Rebecca Kent (intro)
Uncertainty around COVID-19 is continuing to change the behavior of office workers. And now, investors are evolving their investment strategies, too.
While the office sector grapples with the new normal, investors are making purchasing decisions based on the expectation that companies will demand modern, affordable spaces close to where their employees live.
In Sydney that could be Parramatta, Macquarie Park or North Sydney; or in Melbourne, Cremorne, Richmond, Mulgrave or Geelong; and in Brisbane, Fortitude Valley or South Brisbane.
This year the number of offices purchased in Australia’s metropolitan markets has surpassed CBD deals by a significant margin for the first time in five years, as investors search desperately for stability and long leases.
In real estate terms, most non-CBD assets fall into what is known as the middle markets segment of the office sector. We’re going to find out more about what’s going on in that space in this episode of JLL’s Perspectives Podcast – a snapshot of the latest developments in real estate impacting our cities, our workplaces, and the broader built environment. I’m Rebecca Kent.
Rebecca Kent
I'm Rebecca Kent host of JLL’s perspectives podcast. In this episode, we're covering a segment of the office market that's attracting a lot of attention from investors at the moment. It's the middle markets. While I'm hosting remotely, my guests are all in the same room at JLL HQ in Sydney. We've got Grant Nichols, fund manager of Centuria office REIT. Hi, Grant.
Grant Nichols
Morning.
Rebecca Kent
And Luke Billiau, head of capital markets for New South Wales at JLL.
Luke Billiau
Good morning, Bec.
Rebecca Kent
Uncertainty around COVID-19 is continuing to change the behavior of office workers. And now, investors are evolving their investment strategies, too.
While the office sector grapples with the new normal, investors are making purchasing decisions based on the expectation that companies will demand modern, affordable spaces close to where their employees live.
In Sydney that could be Parramatta, Macquarie Park or North Sydney; or in Melbourne, Cremorne, Richmond, Mulgrave or Geelong; and in Brisbane, Fortitude Valley or South Brisbane.
This year the number of offices purchased in Australia’s metropolitan markets has surpassed CBD deals by a significant margin for the first time in five years, as investors search desperately for stability and long leases.
In real estate terms, most non-CBD assets fall into what is known as the middle markets segment of the office sector. We’re going to find out more about what’s going on in that space in this episode of JLL’s Perspectives Podcast – a snapshot of the latest developments in real estate impacting our cities, our workplaces, and the broader built environment. I’m Rebecca Kent.
Rebecca Kent
I'm Rebecca Kent host of JLL’s perspectives podcast. In this episode, we're covering a segment of the office market that's attracting a lot of attention from investors at the moment. It's the middle markets. While I'm hosting remotely, my guests are all in the same room at JLL HQ in Sydney. We've got Grant Nichols, fund manager of Centuria office REIT. Hi, Grant.
Grant Nichols
Morning.
Rebecca Kent
And Luke Billiau, head of capital markets for New South Wales at JLL.
Luke Billiau
Good morning, Bec.
Rebecca Kent
And Andrew Ballantine, head of research in Australia for JLL.
Luke Billiau
Good morning Bec
Rebecca Kent
Okay, Luke, middle markets, or metro markets. Maybe just lay out a definition for us. How is this segment of the office market different from CBD markets, for example?
Luke Billiau
Middle markets investments is an asset class that's profiled in value rather than geography. So put simply, there's three tiers of investment: Firstly, you've got private investments that really cover assets up to $30 million. Secondly, you've got the middle market space, which we're talking about today. Those values range from $30m and up to $150m. And then lastly, you've got the institutional investments that exceed $150m.
Now, given the value profile of these assets, generally speaking, the majority of these assets are located in the metropolitan precincts. And that's where we’ve seen significant growth in the market over the past decade and really how this podcast has come about.
Rebecca Kent
So what's a metropolitan precinct then? Maybe just define the geography there for us too.
Luke Billiau
It’s markets like Macquarie Park, St Leonard’s, Chatswood, extending through to Parramatta.
Really it's the value profile that we're seeing a fair bit of activity in at the moment. As a house, JLL tracks in this segment of the market - if we can define it between $30million and $100million – we track in excess of 400 assets in that value profile range. That’s in excess of $20 billion as an investable universe.
Rebecca Kent
You mentioned some Sydney markets there. Does this apply to other parts of Australia as well?
Luke Billiau
It does, primarily Melbourne, just given the quantum and the size of the markets.
