The first half of 2018 is expected to see office vacancy trend downwards in the Melbourne CBD, with Colliers International predicting it is likely to reach the record lows of 2008 when the vacancy rate bottomed at 3%.
“This will provide strong competition for tenants seeking prime office space, which is likely to result in significant face rental growth and a decline in incentives,” Andrew Beasley, Colliers International National Director of Office Leasing, said. “This will see a compound in effective rental growth for landlords throughout 2018."
Mr Beasley predicted a strong start in the first half of 2018, with a number of larger tenants expected to make decisions on their preferred office locations for 2019 and beyond.
“With the vacancy rate in the Melbourne CBD expected to fall to around 4% by mid year, we also expect tenant demand to be high and competition to secure office premises strong with limited options currently available for tenants seeking prime quality office space in excess of 5,000sqm,” he said.
“It’s likely that we will also see an increase in renewal activity as tenants simply will not have the options to choose from, which will see landlords in a strong position to drive rents."
2017 had been another record year in the Melbourne CBD, with particularly strong activity at the smaller end of the market.
“We had an outstanding 2017, with a record 193 leasing transactions across the Melbourne CBD leasing market indicating strong tenant demand,” Mr Beasley said. “The trend towards small suites has been cemented in the Melbourne CBD over the past 12 months, with buildings such as 360 Collins Street, Rialto and 567 Collins Street successfully rolling out small suite strategies that have resulted in strong leasing results in record timeframes."
Tim Farley, Colliers International National Director of Tenant Advisory, said in Melbourne, the sub-1,000sqm office market had seen an increase in leasing activity from growing start-up businesses who are taking advantage of landlords building more freshly fitted suites into their assets, offering more flexible lease terms and removing the effect of CAPEX that had historically served as a barrier to transact.
“Activity in the 3,000-6,000sqm office market appears to be dominated by co-working operators seeking to establish themselves in the city," Mr Farley said. "Co-working providers such as IWG (Regus / SPACES), WeWork and others have shown an aggressive appetite for large tranches of office space across the city and within the majority of prime grade assets.
“The 5,000-10,000sqm market is busy with legal firms seeking to secure fresh quality pre-commitment opportunities as a means of attracting and retaining the best talent in a highly competitive market.
“Arguably the most visible players in the Melbourne market have been the top and mid-tier firms actively reviewing their premises requirements and securing their future premises as far out as 2020 and beyond.
“Melbourne's diversified economy continues to benefit from population and employment growth. Businesses need to address this growth by considering location, culture, environment, productivity and environment in their property-based strategic decisions, with many seeking to consolidate and centralise their operations whilst the boundaries of the city continue to expand.”