In Melbourne's suburban office markets rents, demand on the rise

Carlton & United Breweries recently announced it will relocate to 6388 square metres at Freshwater Place, from an office in the suburb at 77 Southbank Boulevard, which it owner-occupied for 27 years but sold to the state government last year for $95.5 million (this building is expected to be turned into a creative space and withdrawn from the Southbank office market).

Freshwater Place will also accommodate advertising company WPP for 3500 square metres. WPP will relocate from Collins Street in the CBD.

St Kilda Road, a more established office market than Southbank, with much older stock, saw a reduction in vacancy rates over the six months to January 2018: from 11.27 per cent to 7.25 per cent, according to the Property Council of Australia.

Over the past 10 years, and largely because of residential repurposing, the St Kilda Road office market has been reduced by about 100,000 square metres to 645,302 square metres (it will reduce further in coming years when billionaire businessman Lindsay Fox replaces his company Linfox’s headquarters at 493 St Kilda Road with apartments).

The St Kilda Road office vacancy rate dropped to 7.25 per cent in January. Photo: Supplied

By comparison, Southbank has grown in size by 60,000 square metres (434,461 square metres). The CBD office market – seeing it includes Docklands – increased 800,000 square metres over the same period (4.5 million square metres).

Historically, a more affordable office market for large users than other fringe precincts, A-grade effective office rents in St Kilda Road increased 11.7 per cent over the six months to March 2018, to about $318 a square metre, per annum, according to Colliers International. The same quality office comes at a cost of about $351 in Southbank.

Inner East

Incentives are down and rents are rising in the inner east, which captures suburbs up to 10 kilometres from the CBD and includes prestigious suburbs Hawthorn East and Camberwell.

Some tenants in the Cremorne/Richmond area, which is just two kilometres from the CBD, “routinely” pay more than $500 a square metre per annum, in office rents now – a record high.

By and large, however, A-grade rents in the large market defined as Inner East average between $390 and $400 a square metre per annum, according to Colliers International.

A lack of new supply has been a boon for landlords. One of the area’s newest office buildings at the Chadstone Shopping Centre, Vicinity Tower, has filled in the past year.

Tenants are also pre-committing to as-yet-unbuilt offices, including plumbing supply group Reece, which will shift to Richmond from Burwood – 14 kilometres from the CBD.

MYOB has recently leased two offices in Richmond for staff who didn’t want to work at the company’s suburban Glen Waverley headquarters, 21 kilometres from town.

One of the buildings in which MYOB has sub-leased office space in the Cremorne/Richmond area. Photo: Supplied

Other tenants have been forced to move (and pay higher rents) because their former offices are set for residential redevelopment, including Scope Victoria and Kao Brands, both in Box Hill.

Outer East

Tenants being priced out of the city fringe and inner east markets are driving a surge in demand for the precinct that agents call the Outer East – which includes the high-tech suburbs of Mulgrave and Mt Waverley, about 16 kilometres from the CBD.

Since September, the office vacancy rate there fell from 9 per cent to 7.4 per cent (the long-term average is 9.6 per cent).

Almost 65,000 square metres more space was filled, than vacated, in the past 12 months (this net absorption is 10 times more than the St Kilda Road office precinct recorded over a similar period).

“The price difference now between average effective rents in city fringe/inner east area and the outer east has widened, and as a result more tenants are reconsidering how much weight they place on the importance of staff amenity and proximity to the CBD versus affordable, good quality office accommodation,” Colliers International national director of Office Leasing and Capital Markets, Tony Landrigan, said.

Landlords are also stepping up the offering for tenants – landlords MTAA and Salta Properties are building serviced apartments within their business parks.

South East

The south-east office sector, which includes the suburbs of Bentleigh and Moorabbin – the latter being 15 kilometres from the CBD – continues to have metropolitan Melbourne’s highest vacancy rate: 11.9 per cent as at March 2018, according to Colliers International.

This is despite net absorption being a relatively high 14,000 square metres this year (whereas for each of the three previous years, tenants vacated 500 square metres more than they took).

In light of the tenant demand surge, south east A-grade rents have increased 7.5 per cent in the past year, the agency said.