We're seeing offshore investors particularly focus on these markets. If anything, the COVID period and the implications of it have accelerated their interest in this market over the last couple of months.
Rebecca Kent
So what are the indications in this part of the market is picking up?
Luke Billiau
We have seen a lot of activity in the likes of Macquarie Park and St. Leonard's recently, where there have been a number of trades, particularly to those offshore groups over the past couple of months. But primarily it is anecdotal. And by that I mean discussions are increasing with respect to the focus and at least considering these markets as an investment destination, particularly for the offshore groups.
It is a fairly mature market in the likes of Singapore and Hong Kong. So we're getting continual questions. In the past, the middle markets haven't been part of the investable framework or the mandate that investors have had, but we're starting to see that change.
Rebecca Kent
Grant, an interesting time to be investing into offices given the COVID uncertainty. Give us an insight into how it has been since the beginning of the year.
Grant Nichols
I look after the Centuria Office REIT, which is predominantly a metro fund. So we've got 23 assets and most of those are located in the metropolitan markets across Australia or in the secondary CBDs, and that encapsulates markets like Canberra and Adelaide.
Probably the benefit in the markets that we've invested into, particularly going through the COVID period that we've just been in – or which we're still going through - is when you look at our portfolio, we've got a very strong underlying tenant quality within our portfolio, particularly government. So, 25 percent of our portfolio derives its income from government. That has enabled us to maintain very high rent collections through these periods.
I think that's part of what investment demand gravitating towards metropolitan markets is looking for. It’s looking for those quality tenant covenants at a price point that's probably more affordable than what you get within the CBD. So from that perspective, we have had a long-term view on the middle markets or metropolitan markets. And at the moment they are becoming more favorable.
Luke Billiau
The two aspects that the capital is focusing on at the moment is asset quality, firstly, and in the period of social distancing, lower density buildings and less touchpoints to access those buildings is key to that. But also the cash flow characteristics and the security of that cash flow.
I think the lack of small business exposure, particularly in some of these assets, is really what's driving the consideration of those investments for the groups that are looking at the moment.
Rebecca Kent
Andrew, maybe you can explain what COVID has taught us also about the relationship between how people want to work and how they want to travel to work and the commercial viability of offices in relation to all this in certain locations.
Andrew Ballantyne
I think as you when you're going through any form of a crisis, you need to be careful to interpret what's cyclical and what’s structural because often something that we're seeing that is a shorter trend actually gets viewed as being a longer-term structural trend. So we need to be really careful when we're actually analysing all the different things that are happening.
Some of the research that JLL has undertaken around what people enjoyed about working from home showed that they enjoyed no commute, flexibility, greater work-life balance.
I think that piece around no commute is interesting. I don't think I've ever had a discussion with someone and they’ve said, ‘do you know what, I love commuting over an hour to my job’. And that was a pre-COVID discussion that people didn't like commutes. So that's been a positive of working from home.
It is interesting, though around the work from home discussion, that there are a lot more CEOs coming out and saying, ‘actually, it's not as productive as we first thought.’ So we think that's a cyclical story that is being led by COVID. We do believe that there will be an element of work-from-home in the future. But ultimately, organisations will think about how they locate based on where their workers actually live. And they’ll actually think about their real estate strategy in terms of that workforce catchment analysis, and what that means for locational decision-making.
So we do believe that is a longer term structural trend, rather than a cyclical story as a result of COVID.
Rebecca Kent
I understand the characteristics of some of the buildings in metro markets are different from CBD buildings in that they are more conducive to distancing. Are they smaller buildings?
Grant Nichols
So I wouldn't say that they’re necessarily smaller. What you do generally find in metro markets is that they’re lower rise. So that basically means there are not as many storeys and they may have larger floor plates.
The other thing to consider is that the metro markets, particularly in a market like North Ryde, has a lot more newer-generation stock than what you'd find in a Sydney or Melbourne or North Sydney CBD. So from that perspective, when you think about new-generation versus older stock, older stock may have been built 30 years ago, when generally tenants were seeking densities of one to 14 square metres, or one to 16 square metres. Lifts were put in place to accommodate that.
A lot of the new-generation stock, particularly very new generation stock are being built to accommodate one to eight square metres. So there’s a lot more lifts being put in place which can facilitate getting staff in and out of their workplace.
And I think when you think about an office building, the place where you do get the highest densities are in lifts. And that's where tenants have shown the most concern.
