2019 Review / 2020 Outlook – Development Sites

Posted on 29th January 2020

Interest returning for suburban developments

Developers are gradually being encouraged back into the Melbourne metropolitan market, and will continue seeking opportunities for projects aimed at sophisticated investors and owner occupiers.

Fitzroys Associate Director, James Lockwood said developer financing and purchaser lending restrictions have eased throughout the year.

“A rebound in residential prices and auction clearance rates through the second half of 2019 has lifted developer sentiment right across the market.

“This has been assisted by certainty around the tax landscape following the federal election, and easing access to credit after a the Banking Royal Commission.

Metropolitan Melbourne’s vacancy rate is at a tight 2.2%, according to the REIV, while Victoria’s standout economic and population growth indicators have helped maintain momentum in Melbourne’s development market. The most recent Australian Bureau of Statistics data shows state population growth of about 130,000 in the year to March 2019, at 2.1%, based largely on international migration.

“Developers have been refocusing from high-density apartment projects targeted at investors towards development products aimed at owner occupiers and sophisticated investors.

Lockwood said there has been a shortage of new development-grade stock put to the market in 2019, with much of the available stock have been on the market for some time as enquiry broadly dropped off in the early part of the year.

“There is some B-grade and C-grade stock that can be picked up for a good price, but developers are generally sticking to their own agenda and retain their focus on specific types of products.”

“High-end developers will continue to favour owner occupiers, and sites in the inner and middle-ring suburbs.”

Melburnians continue to embrace medium and high-density living, particularly throughout the inner suburbs.

“More Melburnians seek to live and work close to bustling shopping, hospitality and nightlife destinations, which has had a flow-on effect to the commercial development market,” Lockwood said.

Commercial development turning around Melbourne retail strips

Lockwood said residential and commercial development has had a noticeable effect on some of Melbourne’s major shopping strips in 2019.

Chapel Street, South Yarra has experienced a pronounced period of transition in recent years, and has seen a number of properties leased this year to a range of retailers on the back of a major residential and commercial development.

Lockwood said residential and commercial development in the area is increasing the size of the immediate catchment and prompting a shift in the demographic.

“The changing complexion of the demographic will boost trade across all hours, and has already translated into growing spending on food and beverage throughout Chapel Street,” he said.

This has attracted the world’s largest Mexican restaurant chain, Taco Bell, to the famous lifestyle shopping strip, in a deal brokered by Lockwood and Fitzroys colleague Lewis Waddell at 352 Chapel Street.

“Taco Bell is looking to capitalise on the recent influx of spending within the area, and recognised the growth prospects that the growing residential and worker population offered Chapel Street,” Lockwood said.

According to Fitzroys’ newly released Walk the Strip, Chapel Street, South Yarra vacancies came down from 18.1% to 15.6% throughout 2018/19.

Immediately to the north is the Forest Hill precinct, which is Australia’s most densely populated area, while commercial projects are headlined by the upcoming $1.25 billion Jam Factory redevelopment. This will bring 50,000sqm of new commercial space to the precinct, as well as a revitalised retail and cinema offering It will be joined by new office builds at 627 Chapel Street and Chapel Plaza at 402 Chapel Street, which will bring a further 27,000sqm of offices.

Across the river, Smith Street has emerged as an investment and leasing hotspot, Collingwood area has seen strong and consistent growth over the past five to 10 years, becoming one of the most desirable destinations for professionals, students and young families, Smith Street has among the lowest vacancy rates of Melbourne’s iconic shopping and lifestyle strips at just 2.7%, and values have increased

Lockwood said the boom in inner-city living and commercial development on Melbourne’s city fringe has spread from Richmond and Cremorne over to Collingwood, with a surge in commercial and residential projects anchored around the world-class Smith Street hospitality precinct.

Major commercial developments include Grocon’s $120 million Northumberland project, Pace Development Group’s recently-sold 10-storey office building at 51 Langridge Street, a $200 million office tower by major US investor and developer Hines, and Pellicano Group is planning a new office project at 207 Victoria Parade, on the corner of Smith Street.

Tim Gurner’s upmarket Victoria and Vine is one of the newer additions to the local residential development pipeline. Others include Little Oxford, the recently approved mid-rise project at 88-92 Smith Street, as well as The Lyric on Gore Street, Holme Apartments at 112 Smith Street, the six-level Lil’Ox on Oxford Street, and the seven-level 7 Hodgson Street.

Creative businesses attracted to the Richmond, Cremorne and Burnley area for its industrial characteristics sparked the current population and office development boom. Co-working operators and emerging tech start-ups continue to flock to the area, creating what has now become Melbourne’s own Silicon Valley. Servicing this young and energetic local workforce, Swan Street has evolved into one of the city’s premier food and beverage hotspots, with a healthy mix of dining and hospitality options for an all-hours crowd.

Fitzroys Associate Director, Chris James said Melbourne’s inner-east continues to attract development, with projects typically springing up close to the Camberwell Junction and Burke Road shopping hubs.

“Projects opening in the coming months, include the mixed-use CV project on the corner of Camberwell Road and Monteath Avenue will include 88 apartments and 8,500sqm of commercial office space, and Chinese development giant Dahua Group’s Hawthorn Park just metres away, bringing 345 new residences to the area,” he said.

Next hotspot?

James said as more projects reach completion through Cremorne, Richmond and South Yarra and tenants seek to find space on the city fringe, an increasing number of developers will look to neighbouring Abbotsford for opportunities.

“Abbotsford looms as Melbourne’s next commercial development hotspot. Like the current busier locations, Abbotsford is well-connected, close to the city, has a growing residential component, and has a strong food and beverage and amenity offering, and the added bonus of the picturesque surrounds of the Yarra River,” James said.

Melbourne CBD’s tight office vacancy rate of 3.7%, according to the Property Council of Australia, will fuel further demand from tenants for space through the inner city.

“Abbotsford has large amounts of industrial and residential land, and it’s a matter of time before this is rezoned by the council, which is likely to reshape the suburb in a substantial way,” James said.