THE EMERGING INNER EAST:

MELBOURNE’S CREATIVE HEART AND ITS OFFICE MARKET TRANSFORMATION

RESEARCH | FRINGE REPORT | SEPTEMBER 2019 Inner east suburbs, Melbourne.

- 2 - KNIGHT FRANK RESEARCH OVERVIEW

‘Fringe’ : The outer, marginal or extreme part of an area, group, or sphere of activity. Oxford Dictionary

This publication’s author: Characterised by non-traditional forms of Positioned conveniently between the CBD architecture – the relics of Melbourne’s and the affluent eastern suburbs, the inner “ industrial age – and inhabited by businesses east is close to many of Melbourne’s” most Finn Trembath that prefer a more casual code, the inner admired attractions and transport links and Associate Director, Victoria, fringe is the antithesis of ‘corporate’, plays host to some of the city’s most notable Knight Frank Australia providing tenants with unique spaces industrial architecture and café’s - all of which can be configured to mould a which makes it incredibly attractive to both business’s brand image. business and workers alike. Wrapping itself around the city’s CBD, some As evidence of this, more Millennials are Melbourne’s office market of Melbourne’s most popular fringe suburbs choosing to live in the inner east than any landscape is changing. include Carlton, Brunswick, Fitzroy and North other part of Melbourne, and the tiny enclave Melbourne to the north; Flemington, Kensington of Cremorne – often mistaken for the Underpinned by a knowledge based and Parkville to the west; Southbank, St Kilda larger suburb of Richmond – has in recent economy and fuelled by rapid Road and South Melbourne to the south; times seen a rise in commercial popularity population growth, a seismic shift in and Cremorne, Richmond, Abbotsford and unrivalled in recent Melbourne history. This demand for office space is seeing Collingwood to the east. explosion of business activity in Cremorne the city’s inner fringe become a has sent ripples across the inner east, with Of these, it is the inner east that is legitimate alternative to the CBD. sleeper suburb Abbotsford now showing spearheading this unprecedented change real signs of prosperity and growth. All of Melbourne’s inner fringes possess in office market demand. Representing these factors position the inner east at the a trendy urban edge and sense of almost half of all fringe office stock, vanguard of a new era for the Melbourne community that appeals to today’s spanning north along the Yarra River this office market. new generation of workers. creative belt benefits courtesy of its location.

The nature of demand for Melbourne office space is in a state of flux, and with this we are seeing the emergence of bona fide new office precincts within the city’s fringe. Hamish Sutherland – Head of Office Leasing, Knight Frank VIC

“MELBOURNE FRINGE REPORT - THE EMERGING INNER EAST - SEPTEMBER 2019 ”- 3 - MELBOURNE’S CHANGING OFFICE LANDSCAPE

Now, the next wave of expansion is taking place in the eastern fringe.

Now, the next wave of expansion is taking As these precincts grow their tenancy mix CLUSTERS OF BUSINESSES place in the eastern fringe. Taken as an changes, with larger corporate tenants “CREATING CRITICAL MASS IN aggregate, a broad range of businesses arriving, such as MYOB, Reece Group” and THE EASTERN FRINGES populate Melbourne’s inner east, however SEEK in Cremorne, Suncorp in Richmond Emblematic of a city experiencing significant on closer inspection suburbs such as and Aesop in Collingwood. And with this growth and change, many of Melbourne’s Cremorne, Abbotsford, Richmond and deepening of the business mix come a emerging office markets have started Collingwood are carving out their own number of benefits, be they in the form of to reach critical mass. Put simply, this is unique commercial identity. opportunities for collaboration, networking and learning, or access to a suitable when like-minded businesses gravitate to Cremorne has become a hot-spot for retail recruitment pool. particular areas creating industry clusters, and businesses providing information, and as these burgeoning pockets grow media and telecommunication services they achieve greater density, eventually (aka ‘tech’); Abbotsford has become prospering to become genuine precincts. home to a number of businesses in the For example, the area around South finance/insurance sector; Richmond is Melbourne and St Kilda Road has for synonymous with healthcare, professional the better part of the last 20 years been and information media/telecommunications recognised for its agglomeration of media, services; and much of Collingwood’s office marketing, and advertising commerce, while NLA is being occupied by businesses in the in the last decade Parkville has become transport, public administration, fashion and synonymous with Biotech. education sectors.