So the benefit of metro offices and particularly new-generation metro offices is that they are low rise, so it's a short lift travel time. But also they generally have greater a greater amount of width so you can get fewer people into lifts and that can create more social distancing.
Luke Billiau
To add to that Grant, there are discussions around car parking and ratios of car parking. They are obviously markets that can benefit from the big infrastructure pipeline that we're going to see in Sydney and the metropolitan markets moving forward.
We're consistently getting feedback - and there's obvious restrictions around travel, particularly that offshore capital coming in – there is a sense and a desire to do deals. And that quantum of money is easier to convince investment committees to place that capital sight unseen or with a proxy inspection.
Andrew Ballantyne
I think it's interesting when you look in real estate, I tend to think there are six idiosyncratic risk factors. And those factors are not weighted equally. And they're ultimately influenced by the economic conditions that we see at the moment.
So you think around some of the factors that are becoming stronger, and it's been touched on a few times, it's covenant and WALE. So, the strength of the covenant to pay the rent and how long they are actually committed to the space for.
Grant touched on the public sector being a large occupier in Parramatta but also in Macquarie Park and some of the other markets. When you look at some of the growth drivers that we're going to see moving forward, in particular related to healthcare, and also the technology sector, we see very strong representation from both those industry sectors in metropolitan markets.
And I think when investors are sitting in front of their investment case, it's much easier to be articulating exposure to a growth story than almost the defensive strategy. So saying that we're actually going to invest in markets that are intrinsically linked to what happens in health and technology is a much easier story to get through an investment case the moment.
Rebecca Kent
Why are government tenants and the healthcare and technology sector attracted to the metro markets?
Andrew Ballantyne
I think you need to look at the industry sectors differently.
So let's maybe start with healthcare as a sector. I'm a big believer in – clustering is not a word we use as much as we used to because of what it means around the health crisis - but I'm a big subscriber to industry clustering, economies of agglomeration, knowledge spill overs, technology spill overs. So there are very strong reasons for why businesses locate where they do.
And ultimately, it comes through to proximity to customers, proximity to suppliers, the workforce catchment and other strategic relationships that they may have.
So if you look at a market like Macquarie Park, some of the healthcare operators based out there have strategic relationships with the university, and they share research facilities with the university. So that's a very strong reason from the locational attributes of Macquarie Park of why they're going to be based there and why they're going to be based there for the long term.
You also tend to find that their service providers ultimately want to cluster around them as an organisation or an anchor organisation as well. So that brings in a different type of user, say from professional services firms that work with these larger healthcare organisations.
Your comment around the government is interesting because government or, the public sector more broadly, is reflective of the whole population, so their footprint should be more dispersed rather than being concentrated within one or two markets.
If we take New South Wales specifically, we've been going through the decade of decentralisation policy, and we’ve more or less had that decade. That decade has seen the New South Wales government actually stimulate and underwrite certain markets through their own tenancy, which provides employment opportunity.
But also, again, you find that professional services and as consultancy firms tend to cluster around the government there as well because there are full on benefits to them as an organisation in terms of where they're based. So I'm a big subscriber to that industry clustering theory and what that means for markets.
Rebecca Kent
Typically your metro assets have longer weighted average lease expiries than CBD assets. Can you explain why that is?
Grant Nichols
It comes down to the type of tenants that are attracted to metro markets and the fact that in a lot of metro markets you do get very large users that dominate buildings. So when you think about CBD buildings they are generally multi-tenanted. And with multi-tenanted buildings, it's very hard to get a WALE beyond five years just because of the nature of having so many different tenants within the one building.
When you go to metro markets, you can get a single user over an entire building that will take, in some instances, up to a 20-year lease. So that does allow you to get a much longer lease term in place with very secure cash flow.
The other benefit of those metro markets is that a lot of the times you can see these large users come into buildings and a lot of times they renew. So there are a number of buildings in metro markets that are haven't had a day of vacancy since they've been constructed. And some of these buildings are in excess of 30 years old.
When you contrast that to the Sydney CBD particularly, I can't think of too many buildings that have never had a day of vacancy. So not only can you attract very good quality tenants, but they can be very stable markets as well.
Luke Billiau
A lot of the feedback we're getting from the investors is very much around the spread in rents, between the CBD or North Sydney versus markets like Macquarie Park or North Ryde.
