Office in the 'burbs more sought after, but scarce

'Tenants remain uncertain of their revenue outlook.'
'Tenants remain uncertain of their revenue outlook.'

MELBOURNE'S suburban office market is picking up, but little new space is being built as access to capital and pre-commitments requirements make it difficult to get up new projects.

CBRE metropolitan investment properties director Justin Clarkson said seven sales of more than $5 million had been finalised so far this year in areas such as Mulgrave, Hawthorn and Brunswick - about the same number as in all of last year, ''a significant improvement".

At the same time, a Jones Lang LaSalle report found that demand in the long term would come from growth sectors such as healthcare, education and business, and scientific and technical services.

Also, JLL said suburban assets were relatively good value compared with the CBD. The spread between prime yields in the CBD and suburbs was 125 basis points - above the long-term average of 95 basis points.

Mr Clarkson said suburban buyers were usually private investors, but syndicates were increasingly active, outbidding the private sector. Syndicates bought about 25 per cent of the suburban office buildings transacted in the past 18 months. These buyers included Vantage, Forza Capital and Property Bank from Perth.

International buyers had also made their mark, buying assets such as 362 Wellington Road in Mulgrave, which was sold by CBRE for $8.8 million. But given the caution still evident in the wider Victorian market, Mr Clarkson said buyers were preferring quality assets with low risk profiles.

"Tenant quality, lease terms and guarantees are more important than ever in this careful market," Mr Clarkson said.

On the rental front, office vacancy rates had fallen to 6.8 per cent in the south-eastern market, but in the inner-east, prime rents were now at $296 per square metre, up 15 per cent over the past two years.

JLL's senior research analyst, Nicholas Wilson, said suburban leasing's fundamental strength favoured development. ''However, capital market conditions are, for the time being, not favourable to development,'' he said.

With no supply-side risks, rents were going higher, but construction costs had risen. Developers needed average rents to be 20 per cent above current market rents to make projects economically viable.

Mr Wilson said historically, the non-CBD offices had not been a pre-commitment market, but in the past 18 months a lack of supply had pushed tenants into this market.

Most pre-commitments were in Mulgrave business parks and state government requirements in Dandenong. ''Further demand-side constraints exist due to the broader volatility in the global economy. Tenants remain uncertain of their revenue outlook and therefore their future space requirements,'' he said.

Tenants did not want to pre-commit to a project on a long-term lease, as would be required by developers and their financiers.

Nevertheless, Colliers has reported new deals in the Mulgrave precinct. Leah Baxter, executive officer, leasing, brokered two new leases to recruitment companies in one office building at 17-21 Miles Street.

These were Drake Recruitment, 240 sq m on a five-year lease, and Mango Recruitment, 50 sq m on a three-year lease - all negotiated in the $270-$290 per sq m bracket.

Ms Baxter also negotiated a new three-year lease to food manufacturer Sara Lee for 55 sq m at 195 Wellington Road in Clayton.

Mr Wilson said lenders had maintained their conservative attitude towards non-CBD commercial development. ''Access to capital remains a hurdle to most projects,'' he said, with most lending to non-CBD development coming from second-tier retail banks.

''These groups have pulled back their exposure to commercial property lending with fewer alternative lenders to fill the void,'' he said. Also, banks were imposing stringent lending criteria, including low debt-to-cost ratios and long-term pre-commitment requirements, thus speculative development had mostly disappeared, Mr Wilson said.

This story Office in the 'burbs more sought after, but scarce first appeared on The Sydney Morning Herald.