Melbourne is set to look vastly different in three years’ time, with the market anticipated to balloon by about half a million square metres.
This is equivalent to more than 10 per cent of its current market – the highest number and proportion of stock additions in the country, according to the Property Council of Australia.
“We currently have in excess of 455,000 square metres of new office stock forecast to enter the market from now through to 2021, 80 per cent of which is already committed,” said Tony Landrigan, national director of office leasing at Colliers International.
“The new development cycle is set to commence this year, which will see three new premium-grade office buildings being added to the development market in Charter Hall’s 555 Collins Street, Cbus Property’s 435 Bourke Street and Lendlease’s Melbourne Quarter Tower, which are all due to complete in late 2022-2023.”
Fringe CBD developments were also gaining traction as they provided a different option for tenants from the premium-grade projects in the CBD, Mr Landrigan said.
“Due to the lack of immediate stock in 2019 and the increase in net effective rentals, the conversion from residential sites to commercial sites will also continue.”
But with Melbourne being the tightest CBD office market in Australia with an office vacancy rate of 3.2 per cent, the projected building boom doesn’t mean tenants will feel instant relief.
“In 2019, if you are a tenant looking for in excess of 5000 square metres of office space in the Melbourne CBD, you will have less than a few options to consider; such is the tightness in the CBD market this year. We expect a severe undersupply moving into 2020 and beyond,” Mr Landrigan said.
“Vacancy will remain extremely tight in the Melbourne CBD for the next six to 12 months with minimal movement forecast. The CBD vacancy rate is forecast to drop to 2.7 per cent, which will make Melbourne the tightest leasing market in Australia.”
And in turn, rents in Melbourne’s CBD have been climbing at the fastest growth rate since 2001, rising 14 per cent in 12 months, to be up by 32 per cent in the past five years, said Hamish Sutherland, partner and Victoria head of office leasing at Knight Frank.
“This rapid increase has had a flow-on effect on emerging markets in the urban fringe, where office rents have also escalated rapidly,” he said.
Mr Sutherland believes the “war for talent”, created by strong economic and employment growth in Melbourne, has fuelled the escalating demand.
“On top of this, a profound cultural shift to new ways of working, such as agile practices, mobile workforces and flexible hours is also resulting in new requirements and together these forces are resulting in unprecedented demand for office space in Melbourne’s CBD.”
Looking ahead, net face rents are forecast to go up by a further 9 per cent by the end of 2019, Knight Frank data shows.
But with nine new office projects under construction in the CBD due to be delivered in the next two years, that rental growth rate is expected to slow as new supply comes online in 2020, said David Cannington, head of research and strategy at Investa.
“A softening in CBD office leasing market conditions is expected to support moderate rental growth in the coming months with rent increases maintained at growth rates of 3 to 3.5 per cent in 2020.”
Mr Cannington agreed that employment growth, coupled with an increasing government sector, as well as utilities, education and coworking businesses’ search for expansion space had contributed pressure to the already tight market.
“In particular, demand for prime office space has been very strong, with 220,000 square metres of additional prime office space occupied in the past year driving the prime office vacancy rate to 2.4 per cent [76,000 square metres of vacant office space],” he said.
“This reflects the strength of demand for Melbourne CBD office space driven by solid white-collar employment growth and businesses centralising from surrounding office markets.”
JLL’s Victorian head of office leasing Stuart Colquhoun attributed most of CBD demand in the first quarter of 2019 to the finance and insurance services sector, which accounted for about 55 per cent of total take-up in that period.
He cited ANZ’s relocation to the 839 Collins Street development – taking up 26,500 square metres in the new 38,000-square-metre complex – as the largest single absorber of space for the quarter.
And as contiguous office space becomes more and more inaccessible in the CBD, Mr Colquhoun predicts tenants will consider fringe city options – a turning point after five years of centralisation.
“2019 is, however, predicted to be a substantial year for supply in Melbourne’s CBD, with approximately 128,620 square metres of new office space expected to be delivered over the remainder of the year.”
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