One of Canberra's most desirable blocks of land could become home to new offices for the federal Education Department.
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However property market experts say diminishing demand from Commonwealth agencies for office space raises questions about the possible new development.
The City Renewal Authority is seeking expressions of interest for the purchase and development of Block 40, Section 100 of the city - better known as the Magistrates Court car park, opposite the Melbourne Building.
It is expected the site will sell for more than $70 million, and it has been released to meet the demand created by the Department of Education, Skills and Employment seeking expressions of interest for new accommodation.
The ACT government believes the new development will form a significant part of its mission to revitalise the city centre and prove it can continue to drive investment for new and, importantly, more sustainable buildings.
However, the federal government, which occupies about half of Canberra's commercial office space, has sought to reduce its footprint by about 30 per cent.
Recent news highlights this contraction. The Tax Office occupies 50,000 square metres across two buildings but is seeking to house staff in one 32,000-square-metre building.
The ACCC takes up about 6500 square metres, but has hit the market looking for just less than 4000 square metres. The Veterans' Affairs Department is hoping to switch 13,000 square metres for less than 10,000.
There are about 12,000 vacant work spaces in ACT-based Commonwealth government offices and agencies will likely continue to look to offload space to meet efficiency targets.
Synergy Group director Stephen Oxford, who consults with government on property issues, said it was counterintuitive for the ACT's commercial property market to be expanding while its biggest client was shrinking its footprint.
He said this would inevitably lead to vacancy rates rising across the territory.
"We already have 350,000 square metres of new stock in the development cycle," Mr Oxford said. "Why add 70,000 square metres to that essentially as surplus? ... The vacancy rate pushing 15 per cent is not a good scenario. I don't want to walk around ... and see ghost buildings."
If the Education Department moved to the site it would "kill the west of the city", Mr Oxford said.
Despite the market movements, he said the site would likely secure an investor due to the Commonwealth's preference for new buildings and the possibility of securing a 20-year lease.
Canberra remains an attractive investment opportunity due to the long leases and stable employment market. However, this could change if the market was oversupplied and demand continued to decrease, as it would become more difficult to find tenants, particularly in older buildings, he said.
The Commonwealth occupies modern, relatively new buildings, often designed to their specific needs, which they shouldn't need to leave. But they enter the market to take advantage of discounted prices on new developments.
"The solution is, in part, for landlords to be more aggressive in their pricing," Mr Oxford said.
However, while Raine and Horne Canberra executive director of commercial sales and leasing Michael Ceacis agreed Commonwealth demand was decreasing, he thought the territory would have no problem securing an investor for Block 40.
The fact nothing else that large or prominent had come onto the market in many years would make it attractive, he said. Mixed-use development would also increase its appeal.
"If a Commonwealth agency takes the lot though, it will leave a vacancy in A- and B-grade buildings that will take some time to fill," Mr Ceacis said. However, he was confident any vacancy rate spikes would be relatively short-lived as the Canberra market was historically resilient.
An ACT government spokeswoman said the build would take into consideration broader city development opportunities, including the revitalisation of the nearby civic, cultural and arts precinct.
"It is important that Canberra can attract investment in the development of new high-quality, sustainable buildings that enhance the city centre's public environment," she said.
She also noted the project would provide construction industry jobs and benefits.
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