FIGURE  Tenancy Mix - Melbourne Inner East - 2019 2% Professional, Scientific & Technical Services 2% 3% 2% Information Media & Telecommunications Services 18% 4% Healthcare & Social Assistance Financial and Insurance Services 5% Manufacturing Retail 5% Electricity, Gas, Water & Waste Services Transport, Postal & Warehousing Construction 15% 5% Public Administration & Safety Education & Training Wholesale Trade 8% Rental Hiring & Real Estate Services Other Services 12% 8% 10%

Source: Knight Frank Research

- 4 - KNIGHT FRANK RESEARCH The spectacular rise in rents in Richmond FRINGE RENTS SKYROCKET and Cremorne can in part be explained by INCREASED As Melbourne’s office fringe market has the fact that much of the demand for office INVESTMENT ACTIVITY grown, so too its office rents have grown. space in these areas stems from tenants In line with rising rents, investment activity With the CBD office market experiencing that, through their reliance on a Millennial has also risen noticeably in Melbourne’s record growth and the fringe already and Gen Z workforce, care less about inner east. Between 2015 and 2016, starved of supply, rents in the fringe congested streets and lack of parking and commercial sales volumes across have skyrocketed, in particular within more about quality of amenity. Richmond, Cremorne, Collingwood and the popular inner east sub-markets of Abbotsford tripled (up from $62,200,000 Rents in the up and coming inner east Richmond and Cremorne. to $186,648,888), and sales volumes have suburbs of Collingwood and Abbotsford kept pace in 2017 and 2018, the clear In the past four years average prime net face sit below those recorded in Richmond and upswing in investment activity a sure sign rents in the broader fringe area have risen Cremorne, although, there is substantial investors are showing increased interest by 54%, excceding the pace of growth in potential for further growth in these markets in the inner east. While sales are down in the CBD (37%). Furthermore, rents within as demand increases and the quality of H1 2019 this has more to do with a lack of the inner east hot spots of Cremorne and supply continues to improve. Richmond have grown by over 80% in the supply than demand which is proving to last four years off the back of low vacancy be very high. levels – as at April 2019, Knight Frank Research recorded vacancy in Cremorne at 1.5% and Richmond at 5.4%.

TABLE 1

FIGURE  Tenancy Mix - Melbourne Inner East - 2019 AVERAGE PRIME NET FACE RENTS July 2015 ($) July 2019 ($) % Change 2% Richmond (inner east) 300-320 550-580 +81 Professional, Scientific & Technical Services 2% 3% Cremorne (inner east) 300-320 570-600 +88 2% Collingwood (inner east) 300-320 430-460 +44 Information Media & Telecommunications Services 18% 4% Abbotsford (inner east) 280-300 420-450 +50 Healthcare & Social Assistance South Melbourne (inner south) 350-400 500-550 +38 Financial and Insurance Services 5% North Melbourne (inner north/west) 300-350 360-410 +17 Manufacturing CBD 495 680 +37 Retail 5% Source: Knight Frank Research Electricity, Gas, Water & Waste Services FIGURE  Transport, Postal & Warehousing Investment Volume - Melbourne Inner East - 2014 - H1 2019 Construction 15% 5% 250,000,000 Richmond Public Administration & Safety Cremorne 200,000,000 Education & Training Collingwood Abbotsford Wholesale Trade 8% 150,000,000 Rental Hiring & Real Estate Services 100,000,000 Other Services 12% 8% 50,000,000

10% 0 2014 2015 2016 2017 2018 H1 2019 Source: Knight Frank Research Source: RCA

MELBOURNE FRINGE REPORT - THE EMERGING INNER EAST - SEPTEMBER 2019 - 5 - DRIVERS OF CHANGE

FIGURE  Population Forecasts - Major Cities - 2019-2035

8,000,000

7,000,000

6,000,000 Nowhere is Melbourne’s architecture as alluring as it is in the fringe. 5,000,000

4,000,000

to enable 39,000 more passengers to stunning Manhattan style loft apartments MELBOURNE’S 3,000,000 utilise Melbourne’s rail system during peak in Collingwood’s Oxford Street, to the rustic “INEXORABLE EXPANSION periods, in turn easing congestion on the charm of South Melbourne’s St Ali’s” café, Well documented of late, Melbourne’s broader network and shortening travel times. these warehouse, factory, industrial vault population is growing at an incredible and auction room conversions are clustered 2,000,000 Yet, it’s not all about economics. Indeed, a pace. The fastest growing city in Australia, in the inner fringe and typically boast classic whole host of other factors are contributing and indeed one of the fastest growing design traits such as large floorplans, high to the rise of the fringe, in particular within cities in the developed world, Melbourne’s ceilings, exposed brickwork, heavy wooden 1,000,000 the inner east. population recently reached the 5 million beams, polished floors, and on occasion mark and is tipped to surpass Sydney’s arched windows. by 2031, if not sooner. This accelerated 0 INDUSTRIAL CHARM While they can be found in all of Melbourne’s population growth has had a positive flow- 2019 2020 2021 2022 2023 Melburnians2024 2025 love 2026their real2027 estate2028 and 2029 2030inner fringe2031 suburbs,2032 many2033 of the2034 most2035 on effect on employment in Melbourne, their art, almost as much as their coffee notable industrial space conversions are with Oxford Economics reporting that Melbourne Sydney and their footy.Brisbane It shouldn’t comePerth as Adelaidelocated in the innerHobart east. Often locatedDarwin off employment grew by 3.5% per year in the a surprise then that we also love our the beaten track, down inconspicuous side threeSource: yearsABS / Knight to 2017 Frank (compared Research to 3.1% architecture and nowhere is Melbourne’s streets and laneways, these properties are for Victoria). In response to this growth, a architecture as alluring as it is in the fringe, at once rustic and urban, and are proving record $50B worth of infrastructure spend in particular within its former industrial highly attractive to Melbourne’s creative and is being invested in Melbourne, headlined spaces that in recent times have been tech businesses and today’s young, by the $11B Metro Tunnel Project which converted for residential and commercial hip workforce. upon completion in 2026 is expected use at unprecedented rates. From the