If you take a view at the moment that spread is about right. Then either you're going see more effective rental growth in these markets, or less downside risk in those rents moving forward. So there's a lot of these themes that are coming to the fore and investors are buying into it. the investors are seriously considering these markets.
And I think another thing worth considering – Grant it would good to get your view on this - the liquidity of these assets is now becoming a bigger picture of portfolio management moving forward. So the fact that you can easily liquidate a A$50 million, A$100 million or A$150 million asset is certainly coming into consideration for a lot of these groups.
Grant Nichols
I think that’s a very good point. Over the course the last few years, we've seen a marked shift in investors’ appetite towards those metro markets. I think, in years gone by you have seen some assets, particularly the larger assets in metro markets be very hard to shift just from a liquidity standpoint. Whereas at the moment, I think you are seeing pretty much every major player looking at metro markets.
Rebecca Kent
Andrew, there's been a lot of talk about the hub and spoke model. I know you've been a proponent of this model, or certainly you've been talking about it a fair bit, long before COVID.
Andrew Ballantyne
I think sometimes, we talk about trends, and we do certainly as a house believe the hub and spoke model becomes more relevant. I do think it's important to caveat that it's not for every organisation.
I think there's a view out there that it's going to become very widespread, and I don't think that's necessarily the case, but I do think it works for certain organisations. And I think you need to understand the characteristics of those organisations as to why it ultimately works for them.
And the one that we touched on a little bit earlier, which I think is very relevant is around workforce catchment. And ultimately, we're doing in the office sector what shopping centre owners have done forever: They understand that X percent of their sales comes from the primary catchment, then they've got their secondary catchment and the tertiary catchment.
So a lot more organisations are spending more time with their postcode surveys in terms of where their employees actually live.
But more importantly, overlaying that with demographic forecasts in terms of where 20 to 40-year-olds with high degrees of educational attainment are likely to live over the next 10,15 and 20 years. Because it's ultimately the marriage of those two pieces of research that informs what your workforce catchment is.
And if we take Sydney as an illustration, we get some very strong hot spots that pop up under those characteristics. There's one towards the north-west, largely around the Hills Shire; There's another one to the south-west, which I would argue has lower levels of educational attainment, so it's less relevant from an office sector perspective. And then you have one to the southern part of the Sydney CBD.
So when you look at that type of analysis, it really starts to inform certain organisations about what they will do in terms of how they will appeal to these workers, especially when we think about what do workers not like doing. They do not like commuting. So being able to actually construct a workplace strategy, which talks to where your workers are located, I think is very important.
However, that only works if you've got infrastructure. And if we look at NSW again, after the Olympics, it really stopped building infrastructure for over a decade, and we had a major infrastructure deficit across this across the state.
And what we’ve see more recently with the Sydney Metro, which is the largest public transport infrastructure project in Australia's history, is that it has really improved the connectivity of metropolitan office markets.
We use a pretty simple phrase here at JLL, which is ‘infrastructure changes markets’, and the infrastructure projects that we're seeing largely related to public transportation are certainly changing the accessibility and the the desirability of these metro office markets.
Rebecca Kent
Thanks, Andrew. Great. All right. We'll leave it there. I think that's a really thorough assessment of the middle market. So Grant, Luke, and Andrew, thank you very much, an interesting chat.
All
Thanks, Bec
Rebecca Kent (closing)
That was episode 14 of JLL’s Perspectives podcast – I hope you enjoyed it. If you’d like to know more about investing in metropolitan, or middle markets, you can get in touch with Luke, Grant, or Andrew directly through JLL’s Perspectives podcast webpage which is jll.com.au/perspectives-podcast. There you can also read more about our guests, get the transcript, and subscribe to the podcast so you’ll never miss an episode.
I’m Rebecca Kent. Catch you next time. And Andrew Ballantine, head of research in Australia for JLL.
And Andrew Ballantine, head of research in Australia for JLL.
Luke Billiau
Good morning Bec
Rebecca Kent
Okay, Luke, middle markets, or metro markets. Maybe just lay out a definition for us. How is this segment of the office market different from CBD markets, for example?
Luke Billiau
Middle markets investments is an asset class that's profiled in value rather than geography. So put simply, there's three tiers of investment: Firstly, you've got private investments that really cover assets up to $30 million. Secondly, you've got the middle market space, which we're talking about today. Those values range from $30m and up to $150m. And then lastly, you've got the institutional investments that exceed $150m.
