Melbourne CBD office vacancy to decline as market tightens

Strong demand to deplete supply and lead to rental growth, lower vacancy in landlords’ market

Vacancy in the Melbourne CBD office market is set to decline while rents grow in the face of increasingly tight supply in the years ahead.

According to Colliers International, the Melbourne CBD office market is on the cusp of its last significant influx of space before supply becomes short over the next five years.

Andrew Beasley, Colliers International National Director of Office Leasing, said a flurry of space would become available in the next 12 to 18 months, including 21,000sqm of backfill at 161 Collins Street; 23,000sqm at Freshwater Place; 20,000sqm at 2 Lonsdale Street; and 16,500sqm at 360 Collins Street.

“The majority of these backfill options, with the exception of 360 Collins Street, won’t be coming online until mid-to-late 2017, however we are already seeing a great deal of tenant activity within these options and anticpate the bulk of the space within the buildings will be spoken for prior to completion of refurbishment works,” Mr Beasley said.

“Once this space is taken up, we are going to see a significant shortage of supply. Vacancy will also really tighten up by 2018 and into 2019.

“If you’re looking for Premium and A Grade office space in the 10,000sqm range, you want to be located centrally on or around the core Collins Street precinct and you have an expiry looming in 2018-2019, you could find your options very limited with regards to where you can go on the basis that the majority of new supply won’t be coming online until late 2019 to mid-2020."

Anneke Thompson, Colliers International National Director of Research, said only three new office buildings were currently under construction in the Melbourne CBD – 664 Collins Street (due for completion June 2018) and Building 2 and Building 4 at Collins Square (the former due for completion this month and the latter later this year).

“This is the last push of supply for Melbourne’s CBD, before both Docklands sites and CBD grid sites start to run out beyond 2020,” Ms Thompson said. “Beyond that, we see vacancy falling further, as the supply pipeline really starts to thin out.

”By mid-2019, the vacancy rate is forecast to be as low as 5.2 per cent. The A Grade market should be at 5.6 per cent vacancy, which is very low by recent standards.

“Over the next five years we expect demand will keep up with supply, with an average take-up of roughly 100,000sqm per annum ensuring a strong market in the Melbourne CBD."

Ms Thompson said rents would continue to grow at sustainable rates over the next few years while incentives would slowly begin to stabilise back to more normal levels.

“We are already seeing the market respond, with our very latest rental data showing strong 8.6 per cent annual growth in net effective rents for Premium grade space, and 6.1 per cent for A Grade,” she said.

“To put this in context, the annual average growth rate over the past 10 years has been 3.1 per cent and 3.5 per cent respectively, so the market is really accelerating. The B Grade market is also responding to lack of supply, and effective rents have increased by 6.5 per cent in this grade also."

Mr Beasley said the next two or three years would see the Melbourne CBD office market transition from a tenants’ market to a landlords’ market.

“The lack of supply and subsequent tightening of the vacancy rate means we should start to see face rental growth and incentives come back to more normal levels, certainly not the high levels that they have been around 30%, he said. “It will go from a tenants’ market to a landlords’ market.

“With new developments coming online, including 447 Collins Street and 477 Collins Street, the face rents that are being achieved in these buildings will lift the rent profile for the CBD market, particularly at the western end of the Melbourne CBD, which will benefit other buildings in the area such as Rialto which is currently undergoing an extensive refurbishment and reposition.”

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