FIGURE  Employment Forecasts - Major Cities

Melbourne Sydney Brisbane Adelaide Perth 16%

14%

12%

10%

8%

6%

4%

2%

0% 2014-2018 2019-2023 Source: Oxford Ecomomics

- 6 - KNIGHT FRANK RESEARCH FIGURE  Population Forecasts - Major Cities - 2019-2035

8,000,000

7,000,000

6,000,000

5,000,000

4,000,000

3,000,000

2,000,000

1,000,000

0 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 2035

Melbourne Sydney Brisbane Perth Adelaide Hobart Darwin

Source: ABS / Knight Frank Research

FIGURE  Employment Forecasts - Major Cities

Melbourne Sydney Brisbane Adelaide Perth 16%

14%

12%

10%

8%

6%

4%

2% Artist Impression - 3 Newton Street, Cremorne.

0% 2014-2018 2019-2023 Source: Oxford Ecomomics

MELBOURNE FRINGE REPORT - THE EMERGING INNER EAST - SEPTEMBER 2019 - 7 - DRIVERS OF CHANGE (CONTINUED)

For the Millennials, the boundaries separating work and lifestyle are becoming increasingly blurred. James Treloar – Director, Head of Metropolitan Office Leasing, Knight Frank VIC

FIGURE  THE NEW GENERATION Incidence of Millennials (25-35) living in Fringe - 2019 “Indeed it is this workforce that is driving ” much of the change we are witnessing Abbotsford 39% in Melbourne’s office market. Millennials Cremorne 38% – broadly defined as those in the 25-35 Collingwood 35% age bracket – don’t just want to work in the fringe, they also want to live there. According Richmond 33% to ABS statistics, the proportion of those North Melbourne 31% aged 25-35 living in Richmond, Cremorne, Collingwood and Abbotsford is significantly Brunswick 30% higher than most other Melbourne suburbs, Fitzroy 30% even when compared to other attractive Flemington 29% fringe suburbs such as Carlton and Fitzroy. Kensington 29% Now out-numbering Baby Boomers 2-to-1, Carlton 25% employers are recognising Millennials are the next leaders of the ‘technology South Melbourne 24% driven’ business world, and are responding Parkville 23% by locating (and re-locating) their offices 0% 5% 10% 15% 20% 25% 30% 35% 40% 45% in places where this new generation of workers want to spend their time. And it is Source: ABS / Knight Frank Research imperative they do so, for arguably more than any previous generation Millennials FIGURE  value ‘choice’ highly and are not afraid to Tertiary Qualified (Degree or Higher) pack their cardboard boxes and switch jobs if they’re dissatisfied. Abbotsford 36% Moreover, with Australia currently suffering a skills shortage that is particularly acute in high value-add Information and Richmond 30% Communications Technology services (ICT), competition for highly skilled people requires employers to look after their staff. Collingwood 28% In this context, real estate has a key role as a strategic tool for business to help attract and retain this talent, and the fact that the inner east offers a high proportion of degree Cremorne 28% qualified residents is a key attraction.

Greater Melbourne 20%

0% 5% 10% 15% 20% 25% 30% 35% 40%

Source: ABS / Knight Frank Research

Gen Z/Millennials are smart but also demanding, if they don’t like the office they work in or where their workplace is based, they will leave. Jeff Provan – founding Director of Neo Metro, based in Collingwood.

“- 8 - KNIGHT FRANK RESEARCH” Many of our clients prefer to have meetings held near my office in Collingwood, because it’s more hip here. Andrew Hegeman – Managing Director of Interglobal Freight Management MD

In addition, many Melbourne’s best cafés FIGURE  Incidence of Millennials (25-35) living in Fringe - 2019 CUTTING EDGE AMENITY can be found in the inner east. Akin to 18th FRINGE BENEFITS “For Millennials, being in the fringe is as Century coffee houses that were linked to For many businesses, being situated” in the Abbotsford 39% much about amenity as it is about the age of enlightenment, for many small fringe brings benefits in the form of their Cremorne 38% architecture and proximity to the CBD. And businesses these modern day cafés brand identity. Perhaps more than ever in Melbourne amenity starts and ends with before, the suburb where a business is Collingwood 35% double as networking spaces outside food and coffee. of the office, and turn the areas they located says a lot about the business, Richmond 33% and to this end the non-conventional office On the food front the emerging east delivers inhabit into engines of creativity. buildings, vibrant amenity, and urban edge North Melbourne 31% in spades. The pho and vegan burgers on Attractive public spaces, be they for that symbolise the fringe reflects on the Brunswick 30% offer along Bridge Road, Swan Street, personal exercise, networking or break-out businesses that set up shop in these areas. Church Street and Johnston Street are hard Fitzroy 30% purposes, also underpin the allure of the And increasingly, businesses of all sizes to beat, while it is no coincidence Smith inner east. To this end, look no further than and types are attracted to these markets – Flemington 29% Street, which separates Collingwood and Cremorne, where main thoroughfare Swan it’s no longer all about the smaller, creative Abbotsford, is arguably the hippest street in Kensington 29% Street has undergone a resurgence in businesses. For instance, in Cremorne, Melbourne today, with numerous Carlton 25% recent times which has resulted in a vast global brands such as Disney and Tesla fashionable eateries such as Huxtabuger, array of fashionable bars and shops now have followed the smaller, creative South Melbourne 24% Shop Ramen and Saint Crispin along this lining the street. And for those looking to trailblazers who initially established bohemian thoroughfare. Parkville 23% unwind with a jog or a spot of frisbee, the a presence. 0% 5% 10% 15% 20% 25% 30% 35% 40% 45% options are aplenty with Gosch’s Paddock, the Royal Botanical Gardens and the Yarra Source: ABS / Knight Frank Research River all sitting on Cremorne’s doorstep.

