Tenant Demand – Continuing to Outperform Expectations

The security of knowing an investment property is leased, well managed and you have access to expert intellect as to its position in the market provide the foundations for a confident experience. In isolation from an individual management agency’s marketing and leasing approach, the underlying level of tenant demand the market has to work with is perhaps the most critical element in setting the market position and day-to-day investor sentiment.

Throughout 2017 Melbourne has been subject to its strongest test yet of the depth of tenant demand, as historically high new volumes of rental inventory was completed and become available to the leasing market. Against extensive commentary hypothesising the potential reaction of the market to new completions, tenant demand has not only exceeded the levels required to rapidly absorb new supply, but also underwrite/back-fill established stock in the same locations as new buildings were delivered.

Interestingly, rental values secured in newly completed buildings were often at meaningful premiums to previously completed new buildings in the same location. Tenant applications are oversubscribed and ques form for new project releases (as per attached image). This can be attributed to a range of reasons, however the more extensive amenities being offered in many new buildings, underlying premium for new accommodation and in the case of the central city region, desire for a large cohort of tenants to ‘tower hop’ to the latest offerings are key observations.

The response to new buildings is understandable and expected. The primary test is however the position of the established market, the 3yr+ old buildings that are past their honeymoon phase, well established, understood by tenants and whose operation and position in the market is tested and proven. This has been the focus of our attention as the performance of these buildings represent the underlying strength of the market as they require demand from a broader and deeper tenant profile to maintain absorption of vacancies as they emerge, and underlying rental values. There is often a pricing arbitrage or difference between new and established stock, but this is assisting the performance of the established market.

Encouragingly, the performance of the secondary leasing market in established buildings has been exceptional, and is expected to remain so as the volume of new annual supply subsides over coming years and the supply-demand balance is tipped further towards the landlord side. The strength of performance of established buildings is rooted in the broadening tenant profile in the market and desire for some tenants to take occupancy in buildings that have been tested and whose tenant profile, operation and position in the market is known. This is particularly the case for  tenants such as new immigrants, country or non-CBD people locating to the city and those who are self reliant on income and who seek accommodation that meets their requirements but at a slight discount to new accommodation.

This is not a commentary about not only the strength of population growth , but also a reminder of the changing nature of our city. The biting reality of the cost of housing and forced longer term rental outlook, structural changes in our housing market, time and financial implications of a city increasingly difficult to travel around, and the desire for younger people to maintain proximity to social networks are critical drivers to the increasing depth of our tenancy market.

The ultimate test will be on the city to provide the right type of accommodation as the rental market expands and becomes more mainstream.

Read more: http://www.npm.com.au/tenant-demand-continuing-outperform-expectations/