Companies are turning their backs on lavish offices in favor of more practical and inexpensive surroundings. From CFO in April 2003.
Extravagance and lax auditing have sounded the death knell for the premium-grade offices of the late 1980s and 1990s.
John Furniss, national director commercial leasing at property consultancy CB Richard Ellis, says: “Nobody wants to hear the words ‘premium’ or ‘prestige’ these days, like 101 Collins Street or 120 Collins Street [Melbourne]. You won’t necessarily see buildings like that again. Tenants these days don’t want the outstanding foyers.”
Leading the charge is Coles Myer chief executive officer John Fletcher. Soon after he was appointed, he ripped out the company’s opulent Ritz-Carlton-style sixth-floor suite, which housed the company’s top six executives. It is now occupied by 60 staff. A Coles Myer spokesperson said that the move was because “we want the culture in Coles Myer to be ‘everybody travels in the back of the bus'”.
Nobody is expected to slum it, but executives are losing their offices in favor of open plan space. The idea is that people communicate more effectively in this environment.
Furniss says: “People are looking for more middle-of-the-range space. Corporate cultures change, and there’s a far more open-plan, open-door policy, so people want the space to represent that. They don’t want all the marble and gold on the ground floor and everywhere else.”
People are looking for buildings with premium services and large uninterrupted floor plates, but without the flash lobbies and gold taps.
Despite the trend, Sydney is seeing the birth of new landmarks with the Renzo Piano-designed Aurora Place and the Norman Foster-designed Deutsche Bank building on 126 Phillip Street – featuring Australia’s tallest atrium, rising the full 31-storey height of the building – set for completion in September 2005.
Both are signature buildings featuring large floor plates uninterrupted by columns or partitions.
Frank Hack, director of Lend Lease Corporate Solutions, says: “They are the next generation of Chifley Square. [But] will there be another one of those buildings in Sydney in the near future? No, of course not.”
Few companies can now afford to pay the premium rents charged in the central CBD and are opting for the fringes of town or the suburbs. Many are moving into refurbished buildings.
According to Bill Dowser, state director Victoria at architect Bligh Voller Nield, B-grade buildings can be refurbished into A-grade buildings. He says: “The problem with premium and the whole rating system is that it is like a hotel system. It depends whether you have got the phone next to the bed and this size bed or that. But it doesn’t talk about the ambient quality of the building, which people are becoming far more aware of.”
The main motivations for corporate relocation are consolidation from multiple locations, the need for larger floor plates to accommodate open-plan working and lease renewals.
Sydney and Melbourne offer plenty of opportunities, with new developments coming to the market and refurbished vacated space.
Many companies in Sydney have dropped space because of downsizing driven by global head offices. In Melbourne, the main driver is the opposing forces of lease renewals and over-development.
Kevin Stanley, national director research at CB Richard Ellis, says: “It’s more of a tenants’ market at the moment than a landlords’ market. Certainly, owners are prepared to offer an increasing amount of incentives to tempt tenants into good-quality space. If you are in a good position to move, which many companies still are, it is well worth having a look at the market.”
Melbourne’s last spate of development was in the late 1980s and early 1990s when companies signed 10- to 12-year leases. These are now up for review, creating a surge in space in the market.
Hack says: “They often have the option to take it to another five years, but the option renewal will go to market price. If it goes to market price now, they can do better by going out to the market and looking for new space.”
In both markets, companies are being offered rent-free periods and incentives to take new space.
Hack says: “If a CFO looked at the cold hard numbers of what the renewal would be versus what he would be able to negotiate in the market, I think he would be quite excited about the opportunity.”
The buildings available – particularly new developments – are offering larger floor plates – nearer 2000 square metres than 1000 square metres – reflecting the trend towards open-plan working and open communication within companies.
Dowser says: “I think tenants are demanding a different type of building, and the property market is reacting to the way businesses have changed and become far more team-orientated and less individual.”
Lend Lease is typical of many that have moved out of the CBD. In its case, it is moving from the circular Australia Square Tower to Hickson Road at McMahons Point. Although the new building is comparable in price to the 1960s icon, the floor plates will be more than 2100 square metres – 100 metres long and 20 metres wide – compared with 1000 square metres.
