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Melbourne CBD office market primed for more rental and capital growth

Colliers International releases new CBD Office Research & Forecast Report

The Melbourne CBD office market offers significant opportunity for rental and capital value growth on the back of population-driven demand, a low supply outlook, record low vacancy and affordable face rents.

According to Colliers International’s latest CBD Office Research & Forecast Report, prime face rents in the Melbourne CBD are expected to grow by 6.4% annually over the next three years. 

Low vacancy rates, which increased slightly from 3.2% to 3.3% in July 2019 on the back of an increase in sublease vacancy, have led to intense competion for remaining office space in the Melbourne CBD.

“Low vacancy has led to competition for remaining spaces, driving up net face rents in the last 12 months,” Andrew Beasley, Colliers International National Director of Office Leasing, said. “A Grade face rents have grown by 5.9% over the past year, while premium grade has grown a more modest 1.4%. 

“However, over the past three years, Premium and A Grade rents have grown by an average of 8.4% and 7.8% respectively. The slowdown in rental growth over the last year is due primarily to a lack of deal activity due to the shortage of space.”

According to Colliers International research, the Melbourne CBD currently comprises 4,614,349sqm in stock across all grades, with seven buildings being completed by 2020, providing 342,000sqm, based on current commitments will see these close to 95% committed on Practical Completion. In addition, in the CBD grid, there is currently almost 200,000sqm of prime grade office seeking development approval.

“Major prime grade backfill is set to deliver 150,000sqm between mid-2020 to late 2022 and, based on Melbourne’s average net absorption, is unlikely to provide any relief for tenant demand.

“The tight office market is supported by Melbourne’s outperforming population growth. Melbourne’s population is forecast to reach 6 million by 2028, up from 5 million currently. The difficulty posed for the first time in the Melbourne office market is the limited availability of land suited to an office development. 

“Previously, Docklands provided a large supply of developable land which has now reached near capacity. Since the first development fifteen years ago in 2004, Docklands has added approximately 1,000,000sqm to the overall CBD stock. Docklands land supply has now primarily been exhausted in the prime sought after locations along Collins and Bourke Streets.”

Added planning constraints were motivating developers to consolidate to obtain a developable envelope, the report found. A prime example was the significant amalgamation of four sites by Cbus Property at the corner of Bourke and Queen Streets to be developed into 435 Bourke Street – a proposed 60,000sqm prime grade office grade building. 

In addition, Dexus recently purchased 52 and 60 Collins Streets, comprising a total land area of just under 2,000sqm, which is likely to supply a circa 30,000sqm office tower to sit alongside their more recent 100% interest acquisition of 80 Collins Street.

Charter Hall strategically acquired 555 Collins Street and 55 King Street with plans to develop two towers of approximately 45,000sqm and 35,000sqm respectively. Last year, Mirvac purchased the former Australian Federal Police Headquarters at 383 La Trobe Street which they plan to develop into a 40,000sqm office tower. 

Mr Beasley said all of these proposed developments, which were still subject to planning approvals, were estimated to be delivered between 2022 and 2025. 

“The delay in these developments coming to market will again be a driving factor for rental growth due to the limited supply, particulary over the 12 to 18 months,” he said. “The enthusiasm of developers in securing sites for the next supply cycle shows confidence in the CBD office market and the continuation of already strong absorption levels.

“The tight market has resulted in strong absorption levels – 83,312 sqm in the last 12 months to July this year.”

Tim Farley, Colliers International National Director of Tenant Advisory, said occupier activity had been strong in the Melbourne CBD and city fringe for a number of years. 

“A major contributing factor for this has been strong population growth, and commensurate jobs growth,” Mr Farley said. “The Melbourne CBD benefits from being the most diverse tenant market in the country, and has many industries that grow broadly in line with population growth. 

“Whilst attraction and retention of talent has increasingly been a key criteria in most accommodation briefs for some time now, landlords and developers have responded to those people-centric demands adopting initiatives to attract and retain tenants, with place-making, wellness, collaboration, flexibility and increased amenity all rating highly.”

“As the home of the Super Fund industry, there is also a steady and assured increase in funds being managed out of Melbourne, which also contributes to demand from the finance and related sectors.”

The scarcity of available land was also driving up capital values in the Melbourne CBD, with Colliers International forecasting a 11-12% increase for prime assets over the next 12 months, and 5% for secondary assets. 

Trent Preece, Colliers International Director of Capital Markets, said investors were still hungry to invest in the Melbourne CBD office market. 

There was a 2.9% increase in total sale volume in 2019 H1 compared to 2018 H1, with the increase significantly influenced by two large transactions at 80 Collins Street and 242 Exhibition Street. 

“The reality is, there has actually been limited genuine buying opportunities for investors in 2019,” Mr Preece said. “Having said that, investors continue to be attracted to the Melbourne CBD office market and the city’s growth fundamentals. 

“Yields have compressed by 8 and 13 bps over the past year for Premium and A Grade respectively. The outlook for yield compression has been strengthened following the two cash rate cuts and a very low 10 year bond rate outlook.

“Capital values in the Melbourne CBD continue to offer investors significant value, and this is serving to boost flows of capital from both domestic and offshore sources. Average prime grade capital values are 50% cheaper than prime grade Sydney CBD, and only 22% more expensive than the Brisbane CBD.

“The Melbourne CBD office market is the tightest of all Australian CBDs, currently sitting at 3.3% at July 2019. Astute private and institutional developers are now planning for the next supply cycle.” 

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Andrew Beasley

National Director

Office Leasing

Melbourne CBD

Andrew has  been an integral part of the Colliers International Office Leasing team for over 20 years and has worked with some of the nation’s biggest corporate, institutional and private clients.

He is considered a major transaction and pre-commitment specialist in Melbourne having been involved in an array of large scale building refurbishments and developments.

Part of Andrew's role also includes leading the successful Melbourne Office Leasing business.

Colliers International Australian Employee of the Year 2018.

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Tim Farley

National Director | Tenant Advisory

Occupier Services

Melbourne CBD

Tim is a National Director of Colliers International's Occupier Services division  and head of the Victorian Tenant Advisory team .  With a career in corporate real estate spanning over 20 years in Australia and the United Kingdom, Tim is an established,  recognised market leader and subject matter expert, with a strategic and organised approach to business. 


Colliers International’s APAC Occupier Advisory Committee

- Education Sector Focus Group

- Legal Sector Focus Group

- Flexible Workspace Focus Group

Tim’s expertise includes:

• Lease & Agreement For Lease

• Market Rent Review

• Acquisitions (Leasehold & Freehold)

• Property Disposal (Strategy, Planning & Management)

• End of Lease / Lease Legacy (Risk & Liability mitigation)

• Strategic Portfolio Review

• Lease Assessment & Restructure

• Qualitative and Quantitative Analysis

Clients Tim has assisted include: Grant Thornton, URBIS, Australian Financial Complaints Authority (AFCA), CGI Technologies Australia, McKinsey & Company, NEC Australia, Bunnings Limited, Coles, Fly Buys, International Workplace Group (IWG), Victoria University, University of Melbourne, Acknowledge Education, Vic Govt., Commonwealth Govt., Sony Pictures Entertainment, Porter Davis Homes, DB Schenker, Telstra, NAB, EQUINIX, Equity Trustees, Medibank, Orica Limited, Asciano, Philips, ASIC, APRA, WILEY Education Services, URBIS, SwissRe, ActForKids, Animals Australia, CHUBB Insurance, Amazon Webservices, NINE Entertainment.

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