Melbourne CBD office centralisation surges at 11:1 ratio

Non-CBD market withdrawals

The exodus from non-CBD markets has hit St Kilda Road the hardest. Since 2006, the precinct has suffered net withdrawals to the tune of 128,000 square metres. CBRE predicts the number of offices permanently taken off the market in the precinct will continue at the rate of about 12,500 square metres each year.

Net withdrawals are expected to increase in other non-CBD markets, including the city’s fringe, Southbank and suburban, albeit at a slower pace than St Kilda Road.

The magnetic pull to the CBD comes as many owners of secondary-grade buildings in non-CBD areas fail to invest in upgrades required to keep pace with premium-grade offerings in the CBD. 

AI talent drives demand

The divide between secondary and premium stock is beginning to widen as AI adoption makes its mark on Melbourne’s office market, says Cameron Douglas-Perrine, CBRE research manager.

“The adoption of AI really accelerates that trend from the [occupier] lens in terms of them seeking better and better quality space, and that in turn will drive a series of relocations in the market,” he says. 

“I can describe it as musical chairs as tenants keep rotating between a series of the best buildings in the market while they try and compete for talent, and they compete for trying to get the best bang for their buck with occupancy.”

More companies are vying for teams with AI skills and want to offer them the most innovative offices to work from. This means tenants are demanding more from each leasing deal so they can attract and retain talent.  

The report warns that those firms that commit to tenancies outside of the CBD risk falling behind in the race for the best AI talent. For this reason, the centralisation of Melbourne’s CBD market is expected to continue into the future.

Minimal WFH rule impact

Even the introduction of work-from-home rights will do little to stop the centralisation trend. Freshly appointed premier Ben Carroll has signalled he may make changes to the proposed legislation as pressure grows from small businesses. The WFH draft legislation introduced by Carroll’s predecessor, Jacinta Allen, was set to allow workers to work from home two days a week from September 1.

CBRE researchers expect the rules will have little to no impact on average occupancy rates across Melbourne, which are currently low on Mondays and Fridays when most workers opt to stay at home. 

“The impacts would be relatively limited, and the logic there is that occupancy Tuesday to Thursday is relatively high, and the reality is that businesses and occupiers, when they think about their office footprint, primarily care about their peak occupancy – they don’t care about their average occupancy,” Douglas-Perrine says.

Construction stalled until 2032

The CBRE report also forecasts no major office developments will start construction until 2032, which is largely due to the Victorian government’s plans to offload 100,000 square metres of leasing space throughout 2027 and 2028. This includes offices at 121 Exhibition Street, 8 Nicholson Street and 50 Franklin Street.

The timing of the government’s footprint reduction comes a step behind other major occupiers, Douglas-Perrine says.

“The government may be a bit late to the party in terms of rightsizing,” he explains. “They held a very large footprint in Melbourne, and they rightsized five years or several years too late compared to where the rest of the market reacted.”