Desk-to-ceiling cables and other surprises - initial comparisons of the Melbourne and Seoul office markets

It has been six weeks since I moved back to Melbourne and rejoined JLL in Tenant Representation. Since coming home, I have tried to reacquaint myself with the market by visiting as many buildings as possible; so far, I have walked through more than 40 in the Melbourne CBD. Thank you to the many leasing agents and landlord representatives who have kindly given me their time before I have anything to offer in return. Although my recent cramming cannot compare to the more than 11 years spent living and working in Seoul, and given the market has certainly changed since I last lived here, I thought it might be worthwhile to record some of the key similarities and differences of the Melbourne and Seoul office markets I have recently observed.

The most striking difference between Melbourne and Seoul is the size – and the density. The Melbourne CBD office market is 4.8 million square metres, but packed into a relatively small geographic area in the city grid (plus Docklands). Seoul has three major business districts, the Seoul CBD, Gangnam and Yeouido, which collectively have around 12 million square metres of space, but spread over a much larger area. While Melbourne does have other business districts of note, such as St. Kilda Road, Southbank and various clusters throughout the suburbs (particularly the southeast), the CBD is the only business district in Melbourne with a significant cluster of space (i.e. more than 1 million square metres). The difference in total stock is not surprising given the population differences: the Melbourne metropolitan area contains a population of 5 million people within 10,000 square kilometres, whereas the Seoul capital area includes a population of more than 25 million people within 11,700 square metres – meaning Seoul is nearly five times more densely populated than Melbourne is.

Considering the buildings themselves, tenants in Melbourne are spoilt with a range of amenities, some of which are currently the exception, rather than the rule, in Seoul. The growth of end-of-trip facilities in Melbourne has been prolific in the past few years, with virtually every prime building (and increasingly more secondary buildings) providing this benefit. I have even heard the competition amongst property owners to provide the biggest and best end-of-trip facilities referred to as an “arms race”! End-of-trip facilities, typically located on the ground floor or in the basement of office buildings (often in repurposed car parking space), support cycling and running (or walking long distances) to work by providing secure bicycle parking, lockers, showers and change rooms. Many of these facilities have towels, hair dryers, personal hygiene products and even ‘drying rooms’ with racks for airing out sweaty work-out gear. They are an important provision to support alternatives to vehicular travel or public transportation, and an environmentally friendly way to reduce city congestion. If office workers in Seoul want to ride a bicycle to work, they may find bike racks provided by buildings (often to improve its environmental credentials), but dedicated change rooms and showers would be a rarity.

In Australia, major commercial office building owners are required to disclose the energy efficiency of the building to prospective tenants and buyers. To achieve this, most have a NABERS rating. NABERS, the National Australian Built Environment Rating System, measures a building’s energy efficiency, carbon emissions, water usage and waste produced in comparison to similar buildings. Some tenancies, such as JLL’s Melbourne office at 101 Collins Street, also have NABERS ratings – our tenancy is 5 stars even though the energy rating of the building is 4 stars and the water rating is 3 stars. Federal and state government departments and agencies collectively are by far the largest occupier of office space, and their requirements for high NABERS ratings (e.g. the federal government requires at least 4 stars) provides a big incentive for landlords to strive for more efficient buildings. The Korea Green Building Council has a building certification system, and more major buildings have LEED (Leadership in Energy and Environmental Design) certification; however, it is not as ubiquitous as NABERS is in Melbourne and it doesn't drive many tenants' decision making.

One aspect of tenants’ space in Melbourne that really surprised me was cabling via the roof (picture supplied, if you don’t know what I mean). I guess this always existed, but I must have forgotten about it. In Seoul, this is virtually unheard of as all modern buildings have a raised (OA) floor for cabling, and many older buildings have systems boxes (for power and data) spread throughout the floor that are incorporated into the design process to eliminate the need for "loose" cabling. Running the cables through the roof is inefficient and, in some cases, unappealing aesthetically (maybe it doesn't look so bad when camouflaged with trees!). I believe the reason for this difference is the way buildings are pre-committed to (or not) before construction starts. In Melbourne, new developments are usually 30% to 40% leased prior to commencing construction and, since the installation of raised floors increases the cost of base building construction and the resulting rental rate, many tenants do not require them to be installed. Developers are also reluctant to absorb the cost of their installation into their margins if tenants are not paying for it (especially if they can attract tenants without raised floors). In contrast, in Seoul buildings are pretty much never pre-leased before construction, and leasing more than six months prior to completion is quite rare (it is a “build-it-and-they-will-come” market). This means many Korean construction companies build space that is attractive to prospective tenants and competitive in the wider market, creating a greater incentive for them to provide a modern base building design that includes raised floors; it is basically the market standard in Seoul.

This brings me to one final observation – the difference in the vacancy rates and trends. Because development is now leasing-led in Melbourne, with no major speculative construction since the early 1990s, the vacancy rate here is relatively contained and forecast to stay this way in the near future. Indeed, I think there would need to be a prolonged slump in demand for there to be a significant rise in the vacancy rate. Alternatively, in Seoul the speculative nature of construction has meant there has been a relatively high vacancy rate for many years (which trended upwards as there was too much speculative construction earlier this decade), and even though the construction pipeline has since thinned, there is still enough in the pipeline (and plenty of development sites) to place a cap on short-term rental growth. Conversely, the Melbourne CBD is running out of development sites, and Docklands - which had provided a release valve to any potential rental growth impetus in the CBD - is finally almost full, meaning greater rental growth can be reasonably expected in coming years. Interestingly, both markets still feature high levels of incentives, despite them being at different stages of the rental cycle, but for different reasons and delivered in different ways, so that can be a discussion for another day...