FIGURE  Tertiary Qualified (Degree or Higher)

Abbotsford 36%

Richmond 30%

Collingwood 28%

Cremorne 28%

Greater Melbourne 20%

0% 5% 10% 15% 20% 25% 30% 35% 40%

Source: ABS / Knight Frank Research

MELBOURNE FRINGE REPORT - THE EMERGING INNER EAST - SEPTEMBER 2019 - 9 - A LENS ON THE INNER EAST CREATIVE BELT

class suburb up until the 80s, Richmond FIGURE FIGURE RICHMOND – POST underwent a period of gentrification in INDUSTRIAL APPEAL the 1990s and 2000s characterised by Richmond is the king of Melbourne’s residential and commercial warehouse 3% 4% commercial fringe. With approximately conversions, and the arrival of a fashion 3% 6% FIGURE 4% 21% FIGURE 146,396 sqm of office space, more than sector keen to take advantage of the area’s 7% 7% a fifth of all commercial real estate in proximity to trendy retail strips Chapel Street 3% the fringe can be found in this popular and Church Street. With post-industrial 4% 35% 3% 6% inner east suburb. But it wasn’t always charm, and close proximity not just to the 10% 4%Tenancy Mix 21% Tenancy Mix that way. Like most fringe suburbs, CBD but also the affluent eastern suburbs, 7% Richmond 7% Collingwood Richmond’s commercial status was born today Richmond is Melbourne’s premier 22% from an industrial heritage. Once a thriving inner fringe commercial precinct. 19% 35% manufacturing hub, in the 1960s and 101%6% Tenancy Mix Tenancy Mix 1970s Richmond’s vast array of warehouse Richmond Collingwood spaces became popular with the arts, who 22% pounced on the opportunity to acquire large 18% 19% 26% floorplates at low cost. Very much a working 16%

TABLE 2 Professional, Scientific18 %& Technical Services Transport, Postal & Warehousing26% Other Public Administration & Safety RICHMOND Healthcare & Social Assistance Education & Training Vacancy 5.4% Information Media & Telecommunications Services Professional, Scientific & Technical Services Professional, Scientific & Technical Services Transport, Postal & Warehousing Stock 146,396 sqm Manufacturing Healthcare & Social Assistance Other Public Administration & Safety Retail Information Media & Telecommunications Services Pipeline (U/C, DA Approved + Applied) 116,078 sqm Healthcare & Social Assistance Education & Training Transport, Postal & Warehousing Prime Net Face Rents $550 - $580 Information Media & Telecommunications Services Professional, Scientific & Technical Services Wholesale Trade Manufacturing Healthcare & Social Assistance Prime Yields Range (new build) 4.75% - 5.25% Financial and Insurance Services Retail Information Media & Telecommunications Services Source: Knight Frank Research Transport, Postal & Warehousing FIGUREWholesale Trade FIGURE Financial and Insurance2% Services 2% 4% 4% creative and tech start-ups and SMEs 3% 3% FIGURE4 % FIGURE 4% CREMORNE – MELBOURNE’S have set up shop along Cremorne’s narrow TECH HEARTLAND 4% back streets, attracted by its urban-chic 7% 2% 2% If Richmond is Melbourne’s king of fringe, architecture, quality amenity and proximity 4% 4% 37% 10% 3% then Cremorne is its prince, and for all to the CBD. Despite being geographically 4% Tenancy3% Mix 36% 4% Tenancy Mix intents and purposes nestled within the a small suburb, Cremorne plays host 9% Cremorne 4% Abbotsford broader boundary of Richmond. Known to a vibrant mix of tenants both large or 7% today as Melbourne’s “Silicon Yarra” or small, corporate and non-corporate. Major 37% “Silicon Valley” – terms used to describe global names such as Tesla and Disney Tenancy Mix 36% 10% Tenancy Mix the bevy of tech businesses that call the are housed within a corporate park along 9% Cremorne 19% Abbotsford area home – Cremorne has always had an the bustling Church Street, while copious element of commercial activity, however its smaller businesses inhabit the area’s 35% 19% popularity as an office hub has taken off in various side streets and laneways. the last few years. The recent completion of 19% several new residential apartment buildings in neighbouring Richmond and South Yarra Information Media35 &% Telecommunications Services Financial and Insurance19% Services has fuelled a demand for commercial Retail Construction enterprise, and in turn coworking operators, Construction Professional, Scientific & Technical Services Professional, Scientific & Technical Services Manufacturing Information Media & Telecommunications Services Financial and Insurance Services TABLE 3 Healthcare & Social Assistance Education & Training Retail Construction Financial & Insurance Services Public Administration & Safety Construction Professional, Scientific & Technical Services CREMORNE FIGURE  Manufacturing Healthcare & Social Assistance Purchaser Mix - Inner East - 2017/2018 Professional, Scientific & Technical Services Manufacturing Vacancy 1.5% Mining Information Media & Telecommunications Services Healthcare & Social Assistance Education & Training Stock 108,066 sqm Wholesale Trade Financial & Insurance Services Public Administration & Safety Pipeline (U/C, DA Approved + Applied) FIGURE  82,253 sqm Manufacturing Healthcare & Social Assistance Purchaser Mix - Inner East - 2017/2018 Prime Net Face Rents $570 - $600 Mining Information Media & Telecommunications Services Prime Yields Range (new build) 254.75%% - 5.25% Wholesale Trade AREIT 28% Developer Source: Knight Frank Research 25% AREIT 28% - 10 - Developer KNIGHT FRANK RESEARCH 17% Investor 19% Unlisted Fund / Syndicate 12% 17% Owner Occupier Investor 19% Unlisted Fund / Syndicate Owner12 Occupier% Source: Knight Frank Research

