Melbourne office rentals hits 'turning point'

With a large wave of office supply totalling 335,000 square metres looming for Melbourne in 2020, landlords surrendered the upper hand in negotiations as they sought to lock in tenants and secure cash flow early, with incentives increasing slightly in the second half of 2019.

Gross effective rents in Melbourne – now at $636 per square metre per year – are expected to remain flat in 2020 before falling slightly in 2021, according to Cushman & Wakefield.

Despite the completion of two major developments in 2019 and seven more buildings expected to come online in 2020, industry players remain confident in the Melbourne market with 84 per cent of landlords and tenant representatives expecting positive rental growth this year, according to a survey conducted by the real estate services company.

In Sydney year-on-year rental growth also contracted, but to a lesser extent, from 7.63 per cent in 2018 to 5.05 per cent in 2019 to hit $1044 per square metre.

Rental growth is still much softer than when it spiked in 2016 by 19.5 per cent, following the NSW government’s compulsory acquisition of several buildings in the CBD for its Metro project, creating a supply-and-demand imbalance.

The uncertain economic outlook, with September 2019 GDP results the weakest in over a decade, prompted tenants to become more assertive in negotiations, and made landlords more motivated to secure deals over larger tranches of space with strong covenants, the report said.

About 60 per cent of survey respondents expected rents to increase in Sydney in 2020 compared with 90 per cent for 2019.

“We are witnessing the continuing signs that the office leasing market has reached a turning point, which supports our view that the capital growth cycle for many Australian commercial real estate markets has already reached its peak.”

Tenant representative Steve Urwin, of Kernel Property, said the take-up of new developments in Melbourne had been good, but the re-letting of backfill space – digs left vacant as tenants departed for new offices – would “cause the industry a massive hangover”.

“You don’t need a tsunami warning system to know that the big wave is coming to Melbourne in 2020,” Mr Urwin said.

“Given the construction delays on a number of the new assets, and some substantial refitting/refurbishment work of the premises being vacated by the firms relocating, it will be the end of this year before the bulk of the backfill space is available to occupy.”

Brisbane was a different story, with rental growth accelerating by 4.7 per cent in 2019 to $471 per square metre, compared with just 0.4 per cent growth in 2018 as vacancy rates fell to their lowest level since 2013.

With only a small amount of new office space expected to hit the market, rental growth is expected to continue in Brisbane in 2020.

While on average Sydney and Melbourne CBD office leasing conditions are expected to soften in 2020, tenant demand at a sector level is mixed, Mr Sears said.