Melbourne’s strong fundamentals positive for commercial real estate

In the midst of social and economic lockdown, most landlords and vendors think the world has stopped. But Melbourne’s strong commercial real estate fundamentals coming into the pandemic have continued through and activity, particularly in Melbourne’s commercial suburban market, is continuing strongly.

Just this month, for example, has reported significant commercial real estate activity, including leasing of a large multi-level office site at Box Hill and sale of a large development site at Glen Waverley with zoning for residential aged care

Much of the reported concern about the immediate future of commercial real estate has focused on two things:

  1. Retail is under considerable pressure due to social isolation measures and online shopping will become the norm.
  2. The move to working from home signals a paradigm shift in the way that people will work into the future.

While there is some element of truth to these concerns, perhaps the hype won’t be realised. The reality is that Australians don’t like being cooped up at home with limited social contact and physical interaction. The Victorian government is now talking positively about serious easing of restrictions once the current state of emergency is over on May 11.

Retail must bounce back – it may take some time, although analysis of jurisdictions where governments have already started to lift restrictions indicates that shopping centre attendance is nearing pre-pandemic levels already. Online shopping is not a new phenomenon – it’s one that retailers have been facing for some time. But there is a significant proportion of the population that still wants to try on shoes before buying rather than taking the risk of ill-fitting footwear manufactured overseas!

Interestingly, much of the commentary about a permanent move to working from home is coming from individuals and sectors which already do it or will benefit from it in terms of substantially reduced costs. But, again, most Australians want to work with colleagues face-to-face. And we only have to listen to anecdotes about spouses sharing trips to hotels in order to get work done away from the kids to realise that the end of the office is nowhere near in sight!

The final material opportunity presenting itself to commercial real estate investors is the likely increase in domestic manufacturing as governments seek to stimulate the economy and address impacts associated with dramatic increases in freight costs and negative sentiment towards imports, particularly from China.

Melbourne’s south-east is particularly well suited to light and medium manufacturing, transport infrastructure and facilities available. A push to increase domestic manufacturing could result in a small boom in light manufacturing zoned real estate in the region.

There is no doubt that the commercial real estate market will experience change as a consequence of the COVID-19 pandemic and there is undoubtedly some short-term pain for both landlords and tenants in some areas. However, the opportunities loom large and, with market fundamentals as strong as they already are in Melbourne, our city could stand to benefit considerably.