Melbourne CBD Office Leasing Report - Vol 4, March 2024

Melbourne CBD Office Leasing Market Report Quarter 1. 2023:

Vol.4 March 2024

MELBOURNE CBD OFFICE LEASING - MARKET REPORT, Vol.4 March 2024

Supply Looking forward to 2026 there are 7 new projects which are under construction or have begun siteworks that will deliver 237,750sqm of new office space.

Melbourne’s CBD office market increased by 42,118 square

The completion of Charter Hall’s 48,500sqm office at 555

metres over 2023, with Melbourne’s CBD office market space

Collins Steet was the only new office development added to the

now totalling 5.17 million square metres, an all-time high.

Melbourne CBD office market in 2023.

Over the past 15 years, office space in the Melbourne CBD has grown by 1.2 million square metres and is now 33% larger than 2009 levels.

As at January 2024, A-Grade space accounts for half of all office space across the Melbourne CBD and has grown the most since 2014. In the past 10 years 534,845 square metres of A-grade space has been delivered to the market. In contrast, both C-Grade and D-Grade office stock in the Melbourne CBD office market has declined over the past decade.

With new supply having peaked in 2020, 113,281sqm was added to Melbourne CBD office market during 2023, largely through refurbished stock – led by ISPT’s 500 Bourke Street (43,125sqm) and Victoria University’s 300 Flinders Street (12,656sqm).

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Melbourne CBD Office - Market Report | March 2024

Conversely, more than 31,000 square metres of office space was withdrawn in the Melbourne CBD office market, all of which was within secondary grade stock.

By precinct, 57% of the new and refurbished stock added to the Melbourne CBD was located in the Western precinct followed by the Spencer precinct. The Western precinct continues to hold the most office space in the Melbourne CBD with 34% followed by the Docklands which comprises 1.17 million square metres having increased by 65% over the past 10 years.

Looking forward to 2026 there are 7 new developments which are under construction or have begun siteworks that will deliver 237, 750sqm of new and refurbished space.

MELBOURNE CBD OFFICE LEASING - MARKET REPORT, Vol.4 March 2024

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

Beyond those offices currently under construction, there are a

levels remain modest compared to previous years with

number of projects at various stages of development approval

currently 48% pre-leased. With development activity projected

proposed for the Melbourne CBD office market including:

to remain at below average levels for the medium term,

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

adversely impacted by the elevated high vacancy rates and

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

cost of capital, pre-leasing activity is anticipated to increase as

Street (60,000sqm).

tenants seek to upgrade their workplaces to encourage staff return to the office.

Major CBD Projects Address

Type

Major Tenant Commitments

Total NLA (sqm)

Completion

693 Collins Street,

New Development

Medibank, Seven Network, Beca

70,000

Q1 2024

New Development

Strata Development

9,600

Q2 2024

Full Refurbishment

n/a

6,000

Q4 2024

Full Refurbishment

n/a

28,650

Q2 2024

New Development

n/a

45,500

Q4 2024

New Development

n/a

16,000

2026

New Development

CBA, Baker & McKenzie

62,000

Q4 2026

Docklands 130 Little Collins St, Melbourne 415 Flinders Lane, Melbourne 800 Collins Street, Docklands 7 Spencer Street, Mlebourne 25 Swanston Street, Melbourne 435 Bourke Street

Source: Property Council of Australia/Fitzroys

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Melbourne CBD Office - Market Report | March 2024

MELBOURNE CBD OFFICE LEASING - MARKET REPORT, Vol.4 March 2024

Demand While the Melbourne CBD office market recorded negative net absorption over the past three years, it obscures the clear “flight to quality,” trend and tenants prioritising buildings with greencertificated ratings.

While occupiers remain cautious in the current economic

Victoria’s employment continues to increase, close to an all-time high

environment coupled with the rise of working from home practices,

in January 2024, having increased by 149,761 new jobs over the past

tenant demand is showing signs of improvement as more businesses

12 months. The State’s unemployment rate remains at a low rate of

develop specific workplace requirements for their organisations.

3.9% as at January 2024. Looking ahead, Victoria’s employment is

According to the PCA, the Melbourne CBD office market recorded negative net absorption of 86,531sqm during 2023, the second worst

projected to increase further through 2024, albeit with the growth rate moderating from recent levels.

level recorded since 1990. In comparison, the average annual net

Over the six months to January 2024, the Spencer precinct recorded

absorption level over the past 10 years for the Melbourne CBD office

net absorption of 14,360sqm boosted by the completion of 555

market is almost 38,700sqm.

Collins Street, followed by the Western and Docklands precincts. In

In the six months to January 2024, Premium grade office space recorded positive net absorption of 12,304sqm 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 January 2024.

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contrast, Flagstaff, Eastern, Civic and the North Eastern precincts all recorded negative net absorption over the six months to January 2024.

MELBOURNE CBD OFFICE LEASING - MARKET REPORT, Vol.4 March 2024

Tenant Enquiry Demand remains healthy from occupiers seeking up to 300sqm

completion, has resulted in an increasingly number of tenants

and these groups are focussed on quality fitted space or new spec

seeking to relocate from City Fringe markets into the CBD.

suites. Tenant enquiry levels have been skewed to smaller and medium sized firms with demand for up to 300 square metres remaining resilient. In addition, analysis of smaller firms’ enquiries has shown that organisations are consistently seeking better quality space, capitalising on the attractive leasing terms on offer.

