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Melbourne's CBD office market stretches West: Rethinking The Hoddle Grid June 2016

Melbourne's CBD office market stretches West: Rethinking The

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Page 1: Melbourne's CBD office market stretches West: Rethinking The

Melbourne's CBD office market stretches West: Rethinking The Hoddle Grid June 2016

Page 2: Melbourne's CBD office market stretches West: Rethinking The

Summary Rethinking the Hoddle Grid1

A decade of development in Docklands has resulted in changes to the character of Melbourne’s existing CBD office precincts. A number of key themes have emerged:

• The commercial centre of the Melbourne CBD office market is moving west. We have assessed the mid-point to be on Collins Street between William & Queen Streets.

• The Batman’s Hill and southern part of the Stadium precincts in Docklands have become a precinct in their own right and are generally referred to together as the Southern Cross Precinct. This new precinct has become a seamless extension of the CBD and the Hoddle Grid.

• The Collins Street spine is becoming increasingly important as a connector of businesses to their clients and suppliers within the CBD.

• Docklands development has had a significant impact on Western core / Flagstaff precincts (Mid-town precincts) over the last decade. As a result of the commercial centre of the CBD moving west, the next cycle of office development will see increasing focus on Mid-town Melbourne with the urban regeneration of Western Core and Flagstaff precincts.

Docklands was seen as one precinct but it is really five different suburbs each with different inherent characteristics based on location and tenant profile.

The prevailing thinking about the Hoddle Grid1 is being challenged by accelerating development of office assets on the Collins Street extension around the Southern Cross Station.

The Batman’s Hill Precinct and southern part of the Stadium Precinct (as described by Places Victoria) – Bound by Docklands Park / Flinders Street / Spencer Street / Telstra Dome has become a precinct in its own right and is colloquially referred to as the Southern Cross Precinct.

The Southern Cross Precinct has become a seamless extension of the CBD. The CBD will be seen to end on Collins Street at Batman’s Hill Drive.

Within this precinct, three major projects are the focus of office sector supply. Melbourne Quarter (Lendlease) has now launched with construction to start later in 2016. The first stage of the $1.9 billion development will include a 2,000 sqm elevated park to be built over Wurungjeri Way and Collins Street and a 19-level office tower (21,000 sqm). The remaining Melbourne Quarter Development will include a further 79,000 sqm of office, approximately 600 apartments and 4,000 sqm of retail.

At Collins Square (Walker Corporation), Buildings 2 & 4 are under construction and planning permission for a 45,000 sqm building has been received for building 5.

664 Collins Street (Mirvac) will provide 26,100 sqm with completion expected in early 2018.

• ATO, Marsh Mercer, Transurban Group & CBA have already relocated in Collins Square.

• In late 2016 KPMG, Maddocks Partners, Link Financial Services & AECOM will move into Collins Square Buildings 2 & 4.

• In early 2018 Pitcher Partners will move into 664 Collins Street, Southern Cross Station.

• ARUP is the first occupier to commit to Melbourne Quarter with completion expected in late 2018.

The office stock completed and under construction in the Southern Cross Precinct totals 540,000 sqm which equates to approximately 70% of all office stock in the Docklands. The composition of the completed developments in this area by project number is approximately 75% office with the remainder either residential or hotels.

2 JLL

1 The Hoddle Grid: A colloquial term used to describe the Melbourne CBD which refers to the rectangle bound by Flinders Street, Lonsdale Street, Spencer Street and Spring Street. Named after the designer, Robert Hoddle in 1837.

“Accelerating development in Docklands is changing how we think of the Hoddle Grid and Melbourne’s commercial precincts.

The area near to the Southern Cross Station at the extension of Collins Street has become an office precinct of its own; the Southern Cross Precinct. As a result, the commercial centre of the CBD is being pulled west.

Additional residential development will bookend the western end of Docklands and the increasing residential population will attract retail businesses and will further improve the amenity for office workers.”