Now, given the value profile of these assets, generally speaking, the majority of these assets are located in the metropolitan precincts. And that's where we’ve seen significant growth in the market over the past decade and really how this podcast has come about.
Rebecca Kent
So what's a metropolitan precinct then? Maybe just define the geography there for us too.
Luke Billiau
It’s markets like Macquarie Park, St Leonard’s, Chatswood, extending through to Parramatta.
Really it's the value profile that we're seeing a fair bit of activity in at the moment. As a house, JLL tracks in this segment of the market - if we can define it between $30million and $100million – we track in excess of 400 assets in that value profile range. That’s in excess of $20 billion as an investable universe.
Rebecca Kent
You mentioned some Sydney markets there. Does this apply to other parts of Australia as well?
Luke Billiau
It does, primarily Melbourne, just given the quantum and the size of the markets.
We're seeing offshore investors particularly focus on these markets. If anything, the COVID period and the implications of it have accelerated their interest in this market over the last couple of months.
Rebecca Kent
So what are the indications in this part of the market is picking up?
Luke Billiau
We have seen a lot of activity in the likes of Macquarie Park and St. Leonard's recently, where there have been a number of trades, particularly to those offshore groups over the past couple of months. But primarily it is anecdotal. And by that I mean discussions are increasing with respect to the focus and at least considering these markets as an investment destination, particularly for the offshore groups.
It is a fairly mature market in the likes of Singapore and Hong Kong. So we're getting continual questions. In the past, the middle markets haven't been part of the investable framework or the mandate that investors have had, but we're starting to see that change.
Rebecca Kent
Grant, an interesting time to be investing into offices given the COVID uncertainty. Give us an insight into how it has been since the beginning of the year.
Grant Nichols
I look after the Centuria Office REIT, which is predominantly a metro fund. So we've got 23 assets and most of those are located in the metropolitan markets across Australia or in the secondary CBDs, and that encapsulates markets like Canberra and Adelaide.
Probably the benefit in the markets that we've invested into, particularly going through the COVID period that we've just been in – or which we're still going through - is when you look at our portfolio, we've got a very strong underlying tenant quality within our portfolio, particularly government. So, 25 percent of our portfolio derives its income from government. That has enabled us to maintain very high rent collections through these periods.
I think that's part of what investment demand gravitating towards metropolitan markets is looking for. It’s looking for those quality tenant covenants at a price point that's probably more affordable than what you get within the CBD. So from that perspective, we have had a long-term view on the middle markets or metropolitan markets. And at the moment they are becoming more favorable.
Luke Billiau
The two aspects that the capital is focusing on at the moment is asset quality, firstly, and in the period of social distancing, lower density buildings and less touchpoints to access those buildings is key to that. But also the cash flow characteristics and the security of that cash flow.
I think the lack of small business exposure, particularly in some of these assets, is really what's driving the consideration of those investments for the groups that are looking at the moment.
Rebecca Kent
Andrew, maybe you can explain what COVID has taught us also about the relationship between how people want to work and how they want to travel to work and the commercial viability of offices in relation to all this in certain locations.
Andrew Ballantyne
I think as you when you're going through any form of a crisis, you need to be careful to interpret what's cyclical and what’s structural because often something that we're seeing that is a shorter trend actually gets viewed as being a longer-term structural trend. So we need to be really careful when we're actually analysing all the different things that are happening.
Some of the research that JLL has undertaken around what people enjoyed about working from home showed that they enjoyed no commute, flexibility, greater work-life balance.
I think that piece around no commute is interesting. I don't think I've ever had a discussion with someone and they’ve said, ‘do you know what, I love commuting over an hour to my job’. And that was a pre-COVID discussion that people didn't like commutes. So that's been a positive of working from home.
It is interesting, though around the work from home discussion, that there are a lot more CEOs coming out and saying, ‘actually, it's not as productive as we first thought.’ So we think that's a cyclical story that is being led by COVID. We do believe that there will be an element of work-from-home in the future. But ultimately, organisations will think about how they locate based on where their workers actually live. And they’ll actually think about their real estate strategy in terms of that workforce catchment analysis, and what that means for locational decision-making.
So we do believe that is a longer term structural trend, rather than a cyclical story as a result of COVID.
Rebecca Kent
I understand the characteristics of some of the buildings in metro markets are different from CBD buildings in that they are more conducive to distancing. Are they smaller buildings?
Grant Nichols
So I wouldn't say that they’re necessarily smaller. What you do generally find in metro markets is that they’re lower rise. So that basically means there are not as many storeys and they may have larger floor plates.