Tenant enquiry for Melbourne CBD office accommodation remains diverse with demand for office space led by Professional Services (32%) followed by Finance & Insurance (25%) and IT & Telecommunications (18%). Other sectors active in the Melbourne CBD office market over the past 12 months have been the Education and the Healthcare sectors. The

Occupiers across all office markets and sizes are continuing to

education sector has recovered due to the increase in students

reassess their workplace needs as a result of hybrid working.

particularly from China. Whilst the number of Visa’s being

Increasingly tenants are considering the CBD due to the

issued has reduced from previous years the education sector

premier amenity and connectivity of the CBD.

remains one of the most significant pillars of Melbourne’s office

The competitive leasing terms on offer for CBD buildings coupled with the Metro Tunnel infrastructure works nearing

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Melbourne CBD Office - Market Report | March 2024

Market.

MELBOURNE CBD OFFICE LEASING- MARKET REPORT, Vol.4 March 2024

Recent CBD Leasing Transactions Address

Grade

Tenant

NLA (sqm)

530 Collins Street, Melbourne

A

Slater & Gordon

3,935

Tower 4, Collins Square, Docklands

Premium

Optus

10,000

Queen & Collins, Melbourne

Premium

Hall & Wilcox

3,593

271 Collins Street, Melbourne

A/Heritage

Seeing Machines

2,300

737 Bourke Street, Docklands

A

North Western Health

2,088

399 Lonsdale Street, Melbourne

B

Health Careers

1,986

550 Bourke Street, Melbourne

A

Zendesk

1,546

300 La Trobe Street, Melbourne

A

Fleet Partners

1,090

181 William Street, Melbourne

A

AGIG

948

699 Collins Street, Docklands

Pre-lease A

Seven Network

4,500

555 Collins Street, Melbourne

Pre-lease Premium

Bendigo & Adelaide bank

4,114

697 Collins Street, Docklands

A

Nous

2,090

55 Collins Street, Melbourne

A

The Commons

5,061

Queen & Collins, Melbourne

Premium

A&M

900

699 Collins Street, Docklands

Pre-lease A

Beca

2,900

Source: Fitzroys

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Melbourne CBD Office - Market Report | March 2024

MELBOURNE CBD OFFICE LEASING- MARKET REPORT, Vol.4 March 2024

Vacancy According to the Property Council, the total Melbourne CBD office vacancy rate increased to 16.4% as at January 2024.

With new supply surpassing tenant demand, the Melbourne CBD office vacancy rate continued to increase. According to the Property Council, the total Melbourne CBD office vacancy rate increased to 16.4% as at January 2024, higher than its 10-year average of 8.3%. In comparison to the other Australian CBD office markets, only Adelaide CBD’s vacancy rate (19.3%) is higher than Melbourne, while Sydney, Brisbane and Perth CBD office markets have lower vacancy levels albeit all above their respective 10-year vacancy rates. The only major Australian CBD office market with a vacancy rate lower than

Vacancy by Grade In terms of quality grades, Premium grade office stock was the only grade of Melbourne CBD office space which recorded a fall in its vacancy rate over the six months to January 2024, declining to 11.1%. A-grade office vacancy rate increased to 17.3%, its highest rate since 1995. Similarly, B-grade vacancy rates increased to 22.3%, a 30-year high with C-grade and D-grade vacancy rates also increasing over the six months to January 2024.

10% is currently Canberra (8.3%).

Sub-lease Vacancy The sub-lease vacancy levels increased over the six months to

premium and A-grade office space account for 94% of total

January 2024. Current sub lease levels remain below the peak

sub-lease vacancy across the Melbourne CBD office market

of July 2022 and they appear to have peaked. As at January

as at January 2024. One of the most significant sub lease

2024, sub-lease vacancy totalled 104,545sqm, almost double

opportunities is the Telstra space at 242 Exhibition Street.

the 10-year average of the Melbourne CBD office market,

A total of 30,000sqm is available for sub lease in 2 lots of

resulting in a sub-lease vacancy rate of 2.0%. Collectively,

15,000sqm each at a heavily discounted rental.

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Melbourne CBD Office - Market Report | March 2024

MELBOURNE CBD OFFICE LEASING- MARKET REPORT, Vol.4 March 2024

Vacancy by Precinct

Outlook

All precincts have vacancy rates above their respective 10-year

Looking ahead, with the Victorian economy is forecast to expand

averages. The Docklands and Spencer precincts are the only

with labour demand remaining elevated. The vacancy rate of the

precincts to have recorded declines in their vacancy rates

Melbourne CBD office market is projected to marginally increase

in the six months to January 2024. The vacancy rates of the

before declining from late 2024.

Civic, Flagstaff, North Eastern and Western precincts have all increased to 20-year highs as at January 2024.

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Melbourne CBD Office - Market Report | March 2024

MELBOURNE CBD OFFICE LEASING- MARKET REPORT, Vol.4 March 2024

Rents & Incentives The CBD office market is heavily influenced by tenants seeking strong incentives to either fund the cost of their fit out or to reduce their rental.

Despite a marginal rise in gross face rents, net effective

Looking ahead, prime office face rents are expected to

rental levels in the Melbourne CBD office market continue to

continue increase, with incentives at historical highs. Incentive

face downward pressure due to elevated vacancy rates and

levels are expected to moderate through 2024, leading to

continuing increases in outgoings.

effective rental growth for prime office stock in the Melbourne

The availability of diverse, high-quality office accommodation options in the Melbourne CBD continues to drive competition amongst owners which as a result has pushed prime incentives to historical high levels.

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Melbourne CBD Office - Market Report | March 2024

CBD market. In contrast, rental growth for secondary offices is likely to remain modest for the medium term until the vacancy rate has peaked.

MELBOURNE CBD OFFICE LEASING - MARKET REPORT, Vol.4 March 2024

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 buildings.

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 CBD, fringe & suburban leasing 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

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

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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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