David Bowden Managing Director JLL Victoria

Page 3: Melbourne's CBD office market stretches West: Rethinking The

Source: JLL Research

Table 1: Melbourne CBD net supply, 2Q2006 to 2Q2016Total NLA supply (10 years) 2Q15 Total Precinct Stock (NLA sqm) Office Sector Supply (NLA sqm) Stock less than 10 yrs. old Floor plate sizes

Docklands 788,100 598,100 76% 1,600 - 5,000

W.Core & Flagstaff (Mid-town) 2,143,600 237,900 11% 480 - 2,250

Parlimament, Civic, E.Core (East End) 1,481,300 118,600 8% n/a

SouthBank/Riverside 203,800 34,000 17% n/a

Docklands has dominated office sector supply

The initial vision for the Melbourne Docklands was that, by 2015, the area would become a “world class mixed use precinct” creating more capacity for central city employment and activity and expanding the CBD by over a third. The aim is ultimately for 20,000 residents and 60,000 workers in a wide range of industries.

Ten years ago total office stock in the Docklands precinct was approximately 187,500 sqm. As at 2Q16 Docklands totalled approximately 788,100 sqm.

Approximately 600,000 sqm of office stock has been supplied to the CBD market in the Docklands precinct. This compares to approximately 118,600 sqm in the East End precincts and 240,000 sqm in Mid-town precincts.

As a result of development activity being concentrated on Docklands, 76% of Docklands office stock is less than 10 years old compared to only 11% of office stock in Mid-town. (See Table 1).

Docklands precinct has dominated supply and has been able to offer large floor plate sizes.

Melbourne’s CBD office market stretches West: Rethinking The Hoddle Grid • June 2016 3

“We estimate that the mid-town precincts are over 70% occupied by smaller tenants (less than 1,000 sqm) and it is unlikely that these tenants will shift operations to the Docklands where options are currently very limited.

We have been recommending to our clients with assets in the Western Core to consider providing subdivided floor options to attract smaller tenants with very successful results.”

Stuart Colquhoun Regional Director, Head of Leasing

Page 4: Melbourne's CBD office market stretches West: Rethinking The

Figure 1: Southern Cross Precinct – 26% occupied by ASX 100 Companies

Figure 2: Rest of Docklands – 37% occupied by ASX 100 Companies

Source: ASX and JLL Research

Source: ASX and JLL Research

TLS 0.9%TCL 1.3%AGL 3.6%AMP 1.1%MPL 2.0%FXJ 2.3%

CBA 1.6%

Non ASX 10075.9%

11.3%NAB

Non ASX 10063.0%

AMP 2.4%

LLC 1.2%

ANZ33.4%

Large floor plate sizes are attractive to modern tenants

One of the most notable trends over the decade is the replacement of larger tenants (leasing greater than 1,000 sqm) by smaller tenants (occupying less than 1,000 sqm) in the Mid-town precincts.

JLL Research tracks moves of all tenants greater than 1,000 sqm. Analysis shows that over the last decade the average size of tenants in Docklands is 10,250 sqm which compares to 2,900 sqm in Mid-town Precincts and 3,700 sqm in East End precincts.

In addition, ASX listed companies are located in much higher proportions in Southern Cross and other Docklands precincts than the rest of the CBD as whole.

Floor plate sizes in newly constructed assets in Western Core / Flagstaff are significantly smaller than the floor plate sizes available in campus style office developments of Docklands (See Table 1). Docklands floor plate sizes range from 1,600 – 5,000 sqm and this larger range is particularly attractive to companies with 250+ employees that look to have their workforce located on fewer floors. Western Core / Flagstaff floor plates average 480-2,250 sqm by comparison.

Source: JLL Research *As at 2Q16

Table 2: Melbourne CBD: Tenant composition by size, 2Q2006 to 2Q20162006-2016* W. Core /

FlagstaffDocklands E.core/ Parliament

/ Civic

Change in total occupied stock 42,300 561,700 81,200

Tenant moves <1000 sqm (Net total NLA) 110,600 35,800 -128,600

Tenant moves >1000 sqm (Net total NLA) -68,300 525,900 209,800

The Western Core / Flagstaff precincts have been significant net losers of larger tenants. However total occupied stock over the decade has increased as a diverse range of small tenant occupiers have replaced large tenants in greater numbers (See Table 2).

