Office Construction: Signs of a Shift

By Gerry Gleeson April 03, 2017

Key points

• Office construction has been losing out to apartment construction.

• Victoria's strong economy is driving demand for office space.

• Early signs are pointing to a shift in the competitiveness of new office construction.

Office Construction Signs of a Shift.jpeg

Victoria's office construction rate has been flat over the past four years (2012-2016) and still hasn't recovered to its pre-GFC high of 2008. That lacklustre picture is in sharp contrast to New South Wales, where the value of new office construction shot past its own pre-GFC high more than a year ago, according to the Australian Bureau of Statistics.

It’s a curious situation, given the strength of the Victorian commercial real estate market. With the highest economic growth rate of any Australian state in the past year and healthy demand for office space, it indicates a level of caution from property developers that may be unnecessary.

But the major challenge for new office developments has been caused by the state’s population growth. The boom in apartment construction has driven up the cost of land, making it near impossible for office developments to compete.

In commercial-zoned land in good inner-city residential locations, finished apartments are achieving rates of $9,000 to $10,000 per square metre, while offices in the same areas are yielding only $5,500 to $6,500. In those areas, apartment construction will continue to perform well.

The upside is that in the face of the constraint on new office space, Victoria’s healthy economy is driving up rents for available properties in many key inner suburbs such as Hawthorn, Camberwell and even Box Hill.

We’re now starting to see the first signs of a turn in the market that could mean commercial property sites in secondary residential zones will shift back to office construction.

In prime residential areas as well, we’re starting to see signs of offices becoming more competitive. Strata office spaces are now offering rates of $7,000 to $11,000 per square metre in Melbourne, up 10-15% in the last year. These strata offices share many amenities with apartments, including modern design, large balconies, rooftop terraces and communal entertaining areas.With many industry analysts predicting Melbourne’s apartment construction boom to tip into oversupply within the next one to two years, all these signs appear to point to a big shift that could see office construction rates catch up to Victoria’s economic growth.

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Gerry Gleeson

Written by Gerry Gleeson

After a successful career as a stockbroking analyst and manager of a private investment business, a long time fascination with property and a desire to try something new led Gerry into the property management sector.

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