Melbourne CBD Office Market
Record low vacancy, driven by strong demand
Record Low Vacancy
The Melbourne CBD market has witnessed a record low vacancy rate of 3.6% as at July 2018 dropping from 5.9% in July 2017. Prime grade vacancy fell to 3.3% in July 2018 from 5.4% in July 2017. Secondary grade vacancy was recorded at 4.1% in July 2018 dropping from 6.9% in July 2017.
According to the Property Council of Australia Office Market Report, a strong positive net absorption of 122,144 square metres was recorded over the last 12 months, above the 10-year average of 72,000 square metres. Approximately 59,000 square metres of new and refurbished supply was added to the market over the last six months.
According to m3property Research, the vacancy rate is forecast to remain stable until the end of 2019 before it peaks during 2020 when the vacancy rate peaks at 5.2%. Over the period of 2018–2021 approximately 537,000 square metres of new supply is expected to come online with approximately 377,000 square metres (70%) being pre-committed.
Net Effective Rents Continue to Rise
According to m3property Research, a combination of strong tenant demand, low vacancy rate and limited new supply resulted in prime net effective rents growing by 16% over the 12 months to June 2018. Incentives witnessed minimal movement over this period and they are expected to decline over the next 12 months before starting to increase again.
Strong prime effective rental growth is anticipated over the balance of 2018 and 2019 before starting to slow down in 2020.
Strong Sales Activity
Investor activity in the Melbourne CBD remained strong and has achieved a record level in the calendar year 2017 with approximately $5.1 billion worth of office stock traded. Over the first half of this year, transactional activity remained strong with a total of $1.67 billion being sold.
Significant transactions to occur include the sales of Two Melbourne Quarter, which sold for $550 million to Australian Prime Property Fund and First State Super; 699 Bourke Street (50%) which sold to Morgan Stanley for $102 million; and 160 Harbour Esplanade which sold to Victorian Government for $100 million.
Yields Continue to Tighten
Prime yields tightened by 50 basis points over the last 12 months to range between 4.75% and 5.50%. Over the same period, secondary yields compressed 88 basis points to range between 5.25% 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.
Outlook is Positive
According to m3property Research, vacancy is forecast to decline over the next 18 months before it peaks by the end of 2020 at 5.2% which is lower than the historic 10-year average of 6.4%.
- A total of 537,000 square metres of new development is expected to be completed between now and 2021, with approximately 70% already pre-committed.
- We expect net face rents to continue to increase over the next 18 months before the growth rate starts to decline during 2020 and 2021.
- Incentives are expected to increase during 2019–2020 on the back of new supply coming online.
- Investment demand is expected to remain strong over the short term. We believe that high demand and limited stock available for investment will continue to drive yield compression.