Lately I was doing some work in Collingwood and something I noticed was that there was a huge number of for sale and for lease signs up on commercial ral estate. There was also a huge amount of vacancy in commercial premises as well. Since the lockdowns in Melbourne there have been extremely high vacancy rates in commercial real estate. Many companies started to do more work from home arrangements and commercial real estate demand never came back to pre-2020 levels. The inner city, often referred to as the CBD, now has vacancy rates in commercial premises at the highest levels ever (excluding the pandemic lockdown year where the free market was entirely suspended). Inner city suburbs that sit adjacent to the city center, like Collingwood or Richmond, also have exceedingly high levels of empty commercial real estate. There are streets now with rows of buildings with for lease and for sale signs, with many of these buildings sitting empty for long periods of time with non tenants. A strange sight for sure if the assertions made that the local economy is strong are to be believed.

Anyone who's been around Melbourne the last few years knows that the inner city real estate, generally speaking, used to be highly prized and even now large blocks tend to go for a large amount of money because of the potential profit to be made via redevelopment. Residential real estate still remains at high prices and high demand, but commercial real estate has gone in a different trajectory. However there's certain areas that locals know are either less developed or empty for a reason.

Despite the flatness of the city the soil types in Melbourne vary a lot from place to place. For example Some neighbors that are a few blocks from where I was living when I was younger had their house condemned due to huge cracking forming in the walls. The movement of the soil was so bad that cracks in the walls opened up so large that you could put your hand through from one room into the other room. However the soil where I was living, which was only a few hundred meters away, is more stable and a few hundred meters further away things are even more stable.

Before the commercial real estate market effectively started to fail in Melbourne I wondered why it was that Rokeby street and surrounding blocks in Collingwood had so few floors built on them considering the proximity to the city. If you travel not so far to Smith street Collingwood you'll see a number of high density developments as you go up the hill. But going up the hill is more than just something that adds to the walk, its a marker of a fairly significant change in the geology and hydrology. Its also a completely different zone for usage. Just about all of the initial high rise developments in Collingwood were residentially zoned and not zoned for commercial development, but more about zoning later.

River catchment areas

Melbourne was originally built on the banks of the Yarra river. Many generations later Melbourne has turned into a large sprawling city, with a huge footprint. Melbourne sprawls out over a large distance and now there's multiple different river different catchment areas in the greater urban area.

We saw an example of with the 2022 Maribyrnong River flooding when torrential rains in the Maribyrnong River catchment area caused riverine flooding downstream along the river banks in low areas.

Over the last few years there has been a huge amount of urban development in Melbourne and this has led to a number of changes to watercourses like creeks being filled in or paved over. Due to the large amount of pavement and concrete the water draining patterns have also significantly changed.

It turns out that the area around where I was working used to be a creek bed. Because this was filled in a long time ago its almost impossible to find search results for it, unfortunately since the end of the golden era of internet searching it's almost impossible to narrow down any search enough to find information about this.

The way water has flowed in Melbourne has changed over the years as the urban development has increased. This is a similar story in many places, with changes to the urban environment you get changes in various things like the water table and runoff from storm water. This leads to the situation where you can have the same rainfall and the same surface elevation but yet see vastly different flooding effects when the environment is built up due to differences in drainage and how the water can enter the soil. Or you can have works done to mitigate flooding like building drains and managing runoff.

The area in the south of Collingwood also used to be a floodplain. A huge drainage work project was undertaken to give better drainage in the area after very high flood waters came through in the 1930s.

The reason I got thinking about all this is because I had a job I was doing that got interrupted for two weeks because a geology team had to come in to drill deep holes to get soil samples. The impeded access and noise meant I couldn't get my work done. This gave me plenty of time to think about the geology in the area and also plenty of time to think about how the average day-to-day worker is impacted by property development but is not compensated for being inconvenienced or outright disrupted for it. After drilling down 20meters they found nothing but sand and silt. This was perhaps unsurprising to anyone who knew the history of the area and the geology but was likely surprising to any buyer who was led to believe that the ground was something different. I was reminded of the creek because the readings from the holes found the water table was around 7 meters from the surface after a few clear days. After the big rain today I wonder how much higher it would be. I guess that explains why nobody has underground car parks here as they would flood.

Zones and council regulations

I was talking to a neighboring business who's now moved out to get a better deal on their lease, since far cheaper commercial options exist in more distant suburbs. Given that the central business district has been economically crushed and has an enormously high vacancy rate it's clear that proximity to the city center is far less economically advantageous than it used to be. As a result you pay a lot more for commercial real estate close to the city than the market fundamental would suggest.

I noticed the other day they were starting to offload items from their warehouse that they didn't want to relocate to the new warehouse just yet, the date I'd heard was that the building was to be developed January 2024 at the earliest. Seeing this happen led me to strike up a conversation with them, and I'm glad I did because the conversation that ensued was extremely enlightening as to the state of the commercial real estate market in Melbourne. Unfortunately they had also suffered the large inconvenience of having people come and do drilling in their premises too. They were very annoyed because there was already drilling done just a few years ago at their property and the exact same results were found last time as well. On the surface I found this very surprising, You would think in a situation like this that the 2 year old geology report would be sufficient, but despite this the work was redone. Whether this is due to the real estate agents not telling the new landlords about the geography or due to mistrust there's been multiple geological studies done in the last couple of years in the same plot of land. Later I found out that there's been 4 different owners for the title on a large warehouse on the street in the last 5 years. The place I was doing some work out of had multiple owners rotate through and so fast that various utilities still have the old landlords name on them.

It shows very clearly that the people who are buying these properties are explicitly doing it with the plan to make money from developing the sites (are are trying to time the top of the massive real estate bubble here, a very risky play in any bubble). It also seems like many of these buyers are international which introduces a number of additional risks like foreign exchange fluctuations. But everyone probably knows about this stuff already, what I think is more interesting is the informational asymmetry involved in purchasing property overseas. The issue for an international buyer is that real estate becomes significantly more a market for lemons in the sense that there's a large informational asymmetry when you don't know the area you are purchasing into. If there's not so obvious downsides that is local knowledge a real estate agent who's explicitly financially incentivized to close the deal is less likely to tell you about these things if they think they can get away with it.