Melbourne CBD Office Market Report

11.90%

45,560sqm



Vacancy rate as at Jan 22

Net absorption in 6 months to Jan 22

Active demand from SME’s

Melbourne CBD Office Market Report.

Q1. 2022: Improving demand reduces vacancy rate and incentives moderate.

2022

Q1

MELBOURNE CBD OFFICE - MARKET REPORT, Q1

Supply With more than five million square metres of office space, Melbourne’s CBD is the second largest CBD office market in Australia behind Sydney’s CBD. While the population of Melbourne is forecast to overtake

concentrated on the Western and Docklands precincts which

Sydney by 2026, the Melbourne CBD office market is projected

collectively accounted for 90% of the total space completed

to be Australia’s largest by 2027.

in the CBD in 2021. The vast majority of space added to the

Underpinned by Melbourne’s recent construction cycle, in terms of quality of office accommodation, A-grade office space accounts for just under half of the Melbourne’s CBD office space with B-grade and Premium quality office space each accounting for 21% of the total office space across the CBD.

Melbourne CBD office market in 2021 was of A-grade quality (182,866sqm) with the remainder delivered in B-grade assets.

Withdrawals over the year totalled 62,083 square metres of which 3,300 square metres being permanently withdrawn and the remaining 58,783 square metres temporarily withdrawn for refurbishment, highlighted by ISPT’s full refurbishment of 500

For a second consecutive year, new office supply delivered to

Bourke Street. Looking ahead a further 40,000 square metres

the Melbourne CBD market was above the long-term average

is forecast to be permanently withdrawn over the next three

with 198,551 square metres completed in 2021, following the

years.

record high of 351,929 square metres added to the Melbourne CBD in 2020. New supply delivered to the Melbourne CBD was

Melbourne CBD Office Supply by Grade

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Melbourne CBD Office - Market Report | Q1. May 2022

MELBOURNE CBD OFFICE - MARKET REPORT, Q1

Melbourne CBD Office Net Supply

New developments accounted for the majority of stock

Pre-commitment levels in the new development under

additions in 2021, led by NAB’s new office at 405 Bourke

construction remains moderate with 45% of the 150,100

Street (66,000sqm) and Myer’s new headquarters at

square metres that is due for completion over the next three

1000 LaTrobe Street (39,500sqm). In addition to the new

years across the new developments currently pre-committed.

developments, the extensive refurbishments of 100 Queen

Beyond the projects currently under construction, while there

Street and 750 Collins Street were also completed.

are a number of projects with planning approvals in place, the current pre-commitment levels and elevated vacancy rate will

Looking ahead, the level of new supply is projected to ease,

make securing an anchor pre-commitment challenging and is

with 269,991 square metres scheduled to be completed by

likely to limit significant development in the medium term.

the end of 2024, with the majority coming online in 2023.

Major Supply Projects Under Construction Address

Type

Major Tenant Commitments

NLA

Completion

637 Flinders Street

Full Refurbishment

n/a

25,716sqm

2022 Q3

140 Lonsdale Street

New Development

Australian Federal Police

22,000sqm

2022 Q3

693 Collins Street

New Development

Medibank

70,000sqm

2023 Q1

130 Little Collins Street

New Development

9,600sqm

2023 Q2

555 Collins Street

New Development

Amazon, Aware Super

48,500sqm

2023 Q2

500 Bourke Street

Full Refurbishment

n/a

46,125sqm

2023 Q3

Source: Property Council of Australia / Fitzroys

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Melbourne CBD Office - Market Report | Q1. May 2022

MELBOURNE CBD OFFICE - MARKET REPORT, Q1

Demand Victoria’s strengthening economy coupled with employment growth resulted in improving levels of tenant demand over the past six months.

After Victorian employment levels contracted over 2020, the

January 2022, vacancy rose in the Melbourne CBD, impacted

labour force in the state gathered momentum through 2021. In

by new additions. The Melbourne CBD office vacancy rate

the year to March 2022, Victorian employment rose by 64,400

rose to 11.9% as at January 2022 – its highest level since July

equating to an employment growth of 1.9%.

1999, up from 10.4% in July 2021. Notwithstanding the rise in

The growth of employment in Victoria was driven by the traditional white collar employment sectors of professional services and finance. In addition to the strong gains of the key

vacancy, the Melbourne CBD office market has the third lowest vacancy amongst all of Australia’s major CBD office markets only trailing behind Canberra at 6.2% and Sydney at 9.3%.

white collar employment sectors, the health and education

The sharp improvement in employment and job ads resulted

sectors recorded solid growth over the year.

in net absorption in the six months to January 2022 increasing

As a result of Victoria’s employment gains, the state’s unemployment rate has fallen to 4.0% as at March 2022, which is nearing 50-year lows. Looking further ahead, while job advertisements continued to improve, which have risen to 20-year highs as at March 2022 with job ads now up 29% over the year.

to 45,560 square metres, up from negative 96,635 square metres in the previous six months. The level of Melbourne’s CBD net absorption over the past six months was the highest of all Australian office markets apart from the Perth CBD. All grades of Melbourne CBD office space recorded positive net absorption in the six months to January 2022 except for B-grade stock.

