Melbourne CBD Office m3property Insight

June, 2019

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m3property forecasts the vacancy to decline further to 3.1% by the end of 2019 before it peaks during 2020 at 6.0%.

Vacancy to remain at record low level

The Melbourne CBD market continued to record low vacancy of 3.2% as at January 2019 well below the long term average (since 1990) of 10.9%. Prime grade vacancy fell to 3.2% in January 2019 from 3.5% in January 2018. Secondary grade vacancy also recorded a decline from 5.6% in January 2018 to 3.7% in January 2019.

According to the Property Council of Australia Office Market Report, a strong positive net absorption of 135,290m² was recorded over the last 12 months, above the 10-year average of 87,648m².

m3property forecasts the vacancy to decline further to 3.1% by the end of 2019 before it peaks during 2020 when the vacancy rate reaches 6.0%.

Authors

Amita Mehra

National Director - Research, Marketing & Strategy

View Profile > VIC
Gary Longden

Director

View Profile > VIC

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87% of new supply under construction pre-committed

Melbourne CBD has approximately 453,000m² of supply under construction (over 10 buildings) to be completed between 2019–2021 with approximately 377,700m² (87%) already pre-committed.

New stock expected to come online by the end of 2019 includes 107,300m2 of new development with 96% of this pre-committed.

There are 12 office buildings currently undergoing development, full refurbishment or partial refurbishment to be completed over the next three years across the CBD comprising 479,167m² of total NLA.

Co-working space is booming in Melbourne CBD

The last 12 months has seen co-working space to majors expand in a tight Melbourne CBD office market. During Q1 2019 approximately 21,000m² of co-working space in Melbourne CBD was taken up by Singaporean co-working company JustCo.

Key operators including WeWork, HUB, Spaces and JustCo occupy the majority of coworking space in Melbourne CBD.

According to Office Hub report, the price per desk in Melbourne dropped by 10.15% over 2017–2018 as a result of competition in the co-working spaces.

Low vacancy drives rental growth

Strong tenant demand, low vacancy and limited new supply resulted in 6.5% growth in net effective rents over the 12 months to March 2019.

Face rentals in Melbourne’s CBD prime office market witnessed growth of 5% over the year to March 2019, currently ranging from $500/m² to $750/m².

Incentives for prime grade office property has declined to circa 20.5%–27.5% during March 2019. It is anticipated incentives will remain stable due to improved tenant leasing conditions and new supply entering the market during 2019.

Strong start to 2019

Following a strong year of transactions in 2017, 2018 had relatively limited sales activity with the total sum of office transactions in the CBD totalling circa $3.5 billion compared to circa $4.4 billion the previous year.

The current volatility of the Australian Dollar should stimulate increased foreign investment into the CBD office market.

Over the first quarter of this year, transaction activity remained strong with a total of $2.20 billion worth of stock already being sold.

Significant transactions to occur for this year include the sale of 80 Collins Street ($1.5 billion), 595 Collins Street ($314 million) and 737 Bourke Street ($192 million).

Yield compression to continue

Prime yields tightened by 50 basis points over the last 12 months to range between 4.75% and 5.25%. Over the same period, secondary yields compressed 50 basis points to range between 5.00% and 6.00%.

Yields within the Melbourne CBD office market have reached historically low levels. The current spread between Melbourne’s CBD prime office yields and government bonds is approximately 2.6 percentage points, which is considered wide when compared to the 20-year average of around 1.8 percentage points.

Strong investment demand and limited stock available for investment will continue to drive yield compression.

According to m3property Research, yields are expected to remain low due to strong rental growth. This should drive continued investment demand in the Melbourne market. However, the rate of firming has already slowed and this is expected to continue to be the case over the short-term with the 10-year bond rate rising.