Melbourne CBD office rents to rise 40 per cent in 5 years

The Melbourne office market boom will roll on until at least 2024, with prime rents expected to rise another 30-40 per cent over the next five years, according to the latest forecasts from research house BIS Oxford Economics.

While the current record low CBD vacancy rate of 3.2 per cent is expected to trend up, briefly rising above 5 per cent in 2020 as over 250,000 square metres of new office space enters the market, BIS expects this to quickly drop back down to around 4 per cent as take-up outstrips new supply in subsequent years.

“Apart from a brief spike, we’re looking at six years with a sub-5 per cent
vacancy rate,” said BIS property economist Maria Lee.

“That’s unprecedented for Melbourne. Under those conditions the prime CBD market should generate another 30 to 40 per cent growth in rents over the next five years, with values escalating by about 25 per cent,” she added.

Forecasts of another surge in rents and values come on top of prime CBD office rents rising 45 per cent from the bottom of the market five years ago on the back of a strong Victorian economy.

The stronger leasing market combined with a wave of institutional capital seeking exposure to Australian commercial real estate has driven down average prime Melbourne CBD yields to 4.9 per cent compared with 6.3 per cent prior to the GFC.

BIS Oxford Economics’s bullish forecasts for the Melbourne CBD will be welcomed by some of the country’s biggest office developers and landlords.

These include Mirvac, whose 38-storey premium grade Olderfleet tower at 477 Collins Street with 58,000 square metres of office space, is well underway and due to be completed next year.

Also due for completion in 2020 is QIC’s 80 Collins Street project at the city’s Paris End which will include 43,000 square metres of office space and was recently acquired by Dexus for $1.5 billion.

Another major project, Cbus Property’s Collins Arch, is due for completion this year and will include about 49,000 sq m of office accommodation with Charter Hall also planning a huge 80,000 sq m office tower at 555 Collins Street with an end value of about $1.5 billion.

“We don’t expect Victoria to sustain its recent stellar pace of economic and employment growth over the next couple of years, but there’s another factor at play that will boost net absorption,” said Ms Lee.

This, she said, was pent-up demand that had been growing and would be released as new buildings come on stream over the next couple of years

“We expect to see robust net absorption through FY2020 and FY2021,” she said.

The uplift in the CBD has also made its way into the suburbs, where the estimated metro vacancy rate has fallen to 4.6 per cent.

Landlords in key fringe office precincts like St Kilda Road have enjoyed a 27 per cent boost to rents in the past 12 months as vacancies have more than halved.