4 JLL

Page 5: Melbourne's CBD office market stretches West: Rethinking The

Figure 3: Top Sectors (Contribute to Increase in NLA over 10 years) Tenant moves >1,000 sqm

Figure 4: Melbourne CBD: Tenant moves by sector and precinct 2Q2006-2Q2016 (NLA sqm)

11%

22%

20%

8%Finance & Insurance Services

Public Administration & Safety

Electricity, Gas, Water & Waste Services

Information Media &Telecommunications

Education & Training

Professional, Scientific & Technical Services

8%

9%

W. Core And Flagstaff Docklands E.Core, Parilament & Civic

-150000 -100000 -50000 0 50000 100000 150000 200000 250000

Professional, Scientific & Technical Services

Education & Training

Electricity, Gas, Water & Waste Services

Arts & Recreation Services

Construction

Unknown

MiningRental Hiring & Real Estate Services

Retail Trade

ManufacturingAgriculture, Forestry & Fishing

Transport, Postal & Warehousing

Information Media & Telecommunications

Administrative & Support Services

Public Administration & Safety

Finance & Insurance Services

Source: JLL Research

Source: JLL Research

Top performing sectors over the last decade

Population growth has contributed to a strong residential housing construction pipeline over recent years and to growth in the finance and service sectors. This has translated into expansion in office space demand over the decade.

Figure 3 Top Performing sectors and Figure 4: Tenant moves by sector and precinct explains how tenants have moved and expanded within the CBD.

Melbourne’s CBD office market stretches West: Rethinking The Hoddle Grid • June 2016 5

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Table 3: Melbourne CBD Office: Rents and Incentives

* Calculated using JLL Research basket of Melbourne CBD propertiesSource: JLL Research

Figure 4 illustrates the changing tenant profile of the Mid-town precincts.

Professional Service sector businesses are concentrating on Mid-town at the expense of the Parliament / Civic / E.Core precincts (East End precincts).

However, recent pre lease transactions illustrate that legal firms (e.g. Maddocks) and professional service firms (e.g. KPMG & Pitcher Partners) are also embracing the Southern Cross Precinct, Docklands.

The Professional services sector is one of the top sectors to have increased net lettable area over the last decade and tenants particularly lawyers and accountants are focusing on Mid-town locations (net increase over 10 years: 54,800 sqm). The Law Courts still provide a focus for the legal fraternity but for many of these tenants a high proportion of revenue comes from corporate work and have found their clients increasingly located at either end of the CBD.

Those tenants that moved to the Docklands have relocated / contracted from East End precincts where finding a location closer to clients is a priority at lease renewal time.

Education sector tenants have also expanded significantly over the decade and Mid-town has been the location of choice.

The Education sector has seen significant growth and education tenants have expanded and relocated to Mid-town precincts increasing occupier NLA by approximately 40,700 sqm over the decade. Education tenants are suited to secondary grade office space and 89% of Mid-town office stock is over 10 years old.

In addition Melbourne has been awarded second top spot QS Best Student Cities 2016 behind Paris and in front of Tokyo.

The QS ranking is based on student mix, desirability, employer activity, the ranking of the universities and affordability.

Growth in the education sector is likely to continue strongly. In a global environment with mixed employment prospects potential students are

Mid-town – Changing tenant character

taking the opportunity to study and are able to consider any location in the world. Melbourne is well positioned for this influx of students.

However, over the last decade financial services and Insurance sector tenants have on average relocated out of Mid-town precincts to Docklands.

Docklands has been particularly attractive to Finance & Insurance sector tenants. ANZ (83,500 sqm) moved their headquarters to Docklands in 2009 and National Australia Bank (61,000 sqm) consolidated from a number of CBD locations into 700 Bourke St, Docklands in 2013. Finance and Insurance sector tenants represent approximately 40% of Docklands tenant composition. However, while retail banking has focused on Docklands, the investment banking sector has remained in the Eastern end of the CBD.

Tenants that fall into the Public Administration & Safety sector have also exited from the Mid-town precincts over the last decade. The ATO (38,000 sqm) in 2012 and Victoria Police (28,000 sqm) in early 2015 are significant public sector tenants that are now located in Docklands.

Table 3 illustrates the impact of location on rents. The Melbourne East End has the highest average gross effective rents and Docklands the lowest average gross effective rents. However the lowest rents in the CBD can be found in Mid-town precincts reflecting the wide range in the quality and age of office stock.

The $100 million redevelopment of Rialto, 525 Collins Street is timely and very appropriate for an iconic Melbourne building and will provide renewed quality product in the Mid-town precincts. The project is currently under construction and expected to complete in early 2017. Existing sites with planning permission such as 477 Collins Street and recent conditional planning approvals for 447 Collins Street and the Wesley Church site at 118-148 Lonsdale Street will provide renewed quality product to the Mid-town precincts too over coming years.