Source: Knight Frank Research Richmond. Botanicca 9, 588 Swan Street, Richmond.

Artist Impression - 3 Newton Street, Cremorne. Cremorne.

MELBOURNE FRINGE REPORT - THE EMERGING INNER EAST - SEPTEMBER 2019 - 11 - A LENS ON THE INNER EAST CREATIVE BELT (CONTINUED)

developing a substantial scheme on FIGURE FIGURE COLLINGWOOD - Northumberland Street, with leading COMES OF AGE skincare company, Aesop, signed on as In many respects Collingwood is an anchor tenant,3% along with prominent 4% Melbourne’s former industrial heartland. coworking outfit 3The% Commons. And 6% FIGURE 4% 21% FIGURE Some of the city’s most striking warehouses American7% developer Hines is set to develop 7% can be found in Collingwood, with the best a $200 million3% office tower on Wellington of the lot lining Oxford Street. Compared street, made out of prefabricated timber. 4% 35% 3% 6% to nearby Richmond, Collingwood took 1Still,0% the area4% Tenancyhas retained Mix much21% of its Tenancy Mix longer to shake off its blue collar origins. bohemian7% identity,Richmond and this has paved the 7% Collingwood Nevertheless, its grand warehouses – a way for its main street – Smith Street – to 22% product of a time when it was the hub of the become arguably Melbourne’s foremost19% 35% textile and manufacturing industries – were 1hipster01%6% locale.Tenancy It is through Mix this urban edge, Tenancy Mix converted into trendy loft apartments in coupled with theRichmond area now falling under the Collingwood the 1990s and 2000s, and more recently auspices of the government’s ‘Commercial 22% into commercial offices, sparked by the Zone 3’ category, 1that8% Collingwood’s19% 26% gentrification of Smith Street. Reflecting reputation16% as an inner fringe office its future growth potential, Grocon are destination is assured for years to come.

