Large amount of capital set to flow into commercial real estate

As Melbourne’s post-COVID recovery ramps up, green shoots are quickly emerging in the city’s commercial property market.

Heightened buyer interest is particularly being seen for well-located, inner-city commercial buildings that lend themselves to multiple uses.

The commercial real estate sector’s traditional trophy assets - major shopping centres and big city offices - lost some of their lustre through the disruption of last year.

But warehouses and Main Street inner-city buildings that offer retail space plus office or accommodation space are now performing very strongly.

In March, Nelson Alexander Commercial auctioned and sold one of Collingwood’s most iconic buildings in a desirable city-fringe location.

Originally the ‘Victorian Bakery’ (built around 1886), the building at 137-139 Johnston Street occupies a prominent corner. The triple-fronted premises – with a 341 sqm land allotment and a large floor area of approx. 500 sqm with an internal courtyard offered prospective buyers a variety of uses beyond its current use as the travel hostel, ‘Collingwood Backpackers.’

Nelson Alexander Commercial partner Kristian Lunardi says the Johnston Street building, owned by a Melbourne investor for nearly 20 years, attracted interest from a wide group of potential purchasers.

“They were not just people looking to utilise the building as a backpackers’ hostel,” he says.

“There was interest from buyers looking to occupy as a corporate headquarters, from boutique hotel operators and straight investors who acknowledged the building was premium real estate.

The backpacker hostel had a quote range of $2.9 million to $3 million. It sold for an undisclosed sum above the reserve to a buyer who intends to refurbish the property as a hospitality venue.

Real estate investment bankers believe a large amount of capital is ready to be deployed into commercial real estate.

However, at this point, that capital is not chasing large shopping centres and big office towers, which both have more near term leasing risk.

Rather, once considered the lesser light of commercial property investments, warehouses are now at the heart of investment interest, courtesy of the growth in online shopping, which has pushed up demand for logistics space.

Now that the COVID-19 crisis has abated, high net worth individual investors are also aggressively targeting inner-Melbourne commercial property investments with long-term leases and/or multiple-use potential.

The Reserve Bank of Australia has signalled that interest rates are likely to remain low for the next three years. Hence, agents expect demand for assets will build in 2021 as investors seek higher-yielding, defensive investment opportunities to bolster their portfolios.

Mr Lunardi says one impact of the COVID pandemic on the inner Melbourne market has been listing a number of tightly-held properties.

In the case of the Collingwood Backpackers’ sale, the owners had told agents they would never have sold the property if it wasn’t for the pandemic, which has negatively hit travel accommodation demand, at least for the short term.

“COVID is obviously hurting some businesses, but it is also creating opportunities for certain types of real estate, which do not change hands regularly, to be transacted,” Mr Lunardi notes.

“The buyers are acknowledging this, pandemic or not. They are grabbing the once-in-a-20-year-or-more opportunity to buy a property like 137-139 Johnston Street.”

If you would like more information on buying and selling in the current market, please contact any member of the Nelson Alexander Commercial team.

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