Hack says: “The big shift we see is that Australian organisations are seeing the benefits of larger floor plates than have traditionally been available.”
Professional firms are making similar moves. Ernst & Young, KPMG, PricewaterhouseCoopers, Philips Fox and Clayton Utz are all taking new space, driving the market for new development but leaving a large void behind them.
Accountancy firms have moved because of mergers and downsizing. Hack says: “You only have to look when they originally signed their lease deals and look at the expiry [dates] – they are all coming up. They are creating the boom and bust in the market in many respects because they are so big in their space needs.”
These moves leave a raft of buildings with smaller floor plates ripe for refurbishment.
It’s difficult to strictly define prices because of the levels of incentives. Furniss says that on new buildings in Melbourne, owners can’t make incentives work unless they manage to get rents of at least $300 per square metre net. Some refurbishments can be undertaken for something under $300 per square metre with costs dropping on the fringes of town.
The old Ansett building, on the fringes at 501 Swanston Street, is now being refurbished, and can be rented for under $200 per square metre, according to Furniss.
Melbourne seems good value compared with Sydney, where companies are moving to the fringes and suburbs to save money.
Gavin Martin, regional director tenant representation at Jones Lang LaSalle, says that a prestige CBD space with a view can cost $800 per square metre. A low-rise with no view in the CBD costs about $550 per square metre. In the fringes – North Sydney, St Leonards or Chatswood – rent averages at about $425 per square metre. Start wandering from transport links and you get a discount of at least another 15 per cent.
Companies have started to migrate out of the Sydney CBD. Citibank pioneered the move south to the George Street end of Park Street. Two years ago the company moved opposite the Town Hall.
Martin notes that HSBC’s move towards the cinema strip in George Street is daring. Equally daring is Ernst & Young, which will move away from the CBD into the World Square development on George Street. Martin says: “At the end of the day, there are a lot of people who would probably question going down there…”
See table on page 67
Business in the burbs
It’s for the truly imaginative and daring only, but some of the best property opportunities in Australia are in North Ryde in NSW, where office vacancies have risen because of the IT sector’s troubles.
Kevin Stanley, national director research at CB Richard Ellis, says: “They’ve [vacancies] gone up big time because the IT sector left, and left quite a big hole. There’s really no single industry ready to come in and take up all that space.”
He estimates that it will take three to four years for the gap to fill.
North Ryde, for example, has probably the newest building stock in Australia and some of the best deals. Stanley says: “It is one of the few areas where new building has continued even if the demand for space has slowed down.”
The stock tends to be brand-new low-rise buildings designed with the levels of services to support IT-intense businesses.
The problem is that tenants will have to wait until 2008, when there will be a rail link and two stations.
Frank Hack, director of Lend Lease Corporate Solutions, says North Ryde is an opportunity for visionaries who are prepared to wait.
But Gavin Martin, regional director tenant representation at Jones Lang LaSalle, doesn’t rate the suburbs. He says: “In the bigger picture, the suburbs don’t really come up to scratch. If you are looking to move out to the suburbs, particularly in Sydney, it’s not very exciting.”
The missing rail links notwithstanding, parking is also more of a problem than it used to be. For example, the number of spaces approved by council has been cut. Martin says: “The current parking restrictions the council put on you is something like one space for 60 square metres. The old code was something like about one space per 30 to 40 square metres. Most of these companies work on the ratio of about one person to 15 square metres – you are really only offering one parking space per three or five employees.”
For any company contemplating moving out to the ‘burbs, the key is to be near the Macquarie Shopping Centre.
Martin says: “If you are not in walking distance of Macquarie Shopping Centre you are really are beginning to lack amenities for your staff. All you’ll end up having is a coffee shop and a sandwich shop in your premises.”
Meanwhile, in Melbourne, companies are moving to the inner south-east – places like Richmond, Abbotsford and Burnley – which are close to railway links directly into the CBD. Martin explains: “We think in Melbourne the CityLink freeway has made a big difference. It has really helped along that busy south-eastern corridor and means that if you are in Richmond you can be in the city quickly.”