Melbourne CBD Office Marketing Report Vol.2 April 2023

Quarter 1. 2023:

Melbourne CBD Office Market Report Vol.2 April 2023

2023 2022

Q1 Q4 We know Melbourne.

Licensed Estate Agents Auctioneers Property Managers Consultants and Valuers fitzroys.com.au | 9275 7777

MELBOURNE CBD OFFICE - MARKET REPORT, Q1

Supply Melbourne’s CBD office market increased by 96,448 square metres over 2022, with office space now totalling 5.12 million square metres, an all-time high.

In terms of quality of space, as at January 2023, A-Grade quality office space accounts for almost half of all office space across the Melbourne CBD and has grown the most since 2013, with 608,826 square metres of A-grade office space delivered to the market over the past 10 years.

added to the Melbourne CBD office market in 2022.

By precinct, 41% of the new and refurbished stock added to the Melbourne CBD was located in the Western precinct followed by the North Eastern and Docklands precincts. The Western precinct continues to hold the most office space in

With new supply having peaked in 2020, 109,231sqm was

the Melbourne CBD with 33% followed by the Docklands which

added to Melbourne CBD office market in 2022, largely through

comprises 1.2 million square metres having doubled in size

refurbished stock – led by Peakstone’s 637 Flinders Street

over the past 10 years.

(25,716sqm), AMP Capital’s 600 Bourke Street (21,661sqm) and 12,377sqm coming online within the Rialto Towers at 525 Collins Street.

Looking forward, there are four new developments which are under construction or have begun siteworks. Looking ahead through to 2026, the pipeline of new supply is expected to

The completion of Australian Federal Police’s 23,000sqm

deliver 264,700sqm of new and refurbished space across the

office at 140 Lonsdale Steet was the only new development

Melbourne CBD.

Melbourne CBD Office Space by Grade

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Melbourne CBD Office - Market Report | Q1. April 2023

MELBOURNE CBD OFFICE - MARKET REPORT, Q1

Melbourne CBD New Office Supply

Square Metres

Pre-commitments Of the space that is under construction, pre-commitment

Beyond those offices currently under construction, there are a

levels remain modest compared with previous years with

number of projects at various stages of development approval

30% pre-leased. With development activity projected to

proposed for the Melbourne CBD office market including:

remain below average levels for the medium term, adversely

DEXUS’ 60 Collins Street (42,182sqm), Stage 2 of 555 Collins

impacted by the elevated high vacancy rates, pre-leasing

Street (35,000sqm) and Hines’ development at 600 Collins

activity is anticipated to increase as tenants seek to upgrade

Street (60,000sqm).

their workplaces to encourage staff back into offices.

CBD Projects Under Construction/Siteworks Address

Type

Major Tenant Commitments

NLA (sqm)

Completion

440 Collins Street

Full Refurbishment

n/a

4,373

2023,Q4

555 Collins Street

New Development

Amazon, Aware Super, Allianz Australia

48,500

2023,Q4

500 Bourke Street

Full Refurbishment

TAL, PKF, Holding Redlich

46,125

2023,Q4

693 Collins Street

New Development

Medibank

70,000

2024,Q1

130 Little Collins Street

New Development

Strata Development

9,600

2024,Q2

435 Bourke Street

New Development

n/a

62,000

2026

Source: Property Council of Australia / Fitzroys

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Melbourne CBD Office - Market Report | Q1. April 2023

MELBOURNE CBD OFFICE - MARKET REPORT, Q1

Demand Given the current uncertain global economic conditions, increasingly occupiers are taking a disciplined approach to office space requirements. According to the Property Council, the Melbourne CBD office market recorded a second consecutive year of negative net absorption.

Over 2022, net absorption totalled negative 13,663sqm

Having rebounded strongly following the worst of the effects

with the occupied space in the CBD office market adversely

of the pandemic, employment growth across the State

impacted by both new supply and subdued tenant demand. In

appears to have peaked with 49,000 new jobs added during

comparison, the 10-year average annual net absorption level

2022 compared with 104,000 jobs added in 2021. Reflecting

for the Melbourne CBD office market is almost 50,000sqm.

the easing employment growth of Victoria, the State’s

While the Melbourne CBD office market recorded negative net absorption over the past two years, it obscures the clear

unemployment rate increased to 4.0% as at January 2023, up from 3.2% as at July 2022.

