Article

Flex sector benefiting from Melbourne’s small business expansion

February 21, 2020 / By  

Melbourne has been through a period of extraordinary expansion on the back of population and business growth. Over the last five years, the net annual absorption of Melbourne’s CBD office market has averaged more than 125,000 sqm – well over the 40-year average of 66,020 sqm. This is on the back of growth in the flex space sector and an increase in small business expansion.

Flex space continues to be a growing story in the Melbourne market, with flex occupiers accounting for a significant contribution to net absorption results since 2014. In 4Q2019, flex space accounted for 2.5% of total existing CBD stock and is forecast to continue expanding through the new supply wave. Major flex space groups such as Spaces, JustCo, Hub Australia and Work Club Global have pre-committed a total of 16,620 sqm of space across four upcoming developments. Despite this positive growth, uncertainty surrounds the flex space sector, fuelled by WeWork’s publicly failed IPO last year.

Although large enterprise customers are increasingly taking flex space, small occupier expansion remains relevant in the market. Since 2014, small tenants have contributed 54% to the total net absorption, a large increase from the 27% they accounted for during 2007-2011. This period aligned with the rise in flex space and resulted in small tenant movement and flex space contributing to a combined 64% of all CBD net absorption over the last five years.

Figure 1: Melbourne CBD Net Absorption by size and flex space contribution

Source: JLL Research as at 4Q19

According to the Australian Bureau of Statistics’ (ABS) Counts of Australian Businesses, in Melbourne (SA2), the number of small business (1-19 employees) increased from 5,318 to 7,439 (39.9%) over 2007 to 2018. On the other hand, large businesses (20+ employees) decreased by 11.5% during the same period. The increase in small businesses has assisted the expansion of the flex space sector. Their ongoing contribution to take-up of flexible space is part of the reason flex space operators have performed so well in the Melbourne market, in recent years.

Figure 2: Counts of Melbourne Businesses

Source: Australian Bureau of Statistics – Counts of Australian Businesses

A number of key themes are driving growth of the small business sector in Melbourne’s CBD.

  • Structural changes to the way we work assisted by technological advances, allow businesses to establish and thrive with a smaller workforce.
  • Flex space operators provide opportunities to very small businesses that may not have the size or ability to commit to a traditional lease.
  • A robust economic environment which encourages business expansion.

Melbourne’s CBD office market is one of the tightest in the world with vacancy at a new record low (3.4% in 4Q2019). The low vacancy has restricted the increase in flex space stock and somewhat de-risked the market from overly rapid expansion. Catering to both large and small occupier cohorts will be an ongoing requirement, as flexible working continues to evolve.

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