TABLE 4 Professional, Scientific18 %& Technical Services Transport, Postal & Warehousing26% Other Public Administration & Safety COLLINGWOOD Healthcare & Social Assistance Education & Training Vacancy Information Media &0.0% Telecommunications Services Professional, Scientific & Technical Services Professional, Scientific & Technical Services Transport, Postal & Warehousing Stock Manufacturing 25,582 sqm Healthcare & Social Assistance Other Public Administration & Safety Retail Information Media & Telecommunications Services Pipeline (U/C, DA Approved + Applied) Healthcare & Social51,626 Assistance sqm Education & Training Transport, Postal & Warehousing Prime Net Face Rents Information Media$430-$460 & Telecommunications Services Professional, Scientific & Technical Services Wholesale Trade Manufacturing Healthcare & Social Assistance Prime Yields (new build) Financial and Insurance5.0%-5.5% Services Retail Information Media & Telecommunications Services Source: Knight Frank Research Transport, Postal & Warehousing FIGUREWholesale Trade FIGURE Financial and Insurance2% Services 2% 4% 4% at Abbotsford3 as% an alternative option close 3% FIGURE4 % FIGURE 4% ABBOTSFORD – to the CBD. HUB furniture’s shift from the THE NEW KID ON THE BLOCK 4% CBD7% to Abbotsford2% exemplifies this trend 2% Abbotsford is undergoing a modern day that should4% in time legitimise Abbotsford 4% 37% 10% 3% renaissance that is turning it into a lively and as an 4appealing% Tenancy3% destination Mix for business.36% 4% Tenancy Mix enterprising suburb. Boasting picturesque 9With% rents andCremorne site values at a meaningful 4% Abbotsford tree lined streets and backing onto the discount7% to neighbouring markets and Yarra River, Abbotsford possesses natural 35,974 sqm of office development awaiting 37% beauty not all fringe suburbs can lay claim permit approval,Tenancy it seems Mix inevitable36 % 10% Tenancy Mix to, and its close proximity to Hawthorn 9Abbotsford% willCremorne see commercial growth. And 19% Abbotsford means the suburb has access to the well- while nobody is declaring Abbotsford to be heeled – a strategic plus for businesses the new Cremorne35% just yet, it has its own 19% seeking well-educated young staff. Being iconic Melbourne landmarks and unique situated east of Collingwood and north of character. In time, perhaps Abbotsford’s 19% Richmond, Abbotsford stands to receive historic CUB building will one day become knock-on commercial demand from both emblematicInformation Media of 3cool5 &% Telecommunications in the way the Rosella Services Financial and Insurance19% Services suburbs, and already we have seen high buildingRetail is today in Cremorne. Construction rents in Collingwood cause tenants to look Construction Professional, Scientific & Technical Services Professional, Scientific & Technical Services Manufacturing Information Media & Telecommunications Services Financial and Insurance Services TABLE 5 Healthcare & Social Assistance Education & Training Retail Construction Financial & Insurance Services Public Administration & Safety Construction Professional, Scientific & Technical Services FIGUREABBOTSFORD  Manufacturing Healthcare & Social Assistance Purchaser Mix - Inner East - 2017/2018 Professional, Scientific & Technical Services Manufacturing Vacancy Mining 9.6% Information Media & Telecommunications Services Healthcare & Social Assistance Education & Training Stock 60,200 sqm Wholesale Trade Financial & Insurance Services Public Administration & Safety FIGUREPipeline  (U/C, DA Approved + Applied) Manufacturing 43,974 sqm Healthcare & Social Assistance Purchaser Mix - Inner East - 2017/2018 Prime Net Face Rents Mining $420-$450 Information Media & Telecommunications Services Prime2 5Yields% Range (new build) 5.25%-5.75% Wholesale Trade AREIT 28% Developer Source: Knight Frank Research 25% AREIT 28% - 12 - Developer KNIGHT FRANK RESEARCH 17% Investor 19% Unlisted Fund / Syndicate 12% 17% Owner Occupier Investor 19% Unlisted Fund / Syndicate Owner12 Occupier% Source: Knight Frank Research

Source: Knight Frank Research Collingwood, Melbourne.

112 Trenerry Crescent, Abbotsford.

MELBOURNE FRINGE REPORT - THE EMERGING INNER EAST - SEPTEMBER 2019 - 13 - Artist Impression - 3 Newton Street, Cremorne.

- 14 - KNIGHT FRANK RESEARCH WHAT NEXT FOR MELBOURNE’S RISING EAST?

With Melbourne’s population FIGURE  Development Pipeline - Office sqm forecast to continue to grow, CBD rents at record highs and Melbourne Planning Scheme Amendment C270 Richmond 67,778 48,300 planning controls likely to reduce the potential for development in the CBD office market beyond the current cycle, it seems inevitable Cremorne 82,253 0 that Melbourne’s fringe markets will continue to build momentum. Collingwood 32,329 19,297 SUPPLY PRESSURES SPURRING Approved/Construction NEW DEVELOPMENT Potential (Planning Assessment) Melbourne’s fringe market is in many Abbotsford 8,000 35,974 respects a mirror image of Melbourne’s CBD market. Both markets have in recent times experienced low levels of new office supply, 0 20,000 40,000 60,000 80,000 100,000 120,000 which coupled with robust tenant demand Source: Knight Frank Research has resulted in a sharp decline in vacancy levels. As at January 2019, vacancy in the fringe stood at a record low 2.2%, which is lower than that recorded for the CBD (3.2%) FIGURE  and comes off the back of four consecutive Development Pipeline - No. of Apartments - 2018-2021 years of zero new office supply. In response to the city’s record growth and Abbotsford 827 139 low vacancy, currently in Melbourne’s fringe 418,845 sqm of office development is either under construction, has been approved or is awaiting application approval with the lion’s Richmond 724 172 share of this development activity residing in the inner east where there is 319,931 sqm of office space in the development pipeline. Collingwood 457 180 With the inner east leading the way in upcoming fringe development, it is likely that more large tenants will migrate to these Under Construction 2018-2021 emerging markets, following the likes of Cremorne 0 277 Marketing/Not Built 2018-2021 MYOB and SEEK.

