The North Richmond office market is starting to thaw as it absorbs some heat from the trendy Cremorne precinct to its south.
Investors have spent substantial sums buying up office buildings in the area, which has dragged behind East Melbourne and Cremorne in the past five years.
The shift comes as UBS re-rates its attitude to Australian real estate funds based on the “crunch down” of suburban office cap rates to around 6.7 per cent from 7.5 per cent.
In February, syndicator Terraplex spent $20 million on a half-leased riverfront office at 675 Victoria Street. The vacant 1600 square metre space has now been leased to the Australian Childhood Foundation.
Salta Group’s 30,000 square metres of office space at Victoria Gardens is believed to be fully leased after dairy giant Fonterra signed up for 3600 square metres at 40 River Boulevard.
And security solutions group Probe has taken 3600 square metres across two floors at Investec’s eight-level building at 29-35 Elizabeth Street, next to North Richmond railway station.
The 12,000 square metre building, which is less than 10 years old, was purchased for $54.47 million in 2014 and is currently valued at $74.5 million on the Johannesburg Stock Exchange-listed fund manager’s balance sheet.
Colliers International agent Travis Myerscough said: “Along with a few other smaller deals that’s 10,000 square metres leased in three months in a market that’s usually pretty slow.”
The deals were struck at around the mid-to-high $300-a-square-metre range, which is almost $100 a square metre cheaper than Cremorne, which is attracting a slew of technology and creative businesses, such as MYOB and Seek.
“It’s because there’s no large space on the market. In the Cremorne area, and even in Hawthorn and Camberwell, there’s limited stock of that size,” Mr Myerscough said.
“That’s why there’s such a big development pipeline coming through,” he said.
There are 11 projects covering 100,000 square metres slated for Richmond and Cremorne as vacancy rates shrink. Rents have risen 23 per cent in the past year. While areas like St Kilda Road are registering significant withdrawals of stock to residential conversions, the inner east is gaining space. It is close to both major eastern freeways and public transport.
The shift in sentiment comes as Salta, the dominant development player in the Victoria Gardens precinct, switches its focus away from North Richmond to Fisherman’s Bend, south of the CBD.
But other players are filling the void, with several large office projects mooted for Cremorne and Swan Street, close to the Botannica business park where David Jones is shifting its headquarters from Sydney.
Peregrine Project’s Joe Chahin has lodged plans for a 10,000 square metre project at his recently purchased site at 169 Burnley Street, headquarters to Australian Retailers Limited.
Mr Chahin said he was fielding steady interest from interested parties – potential tenants and investors.
“If there’s a time to be opportunistic in the market, it’s now,” Mr Chahin said.
The market rent on which he based his $10 million purchase in December last year has already increased 25 per cent, he said.
“We’ve got people interested who have big buildings out in Keysborough and Mulgrave who want a smaller office nearby but don’t want to be in St Kilda Road or the CBD,” he said.
“It may not be the sexiest address … it’s much easier to get in and out of than Cremorne,” he said.