The other thing to consider is that the metro markets, particularly in a market like North Ryde, has a lot more newer-generation stock than what you'd find in a Sydney or Melbourne or North Sydney CBD. So from that perspective, when you think about new-generation versus older stock, older stock may have been built 30 years ago, when generally tenants were seeking densities of one to 14 square metres, or one to 16 square metres. Lifts were put in place to accommodate that.
A lot of the new-generation stock, particularly very new generation stock are being built to accommodate one to eight square metres. So there’s a lot more lifts being put in place which can facilitate getting staff in and out of their workplace.
And I think when you think about an office building, the place where you do get the highest densities are in lifts. And that's where tenants have shown the most concern.
So the benefit of metro offices and particularly new-generation metro offices is that they are low rise, so it's a short lift travel time. But also they generally have greater a greater amount of width so you can get fewer people into lifts and that can create more social distancing.
Luke Billiau
To add to that Grant, there are discussions around car parking and ratios of car parking. They are obviously markets that can benefit from the big infrastructure pipeline that we're going to see in Sydney and the metropolitan markets moving forward.
We're consistently getting feedback - and there's obvious restrictions around travel, particularly that offshore capital coming in – there is a sense and a desire to do deals. And that quantum of money is easier to convince investment committees to place that capital sight unseen or with a proxy inspection.
Andrew Ballantyne
I think it's interesting when you look in real estate, I tend to think there are six idiosyncratic risk factors. And those factors are not weighted equally. And they're ultimately influenced by the economic conditions that we see at the moment.
So you think around some of the factors that are becoming stronger, and it's been touched on a few times, it's covenant and WALE. So, the strength of the covenant to pay the rent and how long they are actually committed to the space for.
Grant touched on the public sector being a large occupier in Parramatta but also in Macquarie Park and some of the other markets. When you look at some of the growth drivers that we're going to see moving forward, in particular related to healthcare, and also the technology sector, we see very strong representation from both those industry sectors in metropolitan markets.
And I think when investors are sitting in front of their investment case, it's much easier to be articulating exposure to a growth story than almost the defensive strategy. So saying that we're actually going to invest in markets that are intrinsically linked to what happens in health and technology is a much easier story to get through an investment case the moment.
Rebecca Kent
Why are government tenants and the healthcare and technology sector attracted to the metro markets?
Andrew Ballantyne
I think you need to look at the industry sectors differently.
So let's maybe start with healthcare as a sector. I'm a big believer in – clustering is not a word we use as much as we used to because of what it means around the health crisis - but I'm a big subscriber to industry clustering, economies of agglomeration, knowledge spill overs, technology spill overs. So there are very strong reasons for why businesses locate where they do.
And ultimately, it comes through to proximity to customers, proximity to suppliers, the workforce catchment and other strategic relationships that they may have.
So if you look at a market like Macquarie Park, some of the healthcare operators based out there have strategic relationships with the university, and they share research facilities with the university. So that's a very strong reason from the locational attributes of Macquarie Park of why they're going to be based there and why they're going to be based there for the long term.
You also tend to find that their service providers ultimately want to cluster around them as an organisation or an anchor organisation as well. So that brings in a different type of user, say from professional services firms that work with these larger healthcare organisations.
Your comment around the government is interesting because government or, the public sector more broadly, is reflective of the whole population, so their footprint should be more dispersed rather than being concentrated within one or two markets.
If we take New South Wales specifically, we've been going through the decade of decentralisation policy, and we’ve more or less had that decade. That decade has seen the New South Wales government actually stimulate and underwrite certain markets through their own tenancy, which provides employment opportunity.
But also, again, you find that professional services and as consultancy firms tend to cluster around the government there as well because there are full on benefits to them as an organisation in terms of where they're based. So I'm a big subscriber to that industry clustering theory and what that means for markets.
Rebecca Kent
Typically your metro assets have longer weighted average lease expiries than CBD assets. Can you explain why that is?
Grant Nichols
It comes down to the type of tenants that are attracted to metro markets and the fact that in a lot of metro markets you do get very large users that dominate buildings. So when you think about CBD buildings they are generally multi-tenanted. And with multi-tenanted buildings, it's very hard to get a WALE beyond five years just because of the nature of having so many different tenants within the one building.
When you go to metro markets, you can get a single user over an entire building that will take, in some instances, up to a 20-year lease. So that does allow you to get a much longer lease term in place with very secure cash flow.