0 100 200 300 400 500 600 700 800 900 1000

Source: Knight Frank Research

MELBOURNE FRINGE REPORT - THE EMERGING INNER EAST - SEPTEMBER 2019 - 15 - FIGURE FIGURE

3% 4% 3% 6% 4% 21% 7% 7% 35% 10% Tenancy Mix Tenancy Mix Richmond Collingwood 19% 22% 16%

18% 26%

Professional, Scientific & Technical Services Transport, Postal & Warehousing Other Public Administration & Safety Healthcare & Social Assistance Education & Training Information Media & Telecommunications Services Professional, Scientific & Technical Services Manufacturing Healthcare & Social Assistance Retail Information Media & Telecommunications Services Transport, Postal & Warehousing Wholesale Trade Financial and Insurance Services

FIGURE FIGURE 2% 2% 4% 4% 3% 4% 3% 4% 4% 7% 37% Tenancy Mix 36% 10% Tenancy Mix 9% Cremorne Abbotsford

19%

35% 19%

Information Media & Telecommunications Services Financial and Insurance Services Retail Construction Construction Professional, Scientific & Technical Services Professional, Scientific & Technical Services Manufacturing Healthcare & Social Assistance Education & Training Financial & Insurance Services Public Administration & Safety FIGURE  Manufacturing Healthcare & Social Assistance Purchaser Mix - Inner East - 2017/2018 Mining Information Media & Telecommunications Services Wholesale Trade

25% AREIT 28% Developer

17% Investor 19% Unlisted Fund / Syndicate Owner12 Occupier%

101 Cremorne Street, Cremorne.

Source: Knight Frank Research

- 16 - KNIGHT FRANK RESEARCH FIGURE FIGUREFIGURE FIGURE FIGURE FIGURE 3% 3% 4% 4% 3% 6%3% 6% 4%3% 21% 4% 4% 21% 7% 3% 7% 6% 4% 21% 7% 7% WHAT NEXT FOR MELBOURNE’S7% RISING7% EAST?35% 35% 10% Tenancy Mix 10% TenancyTenancy Mix Mix 35% Tenancy Mix Richmond RichmondCollingwood Collingwood 10% Tenancy Mix Tenancy Mix (CONTINUED)Richmond 19% 22% Collingwood 19% 22% 22% 16% 19% 16% 16% 18% 18%26% 26% 18% 26%

Professional, Scientific & Technical Services Professional,Transport, Scientific Postal & Warehousing& Technical Services Transport, Postal & Warehousing OtherProfessional, Scientific & Technical Services OtherPublicTransport, Administration Postal & Warehousing & Safety Public Administration & Safety HealthcareOther & Social Assistance HealthcareEducationPublic Administration & Social& Training Assistance & Safety Education & Training InformationHealthcare &Media Social & AssistanceTelecommunications Services InformationProfessional,Education Media & TrainingScientific & Telecommunications & Technical Services Services Professional, Scientific & Technical Services ManufacturingInformation Media & Telecommunications Services ManufacturingHealthcareProfessional, & SocialScientific Assistance & Technical Services Healthcare & Social Assistance RetailManufacturing RetailInformationHealthcare &Media Social & AssistanceTelecommunications Services Information Media & Telecommunications Services makesTransport, sense Postal some & prospectiveWarehousing tenants Transport, Postal & Warehousing INSTITUTIONAL Retail VALUE-ADDInformation Media AND & Telecommunications Services will WholesaleturnTransport, their attentionPostalTrade & Warehousing to Collingwood and Wholesale Trade OWNERSHIPS TO INCREASE Abbotsford.FinancialWholesale and Like Trade Insurance Richmond Services and Cremorne, BUILD-TO-COREFinancial and Insurance Services STRATEGIES As emerging markets continue to grow and these suburbs offer a similarly lived-in Financial and Insurance Services TO ENHANCE RETURNS attract an influx of large and medium sized downtown feel and close proximity to the The recent growth in popularity of the FIGURE FIGUREFIGURE FIGURE corporate tenants, a change in the mix of CBD that appeals to Millennials. inner east as a new office precinct is being ownership is likely, with smaller scale private FIGURE FIGURE With vacancy sitting at 0% for the past reflected in record low yields, with prime investment and development likely to give 2% 4%2%2% 4% 2% 12 months, 4and% with neighbouring Carlton yields in Richmond4% and Cremorne now way to a rise in institutional capital. Larger 3%2% 3%3%2% 3% and Fitzroy not renowned for office space, ranging from4% 4.75%4% to 5.25%, which is 4% investment groups will be attracted to the 4%4% 4% it would seem inevitable3% Collingwood will comparable to yields 3%being achieved in growth potential of these markets, and their 4% 4%4% 4% benefit7% from broader pent up demand for some7 CBD% precincts. And in Collingwood potential to offer exposure to development 4% 37% 37% office space. As if on cue, the suburb has (5.0% to 5.5%) and the upstart suburb of that does not compete directly with CBD 7% 10% 10% recently been earmarkedTenancy Mix by the state36 % Abbotsford (5.25%TenancyTenancy to 5.75%) Mix Mix prime 3yields637%% Tenancy Mix office stock. AXA IM-Real Assets fund- Cremorne CremorneAbbotsford Abbotsford government9% as falling under a new are9 not%10% far off those low levels. While prime through arrangement for MYOB’s Cremorne Tenancy Mix 36% Tenancy Mix Victorian town planningCremorne category yields have compressedAbbotsford substantially, the development, which will eventually see a 9% ‘Commercial 3 Zone’ which aims to prolonged low interest rate environment and local super fund manager own the property, encourage ‘new economy’ enterprises scope for further rental uplift will continue is an example of this likely emerging trend. 19% 19% to inner-city fringe suburbs. Designed to to underpin strong returns for standing streamline the planning application investments.19% However, there is arguably process for creative35 and% start-up potential for stronger35 %performance19% through 19% COLLINGWOOD AND selective investment in secondary stock. ABBOTSFORD SET TO businesses, and to3 5promote% innovative 19% and enterprising mixed use precincts, The yield discount for secondary remains PROSPER the ‘C3Z’ should further boost wide, presenting the opportunity to execute Information Media & Telecommunications Services InformationFinancial Media and Insurance & Telecommunications Services Services Financial and Insurance Services With rents in Richmond and Cremorne Collingwood’s commercial credentials. value-add and build-to-core strategies Retail RetailConstruction Construction almost doubling in the last four years and AndInformation neighbouring Media Abbotsford & Telecommunications is likely to Services to driveFinancial rental and and capitalInsurance value Services uplift to in some instances reaching CBD levels, it receiveConstructionRetail the knock-on benefits. enhanceConstructionProfessional,Construction returns. Scientific & Technical Services Professional, Scientific & Technical Services Professional,Construction Scientific & Technical Services Professional,MProfessional,anufactu Scientificrin gScientific & Technical & Technical Services Services Manufacturing HealthcareProfessional, & SocialScientific Assistance & Technical Services HealthcareEducationManufa c&tu Social&rin Trainingg Assistance Education & Training FinancialHealthcare & Insurance& Social Assistance Services FinancialPublicEducation & Administration Insurance & Training Services & Safety Public Administration & Safety FIGURE  FIGUREManufacturing  ManufacturingHealthcare & Social Assistance Healthcare & Social Assistance Purchaser Mix - Inner East - 2017/2018 PurchaserFinancial Mix & Insurance- Inner East Services - 2017/2018 Public Administration & Safety FIGURE  TABLEMiningManufacturing 6 MiningInformationHealthcare &Media Social & AssistanceTelecommunications Services Information Media & Telecommunications Services Purchaser Mix - Inner East - 2017/2018 Mining WholesaleInformation Trade Media & Telecommunications Services Wholesale Trade PRIME YIELDS - INNER EAST Wholesale Trade