Prime Gross Face Rents Prime Incentives

Range ($/sqm) Average ($/sqm) Range ($/sqm) Average ($/sqm)

E.core, Parliament & Civic 455 875 595 27% 35% 31%

W.Core And Flagstaff 430 794 588 30% 38% 33%

Docklands 490 630 541 30% 36% 33%

6 JLL

Page 7: Melbourne's CBD office market stretches West: Rethinking The

Table 4: Melbourne CBD Office: Future Supply

Source: JLL Research

There are currently 2,200 apartments under construction in Docklands, with expected completion dates between 2016 and 2017. A further 2,415 apartments are actively being marketed.

There are currently 8,300 apartments currently under construction across the Hoddle Grid that are expected to complete between 2016 and 2019. Withdrawals for residential development has removed old stock from the CBD market and this activity is particularly focused on the Flagstaff and Western Core (Mid-town) precincts where 60 % of residential apartments under construction in the CBD are located.

In addition office occupiers around the Southern Cross station are also likely to benefit from access to a larger pool of potential employees, suppliers and clients with the completion of the Victorian State Government’s Regional Rail Link project in mid-2015. The project removed major bottle necks and will improve reliability by separating Metropolitan and Regional rail services through Melbourne’s west.

Demographic impacts & future office supply

2016 and beyond: Key themes

Total NLA Supply (10 years)

Total Precinct Stock

% of total office stock less than 10 years old

Under construction

Planning Approved

Proposed (estimated completion

prior to 2020)E.Core, Parliament & Civic 1,481,300 8% 43,000 21,100

W.Core And Flagstaff 2,135,600 11% 6,000 134,000 101,000

Docklands 788,100 76% 105,000 122,100 40,000

Batman’s Hill and the southern part of the stadium precinct in Docklands, the Southern Cross Precinct can be considered an extension of the CBD.

The next 10-15 years will see occupier trends amplified as the Southern Cross Precinct and Docklands itself become built out. The $100m regeneration underway at Rialto, together with major office developments announced by CBUS at 447 Collins St and Mirvac at 477 Collins St, further reinforce the importance of Collins St and its extension as an important central spine connecting Eastern End precincts with Docklands.

The first wave of lease renewals will provide the ultimate verdict on Docklands. As yet there is little to indicate that tenants plan to leave.

This important piece of infrastructure is critical in improving the link from Melbourne’s regional cites (Geelong, Ballarat and Bendigo) and Melbourne’s leading population growth corridor in the West to the CBD by providing new connections directly into Southern Cross Station.

In addition to the Regional Rail Link project, the $5.5 billion Western Distributor project is also focused on the west.

The full project was announced in December 2015 as a JV between the Victorian Government and Transurban and is expected to complete by 2022. The main focus of the project is the extension of the Western Ring Road to improve transport linkages into the CBD and provide an alternative road network to the West Gate Bridge.

Office sector supply has been focused on Docklands for the last decade but the future is likely to also be directed to Mid-town Melbourne with planning approvals and proposed office developments with completion expected by 2020 totalling 256,100 sqm in Mid-town compared to 162,100 sqm in Docklands.

Mid-town office markets will benefit from the centralising of office markets and increased tenant focus from a diverse range of tenants. However, existing assets will still be limited by the age of assets and floor plate sizes so smaller tenancies will continue to be a feature.

The lack of availability of large sites and /or the lack of opportunity to amalgamate sites will constrain potential growth. New interim planning rules in the CBD have restricted the development potential of some sites altogether.

Fisherman’s Bend is the next large urban regeneration project to be introduced by the Victorian State Government to the south west of the CBD and the planning framework is still a work in progress. Initial focus is on residential development in place of existing industrial stock. It is expected that over the next decade gentrification of this area will add to the pull effect to the west.

Melbourne’s CBD office market stretches West: Rethinking The Hoddle Grid • June 2016 7

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Jones Lang LaSalle© 2016 Jones Lang LaSalle IP, Inc. All rights reserved. All information contained herein is from sources deemed reliable; however, no representation or warranty is made to the accuracy thereof.

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Glen Waverley Building 2 540 Springvale Road Glen Waverley VIC 3150 tel +61 3 9565 6666

For further information, please contact:

Annabel McFarlane Research Manager - Victoria Strategic Research +61 3 9672 6683 [email protected]