Despite recording positive net absorption in the six months to

Melbourne CBD Net Absorption & Total Vacancy

4 Melbourne CBD Office - Market Report | Q1. May 2022

MELBOURNE CBD OFFICE - MARKET REPORT, Q1

Akin to the other CBD office markets of Australia, Melbourne’s

continued to rise, increasing from 2.4% in July 2021 to 2.5%

CBD vacancy rate is also now above its 10-year average. In

as at January 2022 – its highest level since 1995. In terms

terms of quality grades, A-grade vacancy rose to 14.2%, its

of the quantum of sub-lease space, the current level of

highest rate since 1995 with B-grade vacancy rising to 13.7%,

127,708 square metres is the highest on record as businesses

an eight-year high. Interestingly, Premium grade vacancy fell

reconsidered their office space needs with major occupiers in

to 7.2%. Over the six months to January 2022, C-grade and

particular offering space. Collectively, Premium and A-grade

D-grade vacancy rates also recorded declines.

office space account for 90% of total sub-lease vacancy across

Sublease vacancy in the Melbourne CBD office market

the Melbourne CBD office market as at January 2022.

Melbourne CBD Vacancy by Grade

By precinct, while the majority rose in the six months to January 2022, all precincts with the exception of the Spencer precinct are now above their 10-year averages. The Civic precinct rose to 12.3%, its highest level since January 2000, impacted by tenant relocations and new supply. The Docklands precinct also increased, rising to 13.1% - its highest level on record.

above its 10-year average for the first time since July 2015.

Looking forward, tenant demand is expected to continue to gather momentum through 2022, led by smaller occupiers.

The lower level of development activity coupled with stronger leasing activity is expected to underpin the recovery of the leasing market. The Melbourne CBD office vacancy rate is projected to peak in mid-2022 before trending lower in coming

Within the Melbourne CBD strata office market, total vacancy

years. However, vacancy likely to remain above 10-year average

increased to 4.7% as at January 2022, having risen from 3.4% a

for several years, given the significant volume of backfill and

year earlier. The strata office vacancy rate has now increased

sublease space that is currently being marketed.

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Melbourne CBD Office - Market Report | Q1. May 2022

MELBOURNE CBD OFFICE - MARKET REPORT, Q1

Melbourne CBD Vacancy by Grade

Prime face rents continued to show resilience; however,

Incentives remain at 30-year highs for both prime and

incentives have continued to increase, albeit at a slower rate.

secondary offices given the elevated sub-lease vacancy and

As a result, prime effective rents decreased for a second

uncommitted pipeline of new supply coupled with uncertain

consecutive year.

working models establishing for businesses resulting in a

Face rents in the secondary market have also remained stable

reduction of onsite staff.

since the onset of the pandemic with a wide range of incentive

Looking ahead, face rents are expected to increase over 2022,

levels being offered by landlords reflecting the location and

with incentives beginning to moderate, which will likely result

quality of space.

in effective rental growth recovering over the year.

Recent Leasing Transactions Address

Type

Tenant NLA

NLA

555 Collins Street

Pre-lease

Aware Super

8,000sqm

80 Collins Street

Existing

Moelis

1,300sqm

567 Collins Street

Sub-lease

WSP

8,000sqm

100 Queen Street

Existing

Judo Bank

3,000sqm

120 Collins Street

Existing

Franklin Templeton

1,500sqm

600 Bourke Street

Existing

Findex

1,500sqm

Source: Fitzroys

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Melbourne CBD Office - Market Report | Q1. May 2022

MELBOURNE CBD OFFICE - MARKET REPORT, Q1

Sales Activity Despite Melbourne’s significant lockdown periods, demand to purchase Melbourne office assets was strong with annual CBD office sales volume levels over 2021 totalling $2.3 billion.

The underlying weight of funds and low interest rates kept activity

CBD office assets, secondary yields also remain well below

levels robust despite the uncertainty surrounding all office assets.

historical averages with Melbourne remaining a highly sought-

Foreign investors continued to be attracted to the Melbourne CBD office market, accounting for 65% of total office sales volume over 2021, albeit domestic purchasers increased

after destination for capital from both local and international investors. Average secondary yields range between 4.75% and 5.50%.

their share from the previous year. Offshore purchasers were

Given the recent extended period of limited investment

dominated by those from South Korea, Germany, Singapore and

opportunities, investor demand for office assets is likely to

the United States.

remain strong across the Melbourne CBD, with confidence

Despite the elevated vacancy levels, as at March 2022, average prime office yields remained stable and range between 4.00% and 5.00%. Average prime yields now stand almost 200

improving considering the increasing occupancy levels of CBDlocated assets along with long-term outlook for rental growth of the Melbourne CBD office market.

basis points lower than the long-term average. Similar to prime

Melbourne CBD Office Sales Volume

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Melbourne CBD Office - Market Report | Q1. May 2022

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

ASSOCIATE

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. May 2022

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