Piper: Yes, yes. And more offshore as well. We've had some offshore groups.
Nick: So maybe the headline is ‘The Melbourne office market recovery is complete’, something like that.
Piper: That would be nice.
Nick: There we go. Called it. Jess?
Jess: Over to me. I think on the theme around the struggles in the redevelopment space and new development space, I think what we might see is a shift to some more greater asset repositioning projects, I think more creativity in both landlord and tenant collaboration in how they work together to continue to uplift the quality of stock that we have in the city.
How do you put that in a headline? I don't know, because that's really long, Bec, so I'm sorry.
Rebecca: That's okay, but actually, I know I said it was the last question, but I love the term ‘creativity’, and especially when it comes to collaboration and negotiations. What does creativity look like to you? Are we seeing bits of it already in conversation?
Jess: I think there have just been some great examples of landlords that might be neighbours that have partnered together. I think of 555 Collins and 567 joining arms and creating a great food and beverage precinct behind. All of a sudden it's not just an exclusive space for their building tenants, but just opening up and leveraging off each other around that placemaking. I think it's how they all can partner to create these destinations where people want to come.
Rebecca: Yeah, perfect. All right. Well, thank you, Piper, Nick and Jess. And thank you all for listening to the Perspectives podcast.
This is the podcast that has its finger on the pulse of Australian and global real estate trends, and you can find it on all the major streaming platforms. If you like what you hear, then do favourite or download the show so you're notified of new episodes. And by all means share the content with your colleagues and friends.
I'm Rebecca Kent, and thanks again to my guests.
Nick: Thank you, Bec. Thanks for having us.
