Melbourne CBD Office Market - 2020 and Beyond
Melbourne CBD is forecast to have over 164,000 square metres of backfill space available over the next three years as a result of new developments coming online and pre-commitments into these new buildings.
Tenant demand is expected to be negatively impacted by COVID-19, with tenant contractions, business closures and increased indecision from tenants likely to result in increased vacancy and reduced tenant demand in the short-term.
The impacts of COVID-19 on tenant demand are expected to place increased pressure on the backfill vacancy with prolonged downtime periods.
New Developments Under Construction
- COVID-19 presents potential issues to the supply pipeline due to the delay of building materials from China and other areas in Asia and project lockouts due to a reduced number of workers on-site as per social distancing restrictions and future potential positive COVID-19 cases.
- There are currently 12 developments under construction, adding approximately 517,362 square metres of office space within the next three years. However, 87% of that area has already been pre-committed leaving only 67,928 square metres vacant. Three other developments are awaiting pre-commitments within the CBD and a further four developments are currently within the planning phase.
Approximately 67,928 square metres of new vacant space available over the next three years.
When considering the amount of new space added and pre-committed by year, there are only 29,928 square metres of vacant new space available in 2020.
Obtaining pre-commitments for new developments will be difficult due to the weakening tenant demand resulting from COVID-19 and increased availability of prime stock from the backfill vacancy, leading to an undersupply in the medium-term.
COVID-19 to weaken tenant demand over the next 12- 18 months
Backfill Space Available for Occupancy
- The total space currently occupied by tenants who have pre-committed to new developments under construction to be completed over the next three years is approximately 263,842 square metres. Some of this space will be temporarily withdrawn for refurbishment but all will become available for lease.
- Buildings with planned full refurbishments include 18-38 Siddeley Street, 100 Queen Street, 150 Lonsdale Street and 500 Bourke Street.
- The total vacant space available for occupancy over the next three years is approximately 234,582 square metres including new and backfill space. Only 32,551 square metres is expected to be available in 2020 and 91,041 square metres available in 2021.
- One of the largest areas available for lease within a single building will be at 600 Bourke Street with 24,911 square metres available for occupancy in 2022 across 14 floors. Another large portion of backfill space becoming available will be 18,827 square metres at 101 Collins Street currently occupied by Macquarie and Herbert Smith Freehills.
Uncertainty for tenants occupying under 3,000 square metres of office space
- According to the lease requirements listed on the Property Daily commercial leasing news update over 2019 and 2020, there were more listings for spaces under 3,000 square metres compared to any other space range.
- The number of active leasing requirements for space required under 3,000 square metres contributed to approximately 58% of total number of enquiries, whilst the number of requirements for areas over 10,000 square metres was only 8%.
- The total area by tenant enquiry for spaces between 1,000 to 3,000 square metres was 81,685 square metres, whilst the total area by enquiry for spaces of 10,000 + square metres was 108,500 square metres.
- Even though the demand for spaces between 1,000 to 3,000 square metres contributed to over half of the listings, they only make up 22.61% of the total area required. This is a smaller proportion when compared to the total area required for 10,000+ square metres which contributed 30.03%.
- Current Melbourne CBD tenants with active leasing requirements under 3,000 square metres reflects 75,000 square metres.
- The impact of COVID-19 on leasing requirements is far-reaching due to the financial impact and resultant indecision of tenants as well as social distancing requirements within office buildings. Accordingly, we expect requirements for space less than 3,000 square metres to be on hold for 12-18 months with a potential increase in probability of tenants exercising options in existing premises.
Leasing Requirements By Industry Category
- There were a total of 108 active enquiries listed on Property Daily during 2019 and YTD 2020. The technology (15%) and business services (12%) sectors make up the greatest proportion of total enquiries.
- In terms of total area required by industry category Government with 18% (68,744 square metres) and Technology with 13% (51,834 square metres) makes up the highest proportion of total leasing requirements in Melbourne CBD.
Major Tenant Requirements
- With upcoming leases expiring for firms such as the Commonwealth Department of Defence (2021), Dentsu Aegis Network (2021), and VCAT (2022), many tenants are considering their future office accommodation needs. These large firms are in the market for areas ranging from 8,000 to 20,000 square metres within the CBD which may pose a problem given the lack of large space available.
