One Melbourne Quarter. Image: Supplied

Office space development falls short of average in Melbourne: report

Marc Pallisco|Apr 16, 2019

Despite the number of cranes in and around Melbourne’s central business district, developers have constructed less new office space than usual.

According to the Property Council of Australia Office Market Report – which maintains stock and vacancy figures for the nation’s major office markets – just over 45,000 square metres of new office space (this being for the 567 Collins Street office building, which opened mid last year) was added to CBD stocklist in the six months to January 2016.

This is 33 per cent short of the 10-year average amount of gross office space – about 68,000 square metres – added to the CBD each six months.

447 Collins Street. Image: SHOP Architect PC / Woods Bagot

But the slowdown hasn’t translated to a boom in rents, with office tenants still benefiting from cyclically high levels of what the industry calls “incentives”.

An incentive is a discount offered by a landlord to tenants entering a new lease. It is sometimes presented as a reward to occupants who, among other things, move into new buildings – or stay and extend in their current premises.

According to Knight Frank Research, incentive levels for the highest quality CBD space are between 25 and 30 per cent of the average gross asking rent. For secondary quality space, incentives average between 27 and 33 per cent.

Types of incentives

Tenants, do your research – some sectors of the market, or leases involving small spaces or short terms, don’t deal with incentives.

Landlords who do however may:

● Apply a percentage discount to the advertised rent for a lease period;

● Offer upfront cash payments to the tenant;

● Contribute all or part of the funds required for a fit-out. Typically, landlords spend on fixtures, fittings, furniture (including paintings) and workstations;

● Offer a tenant non-cash items such as motor vehicles, computers or holidays. Most leasing agents or tenant representatives should be able to provide a prospective tenant with details of commercial leases including what incentives, if any, were applied.

New buildings

A wave of new office stock is due to be added to the Melbourne CBD office stocklist this year.

Melbourne’s next two office towers are set to open within the Collins Square precinct in Docklands, next to Media House – home of Fairfax Media.

120 Collins Street. Image: Knight Frank

They include a 70,000-square-metre building, Tower Two, and a smaller office with 40,000 square metres, also within this Walker Corporation development.

More than 60 per cent of space within these two office buildings is pre-committed by tenants, leaving more than 54,200 square metres.

A further 102,400 square metres of refurbished or backfill office space is also set to come on to the market as a consequence of new tenants migrating to Collins Square, according to Knight Frank Research.

Construction of a 25,000-square-metre office within Lendlease’s One Melbourne Quarter project is set to start soon.

Another proposal, which will add 20,000 of new space to Industry Superannuation Property Trust’s 271 Spring Street site, is awaiting approval.

Victoria leasing feature table 1

447 Collins Street

A new multi-storey building, dubbed the pantscraper because of its striking design, has been approved in Collins Street by Planning Minister Richard Wynne.

Out-of-towners

Tenants migrating from Melbourne’s suburbs contributed to a reduction in the overall CBD vacancy rate, from 9.1 per cent in January 2015 to 7.7 per cent, for the same period in 2016.

On a quality grade basis, vacancy is highest (more than 9 per cent) for the highest quality (premium-graded) space, followed by C-grade.

Victoria leasing feature table 2