The other benefit of those metro markets is that a lot of the times you can see these large users come into buildings and a lot of times they renew. So there are a number of buildings in metro markets that are haven't had a day of vacancy since they've been constructed. And some of these buildings are in excess of 30 years old.
When you contrast that to the Sydney CBD particularly, I can't think of too many buildings that have never had a day of vacancy. So not only can you attract very good quality tenants, but they can be very stable markets as well.
Luke Billiau
A lot of the feedback we're getting from the investors is very much around the spread in rents, between the CBD or North Sydney versus markets like Macquarie Park or North Ryde.
If you take a view at the moment that spread is about right. Then either you're going see more effective rental growth in these markets, or less downside risk in those rents moving forward. So there's a lot of these themes that are coming to the fore and investors are buying into it. the investors are seriously considering these markets.
And I think another thing worth considering – Grant it would good to get your view on this - the liquidity of these assets is now becoming a bigger picture of portfolio management moving forward. So the fact that you can easily liquidate a A$50 million, A$100 million or A$150 million asset is certainly coming into consideration for a lot of these groups.
Grant Nichols
I think that’s a very good point. Over the course the last few years, we've seen a marked shift in investors’ appetite towards those metro markets. I think, in years gone by you have seen some assets, particularly the larger assets in metro markets be very hard to shift just from a liquidity standpoint. Whereas at the moment, I think you are seeing pretty much every major player looking at metro markets.
Rebecca Kent
Andrew, there's been a lot of talk about the hub and spoke model. I know you've been a proponent of this model, or certainly you've been talking about it a fair bit, long before COVID.
Andrew Ballantyne
I think sometimes, we talk about trends, and we do certainly as a house believe the hub and spoke model becomes more relevant. I do think it's important to caveat that it's not for every organisation.
I think there's a view out there that it's going to become very widespread, and I don't think that's necessarily the case, but I do think it works for certain organisations. And I think you need to understand the characteristics of those organisations as to why it ultimately works for them.
And the one that we touched on a little bit earlier, which I think is very relevant is around workforce catchment. And ultimately, we're doing in the office sector what shopping centre owners have done forever: They understand that X percent of their sales comes from the primary catchment, then they've got their secondary catchment and the tertiary catchment.
So a lot more organisations are spending more time with their postcode surveys in terms of where their employees actually live.
But more importantly, overlaying that with demographic forecasts in terms of where 20 to 40-year-olds with high degrees of educational attainment are likely to live over the next 10,15 and 20 years. Because it's ultimately the marriage of those two pieces of research that informs what your workforce catchment is.
And if we take Sydney as an illustration, we get some very strong hot spots that pop up under those characteristics. There's one towards the north-west, largely around the Hills Shire; There's another one to the south-west, which I would argue has lower levels of educational attainment, so it's less relevant from an office sector perspective. And then you have one to the southern part of the Sydney CBD.
So when you look at that type of analysis, it really starts to inform certain organisations about what they will do in terms of how they will appeal to these workers, especially when we think about what do workers not like doing. They do not like commuting. So being able to actually construct a workplace strategy, which talks to where your workers are located, I think is very important.
However, that only works if you've got infrastructure. And if we look at NSW again, after the Olympics, it really stopped building infrastructure for over a decade, and we had a major infrastructure deficit across this across the state.
And what we’ve see more recently with the Sydney Metro, which is the largest public transport infrastructure project in Australia's history, is that it has really improved the connectivity of metropolitan office markets.
We use a pretty simple phrase here at JLL, which is ‘infrastructure changes markets’, and the infrastructure projects that we're seeing largely related to public transportation are certainly changing the accessibility and the the desirability of these metro office markets.
Rebecca Kent
Thanks, Andrew. Great. All right. We'll leave it there. I think that's a really thorough assessment of the middle market. So Grant, Luke, and Andrew, thank you very much, an interesting chat.
All
Thanks, Bec
Rebecca Kent (closing)
That was episode 14 of JLL’s Perspectives podcast – I hope you enjoyed it. If you’d like to know more about investing in metropolitan, or middle markets, you can get in touch with Luke, Grant, or Andrew directly through JLL’s Perspectives podcast webpage which is jll.com.au/perspectives-podcast. There you can also read more about our guests, get the transcript, and subscribe to the podcast so you’ll never miss an episode.
I’m Rebecca Kent. Catch you next time.
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