Commercial real estate moving out of major cities

Commercial real estate moving out of major cities

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Commercial real estate construction evokes images of imposing glass cityscapes with cranes interspersed throughout.

One might expect the most attractive place to build commercial real estate is in the heart of a CBD. In urban economics, businesses locating close to other firms can benefit from lower production costs, lower freight costs and higher networking opportunities.

Yet, looking at the top 10 postcodes for commercial construction activity in the past 12 months, the reality of commercial building in Australia could not be further from this.

Instead, the activity is strongest around the fringes of the Melbourne metropolitan and two southeast Queensland regions, and, perhaps most surprisingly, a postcode in the Pilbara region.

Topping the list was postcode 3175 — the Dandenong region — in southeast Melbourne where there were 23 commercial construction starts, all classified as industrial. Of the seven Victorian postcodes in this list, 89 per cent of starts were industrial.

Australian Bureau of Statistics data suggests the number of Victorians employed in manufacturing fell 8.5 per cent over the past five years. On top of that, as Holden winds down its Australia-based operations this year, another 1300 manufacturing jobs are expected to be lost. So where has the underlying demand for industrial construction come from?

Industrial real estate has many uses. Inventory storage and distribution centres are becoming more important as Amazon sets up in Australia. The greater Melbourne metropolitan is a prime position for retail warehousing in particular, due to strong household demand, and being near Tasmania and the ACT, where household consumption accelerated 2.43 per cent and 2.29 per cent respectively last year.

In addition, there are local opportunities with businesses able to take advantage of rising export demand. The 12 month average export value from Victoria lifted 12 per cent in the past five years, and 60 per cent of that uplift was from China. According to Trade Victoria, the state is the largest supplier of food and fibre products to China.

With the Office of Economic Development expecting the Asia Pacific region to account for over 60 per cent of the world’s middle class by 2030, demand for premium food in the region will rise. Food processing and storage facilities are likely to retain demand, particularly in established industrial hubs like Victoria’s Dandenong region, and on the Melbourne fringe where industrial real estate is relatively cheap to establish.

The area with the second highest number of commercial construction starts, at 21 projects over the year, was even further afield in postcode 4350 — consisting of the wider Toowoomba region in Queensland. This region saw 13 industrial starts, a couple of retail and office spaces, and accommodation construction. These diverse construction starts signal Toowoomba as an emerging regional economic growth hub.

Number 10 on the list is also a Queensland postcode, just north of the Sunshine Coast CBD. In the year to March, the 4573 postcode has seen commencement of $30 million of commercial real estate, including a $3m technology hub precinct aimed at attracting digital businesses and supporting local technology start-ups.

Perhaps most surprising is the fourth highest postcode for commercial construction starts — 6714, in the City of Karratha. ­Between a new arts and theatre precinct, food retailers and warehouse builds, the City of Karratha saw nearly $70m in construction start in the year to March.

About $60m of this was in government-owned projects, suggesting construction is being driven by the efforts of local government to diversify employment in the region. New proposals for retail have been scrutinised by ­locals, who are sceptical of whether market conditions warrant this investment.

Interestingly, commercial construction is likely to shift again over 2017, with potential office shortages being forecast in the Sydney CBD. The Property Council of Australia reported the Sydney CBD had the tightest ­vacancy rate of 6.2 per cent in January 2017, which may prompt development in this area.