“flight to quality,” trend as many businesses are vacating

Mirroring the location of new supply, the only precincts of the

older, secondary office buildings in favour for new high-quality

Melbourne CBD office market to record positive net absorption

space. In the six months to January 2023, prime (premium

in the six months to January 2023 were the North Eastern

and A-grade office space) net absorption totalled 40,054sqm,

precinct with 26,310sqm absorbed underpinned by the move

whereas tenants vacated 55,708sqm of secondary office space

of the Australian Federal Police into their new office and the

in the Melbourne CBD office market.

Western Core precinct with 15,134sqm absorbed.

Square Metres

Melbourne CBD Net Absorption

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MELBOURNE CBD OFFICE - MARKET REPORT, Q1

Tenant Enquiry Tenant enquiry levels have more recently shown signs of improvement led by smaller sized tenants seeking to capitalise

Tenant Enquiry by Size

on the attractive leasing terms on offer and employers encouraging staff back into the workplace within better quality office buildings.

Tenant enquiry for Melbourne CBD office accommodation was generally in line with growth of employment across Melbourne with demand for office space led by Finance & Insurance (31%) followed by Professional Services (26%) and Government (18%). While the IT & Telecommunications sector was relatively subdued over 2022, interestingly, there was strong growth recorded in the Arts & Recreation sector. Vacancy

Source: Fitzroys

Recent CBD Leasing Transactions Address

Type

Tenant NLA

NLA (sqm)

555 Collins Street

Pre-lease

Allianz Australia

6,250

530 Collins Street

Existing

Suncorp

9,000

385 Bourke Street

Existing

NPM

500

385 Bourke Street

Existing

Rodgers Reidy

500

637 Flinders Street

Existing

Wesfarmers Health

3,500

171 Collins Street

Direct

AEMO

5,000

567 Collins Street

Sub-lease

WSP

6,000

180 Lonsdale Street

Sub-lease

Latitude Financial

1,800

Source: Fitzroys

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Melbourne CBD Office - Market Report | Q1. April 2023

MELBOURNE CBD OFFICE - MARKET REPORT, Q1

Vacancy With new supply surpassing tenant demand, correspondingly, the Melbourne CBD office vacancy rate continued to increase.

According to the Property Council, the total Melbourne CBD office vacancy rate increased to 13.8% as at January 2023, its highest level since January 1999. Despite the rise, the office vacancy rate of the Melbourne CBD remains below those of the Adelaide and Perth CBD office markets. While the vacancy rate of the Hobart CBD office market is Australia’s lowest at 2.5%, only Canberra’s office vacancy rate is also lower than its 10-year average.

Sub-lease Vacancy Interestingly, having reached a 28-year high in July 2022, sub-lease vacancy levels appear to have peaked in the short term, falling from 2.6% in July 2022 to 1.9% as at January 2023. While still double its 10-year average, the quantum of sub-lease space of 98,318sqm has fallen to it lowest level since January 2021. Collectively, premium and A-grade office space account for 94% of total sub-lease vacancy across the Melbourne CBD office market as at January 2023.

By precinct, while the majority recorded increases in office vacancy in the six months to January 2023, all precincts now

Vacancy by Grade

hold vacancy rates above their respective 10-year averages.

Premium grade office stock was the only grade of Melbourne CBD office space which recorded a fall in its vacancy rate, declining to 9.5% over the six months to January 2023.

Despite the positive net absorption of A-grade office stock,

The Docklands precinct rose to 15.5%, its highest level on record, impacted by tenant relocations. Only the North Eastern and Western Core precinct recorded falls in office vacancies in the six months to January 2023.

A-grade vacancy increased to 13.7% as tenant demand was outstripped by new supply as at January 2023. B-grade office space vacancy surpassed 20% for the first time on record with 220,956sqm currently vacant of which 5,207sqm is via sub lease.

