Melbourne CBD Office Market Report - Q3 2023

Melbourne’s CBD office market contracted by 20,993sqm over the first half of 2023 as the level of withdrawals surpassed new additions

The Melbourne CBD office market now comprises 5.10 million square metres of office accommodation, its size second only to the Sydney CBD office market.

The only addition to the Melbourne CBD office market in 2023 was the completion of Charter Hall’s 555 Collins Street which added 48,500 square metres to the market. In contrast, 69,493sqm was withdrawn from the CBD office market largely through major projects including 800 Collins Street, 300 Flinders Street and 22 William Street.

All the new and refurbished stock added to the Melbourne CBD was located in the Spencer precinct. The Western precinct continues to hold the most office space in the Melbourne CBD with 33% followed by the Docklands which comprises almost 1.2 million square metres.

In terms of office sock quality, as at July 2023, A-Grade quality office space accounts for almost half of all office space across the Melbourne CBD. Interestingly, Premium grade office space has grown the most over the past 10 years, with 482,546 square metres of Premium office space delivered to the market since July 2013.

Looking forward, there are four new developments which have commenced construction. Looking ahead through to 2026, the pipeline of new supply is expected to deliver 255,533sqm of new and refurbished space across the Melbourne CBD.

Source: Property Council of Australia

Melbourne CBD New Office Supply

Forecast

Source: Property Council of Australia

Pre-commitments

For office space that is under construction, pre-commitment levels remain modest with only 13% pre-leased. With development activity projected to remain below average levels for the medium term, pre-leasing activity is anticipated to increase as tenants seek to upgrade their workplaces to encourage staff back into offices post Covid 19.

CBD Projects Under Construction/Siteworks

Beyond those office buildings currently under construction, there are a number of projects at various stages of development approval proposed for the Melbourne CBD office market including: Mirvac’s 7 Spencer Street (46,000sqm), DEXUS’ 60 Collins Street (42,182sqm), Stage 2 of 555 Collins Street (35,000sqm) and Hines’ development at 600 Collins Street (60,000sqm).

Demand

According to the Property Council, over the six months to July 2023, the Melbourne CBD office market recorded negative net absorption of 66,152sqm, the second lowest level recorded since 1990. In comparison, the half-year average net absorption level over the past 10 years for the Melbourne CBD office market is 20,600sqm.

In the six months to July 2023, Premium grade office space recorded positive net absorption of 12,093sqm driven by tenants moving into 555 Collins Street. In contrast, A-grade, B-grade and C-grade offices all recorded negative net absorption in the six months to July 2023.

While the level of occupied office space in the Melbourne CBD

office market has reduced by 167,000 square metres over the past three years, there has been a robust trend of businesses vacating older, secondary office buildings in favour of new higher quality space.

Victoria’s employment continues to improve, reaching an alltime high in July 2023, providing 149,315 new jobs. The vast majority being full-time roles over the past 12 months.

The only precinct within the Melbourne CBD office market to record positive net absorption in the six months to July 2023 was the Spencer precinct with 14,751sqm absorbed. This was underpinned by the completion of 555 Collins Street.

Improving demand for office space in the Melbourne CBD from small-medium occupiers was offset by the consolidation of large corporates resulting in a second consecutive half-year period of negative net absorption

Source: Property Council of Australia

Tenant Enquiry

Office demand within the CBD is dominated by companies seeking up to 500sqm. With companies focusing on attracting and retaining staff, many occupiers have capitalised on the attractive lease terms in quality fitted space in ‘A’ and ‘B’ grade buildings to encourage employees back into the workplace.

Demand for office space was led by Professional Services (36%), Finance & Insurance (21%) and IT & Telecommunications (17%). Other sectors active in the Melbourne CBD office market over the past 12 months have been the Arts & Recreation and the Education sectors.

Annual Victorian Employment Change by Sector

Vacancy

The Melbourne CBD office vacancy rate continued to increase largely due to the continuing consolidation of larger corporates. According to the Property Council, the total Melbourne CBD office vacancy rate increased to 15.0% as at July 2023, its highest level since July 1997. The vacancy rate of Australian CBD offices is 12.8%, lower than the non-CBD (i.e. St Kilda Road, North Sydney, etc) office vacancy rate of 17.3%.

By precinct across the Melbourne CBD, all precincts now hold vacancy rates above their respective 10-year averages. The vacancy rates of both the Flagstaff and Civic precincts have risen to 20-year highs as at July 2023. Only the Docklands and Eastern precincts recorded falls in office vacancies in the six

months to July 2023, both aided with the withdrawal of stock in the first half of 2023.

Vacancy by Grade

In terms of quality grades, the vacancy rates of B-grade and D-grade Melbourne CBD office space were the only grades which fell over the six months to July 2023. Despite the positive net absorption of Premium grade office stock, Premium grade vacancy increased to 12.2% as tenant demand was outstripped by new supply as at July 2023. While all grades of office space in the Melbourne CBD are higher than their respective 10-year averages, the A-grade office vacancy rate has risen to 15.2%, its highest level since 1995.

Melbourne CBD Vacancy

Sub-lease Vacancy

The sub-lease vacancy rate of the Melbourne CBD office market increased over the six months to July 2023, rising to 2.0%, or 103,445sqm. This is below the peak of 132,528sqm recorded in July 2022. Collectively, Premium and A-grade office space account for 96% of total sub-lease vacancy across the Melbourne CBD office market as at July 2023.

The sub-lease vacancy level in the Melbourne CBD remains elevated with a number of major corporates such as Telstra, ANZ, NAB, Fairfax Media and ME Bank amongst others consolidating space.

Source: Property Council of Australia

Rents & Incentives

Although the prime face rents remain stable, incentives have increased to 30-year highs which has resulted in a slight decline in net effective rental levels. Face rents in the secondary market have been outperformed by those recorded in prime office stock.

Incentive levels for both prime and secondary offices in the Melbourne CBD market have risen as vacancy increased. Looking ahead, prime office face rents are expected to stablise, with incentives expected to moderate in 2024, leading to effective rental growth for prime office stock in the Melbourne CBD market. In contrast, rental growth for secondary offices is likely to remain modest for the medium term until the vacancy rate has peaked.

Office Leasing Team

Fitzroys

Phillip Cullity DIRECTOR - OFFICE LEASING 03 9275 7788 0419 322 825 cullityp@fitzroys.com.au

Stephen Land ASSOCIATE DIRECTOR - AGENCY 03 9275 7765 0400 950 290 lands@fitzroys.com.au

Hamish Dennis AGENCY EXECUTIVE 03 9275 7718 0406 500 232 dennish@fitzroys.com.au

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 Pre-commitment & pre-development advice

 Project marketing

 Expert negotiation