- Work from home model / flexible work arrangements (excluding hot-desking) will continue into the foreseeable future. This may have implications for future space requirements.
- Businesses that require their staff to work from the office will require an increased amount of space in the short-term due to activity workspace fit-outs no longer being acceptable due to COVID-19 restrictions on office buildings.
COVID-19 job losses to impact Melbourne CBD vacancy
Potential Impact of Job Losses on Melbourne CBD Vacancy
- To show the real impact on industries of the COVID-19 crisis (without making changes to their labour force survey) the ABS in conjunction with the ATO’s single touch payroll system introduced new surveys, providing estimates for the total change in the number of jobs and how that has evolved since Australia registered 100 confirmed cases of COVID-19 on 14th March 2020.
- Each Victorian employment sector with the exclusion of the Financial & Insurance Services sector saw a decline in employee jobs over the five weeks to 2 May 2020 reflecting a total decrease of 7.3% nationally and a decrease of 8.4% in Victoria. Although the Health Care and Social Assistance sector is impacted, it has seen one of the lowest rates of job decline compared to other industries over the period at -1.9%. The lowest job decline witnessed was in the Financial and Insurance Services sector at 0% and the highest decline was in the Accommodation and Food Services sector at -28.4%.
- m3property have analysed the total number of jobs in Melbourne CBD as per the CLUE (Census of Land Use and Employment) provided by City of Melbourne.
- We have thereafter applied job loss as a percentage by industry category for Victoria in order to calculate the number of potential job losses in Melbourne CBD.
- As per the analysis, Business Services and Finance & Insurance are two industry categories accounting for approximately 50% of Melbourne CBD jobs.
- As per ABS data, Business Services for the period of 14 March to 2 May 2020 had the highest percentage of total jobs lost accounting for approximately 7,292 jobs lost. Current workspace space ratios for Business Services in Melbourne CBD is 17.36 square metres. This may result in 126,570 square metres of sublease or backfill space.
Melbourne CBD vacancy is forecast to double by the end of 2020 with a second peak in vacancy occurring prior to the end of 2024.
Melbourne CBD Vacancy Forecast Scenarios
- Given the uncertain economic conditions as a result of COVID–19, m3property have carried out an analysis of the potential impact on the Melbourne CBD vacancy rate. We have developed three vacancy forecast scenarios for the Melbourne CBD office market by considering potential variations in tenant demand, net absorption and potential backfill space availability.
- Scenario 1 – based on the current economic forecasts including white-collar employment, m3property forecasts that vacancy will first peak at 6.51% by the end of 2021 and reach a second peak by the end of 2024 at 6.90%.
- Scenario 2 – based on the long-term average net absorption, m3property forecasts that vacancy will rise to 6.73% by the end of 2020 and reach a second peak by the end of 2024 at 7.83%.
- Scenario 3 – based on the previous downturn net absorption averages, m3property forecasts that vacancy will continue to rise from end of 2020 (7.33%) and reach a peak of 9.50% by the end of 2024.
- COVID-19 has resulted in increased indecision from tenants, with the majority of tenant enquiries in the sub-3,000 square metres space put on hold indefinitely. Coupled with this, the financial impact of COVID-19 to businesses is expected to further weaken tenant demand in the short-term. With the higher vacancy resulting from an increase in both backfill vacancy and sublease vacancy, the availability of stock is expected to outweigh the demand in the short-term.
- With weakening tenant demand and increased tenant indecision, new developments will have greater difficulty securing pre-commitments in the short-term. This results in predicted undersupply in the medium-term. The increased backfill vacancy of prime stock is likely to be repositioned, increasing the difficulty to secure pre-commitments.
- COVID-19 has resulted in a significant rise in unemployment. The Business Services sector, the second largest occupier of office space in the Melbourne CBD, has seen the biggest rise with a loss of ~7,200 jobs since 14 March 2020. The expected conclusion of the JobKeeper stimulus in September 2020 will likely result in further job losses, which in conjunction with backfill vacancy coming online will significantly increase Melbourne CBD’s total vacancy rate.