Melbourne CBD Vacancy by Grade Total Vacancy

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Melbourne CBD Office - Market Report | Q1. April 2023

MELBOURNE CBD OFFICE - MARKET REPORT, Q1

Rents & Incentives

Sales Activity

Prime face rents continued to show resilience; with the level

Despite the subdued leasing environment, sales activity in

of incentives now showing signs of peaking having stabilised

Melbourne’s CBD office market has surpassed $3.6 billion

over the second half of 2022. Reflecting the preferences of

in 2022, its highest third annual level over the past decade,

tenants, face rents in the secondary market have remained

a 46% increase on levels the preceding year. Transactional

stable as tenants focus their interest in prime quality office

activity was relatively subdued in the second half of 2022 with

space leading to a divergence in rental levels between prime

purchasers cautious given the increasing cost of capital.

and secondary office space.

Transactional activity across the CBD office market this year

While incentive levels for both prime and secondary offices

has been dominated by domestic institutions boosted with

in the Melbourne CBD market remain elevated, incentives for

a number of major transactions such as Charter Hall’s 50%

prime space have recorded a marginal decline, reflecting the

share of Southern Cross Towers. With sales activity above

increased tenant enquiry levels.

average for the past four consecutive years, investment

Looking ahead, prime office face rents are expected to continue increase, with incentives beginning to moderate, leading to effective rental growth for prime office stock in

activity is expected to fall below average levels in coming years with the cost of capital likely to remain elevated through 2023.

the Melbourne CBD market. In contrast, rental growth for

Foreign investors continued to be attracted to the Melbourne

secondary offices is likely to remain modest for the medium

CBD office market, accounting for 44% of total office sales

term until the vacancy rate has peaked.

volume over 2022, albeit with some domestic purchasers

$/square metre

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Melbourne CBD Office Net Face Rents

Melbourne CBD Office - Market Report | Q1. April 2023

MELBOURNE CBD OFFICE - MARKET REPORT, Q1

having acquired offices on behalf of offshore capital. Offshore

Given the recent extended period of limited investment

purchasers were dominated by those from Singapore and

opportunities, investor demand for office assets is likely to

Hong Kong.

remain robust across the Melbourne CBD, with confidence

While prime yields rose slightly through 2022, reflecting the increasing cost of capital for purchasers, they remain well below the 10-year average. As at January 2023, average prime office yields range between 4.5% and 5.5%. Mirroring

improving considering occupancy levels likely to increase through 2023 along with the positive long-term outlook for rental growth of the Melbourne CBD office market in comparison to other Australian CBD office markets.

the tenant preference for prime assets, the yield premium between prime and secondary grade offices has also begun to widen with secondary yields ranging between 5.0% and 6.0%.

Melbourne CBD Office Sales Volume

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Melbourne CBD Office - Market Report | Q1. April 2023

MELBOURNE CBD OFFICE - MARKET REPORT, Q1

Office Leasing Team Fitzroys clients include institutional, corporate and private owners within the CBD, Inner Fringe and Suburban markets.

Contact us today to discover how we can secure tenants for your office property.

Phillip Cullity

Stephen Land

Hamish Dennis

DIRECTOR - OFFICE LEASING

ASSOCIATE DIRECTOR - AGENCY

AGENCY EXECUTIVE

03 9275 7788 0419 322 825 cullityp@fitzroys.com.au

03 9275 7765 0400 950 290 lands@fitzroys.com.au

03 9275 7718 0406 500 232 dennish@fitzroys.com.au

Office Leasing Services Clear leasing strategy & advice Leasing of new office projects, existing developments, creative and heritage space, mixed use developments and specialist property.

Pre-commitment & pre-development advice Project marketing Expert negotiation Regular client communication and progress reports

For more information on how Fitzroys Office Leasing services can help your organisation, Licensed Estate Agents Auctioneers please contact Phillip Cullity on 0419 322 825 or cullityp@fitzroys.com.au Asset Managers

Consultants and Valuers

Disclaimer: The information, views, projections or analysis published in this report including text, graphics, and all images are for general use only and not to be relied upon for financial or related investment in any way. No responsibility or liability whatsoever can be accepted by Fitzroys Pty Ltd for any loss or damage resultant from any use of, reliance on or reference to the contents of this document. Reproduction of any part or whole of this report must seek prior express written approval of Fitzroys Pty Ltd.

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Melbourne CBD Office - Market Report | Q1. April 2023

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