‘Proving extremely resilient’: The regional market rises

It was the kind of brief architects love: Design for us the best pub possible. And, even more interestingly, it was in a regional area – in Albury, midway between Sydney and Melbourne.

So Nick Travers, director of the Melbourne-based firm Techne Architecture + Interior Design, immediately set to work on a multimillion-dollar transformation of The Astor Hotel, and then started to receive inquiries from others in the area about more projects.

“As a result, we’ve set up an office in Albury as it feels like a very good market,” Travers says. “I think the pandemic offered a lot of people the opportunity to work regionally in a way that hadn’t been considered before.

“There’s been a real shift in thinking about where you live and work, and people are now spending money on quality projects in the regions and quality outcomes. We’re also looking at having a team in Byron, too.”

After two years of pandemic, it seems the regional office market has never run so hot. With so many people moving to the coast and country as a result of COVID-19, and significant government funding for many areas, there’s been a considerable uptick in the demand for local office space.

Ollie Ridley, associate, capital transactions at Savills Australia, says a lot more companies are focusing on regional office locations to reduce their overhead costs, helped by a shift in working practices and a focus on flexible and remote working as a result of the pandemic. “In the cities we’re also seeing many companies reducing their office footprint, and subletting some of the space they’re not using,” he says. “But that hasn’t happened in the regions. We’re not seeing that.

“We’re seeing a lot of our investor clients looking in these markets, primarily because the yields are now much more appealing than in metro markets and we have a lot of people wanting to buy, and a lot of companies eager to lease.”

In NSW, for instance, many regional markets are proving extremely resilient. Top of the list is Newcastle, which has outperformed other regional cities with only a marginal increase in vacancy rates from 7.6 per cent in 2020 to 7.8 per cent last year, Ridley says.

Two eye-catching office transactions in Newcastle were the sales of 116 Hunter Street for $2.04 million by James Ferguson and Oliver Coakes, and 745 Hunter Street, with yields hitting 4.41 per cent and 4.01 per cent respectively.

Wollongong is also feeling the benefit of record investment levels with the sale of the ATO building in Kembla Street for $57 million to Castlerock at a yield of 5.64 per cent, and more A-grade space now becoming available. Last year saw 6695 square metres of new office supply and this year is expected to see a further 11,500 square metres.

“Rents, when compared to the city, are much lower and a lot of people have moved out to those regional locations,” says Ridley. “We’re now seeing so much activity there.”

In Victoria, Shaun Venables, partner in commercial agency Burgess Rawson, agrees the regions are going remarkably well. In one of their major auctions recently, offices in Nathalia, in northern Victoria, were bought for $1.583 million on a 6.32 per cent yield, with a $100,000 rental.

“We’re selling quite a lot of office space in regional areas,” says Venables. “The majority have strong leases from the state, federal or local governments, or they might be the local arm of a national firm.

“We’ve always done quite a lot of work in Shepparton and Warrnambool, Sale and Bairnsdale, and a lot of major centres like Geelong, Bendigo and Ballarat. Beyond those, commercial property in South Australia has the advantage of attracting no stamp duty and there’s a big demand there for office space, as well as in Western Australia.”

The regional office market is performing particularly strongly in NSW, too, says Burgess Rawson partner Yosh Mendis. “It’s going exceptionally well. A lot of the regional offices are underpinned by secure tenants, like medical or government tenants or government-supported tenants.”

Commercial property specialist Scott O’Neill of Rethink Investing, and co-author of the guide Rethink Property Investing, says the regional office market proved much stronger during COVID, and after it, than most capital city markets.

“The regional market was much more stable and wasn’t affected by the kind of lockdowns that hit Sydney and Melbourne,” he says. “In the regions, it tends to be more boutique offices for accountants, lawyers and mortgage brokers and vacancy rates didn’t rise at all.”

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