I started writing this post in September last year when I was doing some work in Collingwood. Something I noticed was that there was a huge number of places with "for sale" and "for lease" signs popping up on commercial real estate in the area. There was also a huge amount of vacancy in commercial premises that weren't on the market as well. Since the disastrous lockdowns in Melbourne there have been extremely high vacancy rates in commercial real estate around the city center. Many companies started to do more work from home arrangements in 2020 and commercial real estate demand has never came back to pre-2020 levels since. The inner city, often referred to as the Central Business District or 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 buildings. Despite the economic downturn, which is huge here, real estate prices remain high. 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 real estate 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 and many generations later Melbourne has turned into a large sprawling city. Melbourne sprawls out over a large distance and now interacts with multiple different river different catchment areas in the greater urban area. We also see large changes to water runoff as a direct result of this development as well.

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 decades 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 that has been installed the water drainage patterns have also significantly changed. In the Maribyrnong floods we saw impacts from structures built around the racecourse that caused water to flow in different directions. As is always the case if major drainage or embankment projects are embarked upon the flood risk mapping needs to be updated to take these changes into account.

It turns out that the area around where I was working in Collingwood used to be a creek bed. The entire Eastern portion of Collingwood used to be somewhat marshy territory with poor drainage. 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 internet search enough to find information about this. Before Collingwood was built up, including the large amount of concrete and asphalt paving we see today, the area in the east of Collingwood was a swampy plain known as Collingwood Flat. The whole area was not built up like it is now, Collingwood even had a gold mining company in the 1860s. By the late 1800s Collingwood was a manufacturing hub with a lot going on and many buildings were built in the area.

The way water has flowed in Melbourne has changed over the years as the urban development has increased. Much more water runs off into storm water drains as compared to before. 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 patterns of 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. This is due to differences in drainage and how the water enters the soil. Development can have works done to mitigate flooding like building drains and managing runoff that reduce flooding risk. Overall the built environment can make flash flooding significantly worse but engineering works for drainage can mitigate this in the areas where it is done.

The area in the east of Collingwood 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. Much of these drainage works are below the surface. Unlike the work I've done around firefighting technology a lot of flooding work seems to be "out of sight out of mind" for people not familiar with the discipline. It is only when flood waters rise that the general populace is reminded of the very important work that hydrologists and flood engineers do. In the case of the Marybynong flooding many experts considered the impacts of building that massive flood wall around the horse racing track and knew that this would redirect considerable amounts of water into residential areas. This is a good example of where flood mapping can show the impacts of various flood water levels.

The reason I got thinking about all this is because I had a job I was doing over in Collingwood that got interrupted solidly for two weeks because an engineering team had to come in to drill deep holes to get soil samples and water table measurements. The impeded access and the noise meant I couldn't get my work done there. Of course I got absolutely no compensation for this inconvenience nor did the tenants. 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 in Australia 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 be liable to flood.

Zones and council regulations

I was talking to the owners of a Collingwood business who moved out from the city to get a better deal on their lease, since far cheaper commercial options were available in late 2023 in more distant suburbs. Given that the Central Business District as a geographical area has been economically crushed, as evidenced an enormously high vacancy rate, proximity to the city center is less economically advantageous than it used to be. But despite this prices near the city center remain absurdly elevated, as a result you have to pay a lot more for commercial real estate close to the city than the market fundamentals would suggest. Perhaps the lack of businesses entering into the market show that the market has fundamentally failed.

In September 2023 that business was starting to offload items from their warehouse that they didn't want to relocate to the new warehouse. In our conversations I heard that the building was to be developed in January 2024 at the earliest. I'm glad we talked 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, but I guess hydrology isn't a surface level affair!

You would think in a situation like this that the 2 year old geology and hydrology report would be sufficient, but despite this the exploratory engineering work was redone in the same building just a couple of weeks after being done literally next door (less than 15 meters from the other drilling site). 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. Its clear there's significant information not being transferred here and that people are explicitly profiting from informational asymmetries.

In a dystopian twist in this story now all these buildings that had the engineering surveys done are now sitting empty and abandoned. There has already been people breaking into the empty buildings and engaging in vandalism. It's amazing to see how fast urban decay sets in when everyone moves out. You can see in the photo above that someone has driven a car into the door here, there's damage to the concrete bricks and also broken plastic from the covering of the brake and reverse lights on the ground. In 2023 we were overwhelmingly seeing more vacancies in that area pop up than businesses moving in. To be clear a few businesses moved in to the area in 2023 but overall vacancy rates went up considerably. It will be interesting to see if these high vacancy rates combined with the new land tax introduced in the state of Victoria will put downward pressure on the commercial real estate market. The only new thing near where I was working is a sign erected by the bureaucracy informing that a permit to develop the site has been submitted:

In a very real sense productive tenants were kicked out and bureaucratic signage was the only thing contributed.

Meanwhile the whole area around this sign has exceptionally high vacancy rates. 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 or are just speculating on the commercial real estate bubble by trying to offload the properties for more later. 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. Sane countries don't allow non-citizens to purchase land, and one of the main reasons is that scamming foreigners for bad land deals can actually deprive the country the economic benefits of productively using that land. The "money" that comes in from overseas isn't productive when the properties are left empty. 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 are 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 any problems with the property if they think they can get away with it and if you are on the other side of the world they are more likely to get away with it.

I find it very galling that productive businesses were kicked out for a development proposal that over half a year later hasn't even got approval to go ahead. Talk about a way to turbocharge the destruction of the local economy.