Change 25% 25% July 2015 July 2019 AREIT 28% AREIT 28% (basis points) 25% Developer Developer AREIT 28% Developer Collingwood 6.50%-7.00% 5.0%-5.5% 150

Abbotsford 6.75%-7.25% 5.25%-5.75% 150 17% 17% Investor 19% Investor 19% 17% Unlisted Fund Richmond Unlisted6.25%-6.75% Fund 4.75%-5.25% 150 Investor / Syndicate19% / Syndicate Unlisted Fund Owner12 Occupier% Owner12 Occupier% / Syndicate Cremorne 6.25%-6.75% 4.75%-5.25% 150 Owner12 Occupier%

Source: Knight Frank Research Source: Knight Frank Research

Source: Knight Frank Research

MELBOURNE FRINGE REPORT - THE EMERGING INNER EAST - SEPTEMBER 2019 - 17 - Knight Frank Research provides strategic advice, consultancy services and forecasting to a wide range of clients worldwide including developers, investors, funding organisations, corporate institutions and the public sector. All our clients recognise the need for expert independent advice customised to their specific needs.

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- 18 - KNIGHT FRANK RESEARCH RESEARCH & CONSULTING CAPITAL MARKETS TEAM Ben Burston Guy Bennett Partner, Chief Economist Partner, Head of Institutional Sales, VIC/SA +61 2 9036 6756 +61 8 8233 5204 Ben [email protected] [email protected]

Finn Trembath Danny Clark Associate Director, Victoria Partner, Head of Commercial Sales, VIC +61 3 9604 4608 +61 3 9604 4686 [email protected] [email protected]

Tim Grant OFFICE LEASING TEAM Partner, Head of Eastern Ofiice, VIC +61 3 8545 8611 Hamish Sutherland [email protected] Partner, Head of Office Leasing, VIC +61 3 9604 4734 [email protected] OCCUPIER SERVICES Adam Jones Gordon Wyllie Director, Office Leasing Partner, Occupier Services +61 3 9604 4647 +61 3 9604 4666 [email protected] [email protected]

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Important Notice: © Knight Frank Australia Pty Ltd 2019 – This report is published for general information only and not to be relied upon in any way. Although high standards have been used in the preparation of the information, analysis, views and projections presented in this report, no responsibility or liability whatsoever can be accepted by Knight Frank Australia Pty Ltd for any loss or damage resultant from any use of, reliance on or reference to the contents of this document. As a general report, this material does not necessarily represent the view of Knight Frank Australia Pty Ltd in relation to particular properties or projects. Reproduction of this report in whole or in part is not allowed without prior written approval of Knight Frank Australia Pty Ltd to the form and content within which it appears.

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