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Rivalry intensifies as Melbourne office market closing the gap on Sydney

September 13, 2017

Melbourne's office market is catching up with Sydney's. Photo: Jason South

Melbourne’s CBD office market could become more attractive than Sydney’s, which has traditionally been the darling of global corporate tenants, thanks to cheaper rents and stronger supply levels, new research shows.

“Sydney, often considered the corporate capital and global property hub of Australia, previously benefited from disparity between both the size and quality of available office space,” the Cushman and Wakefield report Sydney v Melbourne – Office Leasing wrote.

“Over a century later these two cities continue their competitive spirit, and from an office leasing perspective, the gap is beginning to narrow.”

The Melbourne CBD’s average prime net effective rents are $370 a square metre, while in Sydney’s city centre, tenants are paying almost double the price at $720 a square metre.

Supply of offices in the harbour city are also tighter with a vacancy rate of 5.9 per cent, compared with Melbourne’s 6.5 per cent.

Sydney is still preferred for top global financial and tech firms. Photo by Jessica Hromas Sydney is still preferred over Melbourne by top global financial and tech firms. Photo: Jessica Hromas

But the Victorian capital is rapidly catching up on construction. Net office supply has grown at nearly three times the rate of Sydney in the past five years – and it isn’t slowing any time soon.

Over the next five years, 435,000 square metres of office space is estimated to be built in Melbourne’s CBD.

In contrast, the forecast for the Sydney CBD is for an office space deficit of 15,250 square metres – a massive drop from the 150,819 square metres which was added to the market in the past five years.

That hasn’t stopped tech firms from clawing for a prime spot in the heart of Sydney, with the demand for CBD office space from the technology sector in the next five years expected to be more than triple that of the finance and insurance industries.

The technology sector is dominating office space in the Sydney CBD. The technology sector is dominating office space in the Sydney CBD.

Tech firms had secured about 40 leases in the Sydney CBD in the past 12 months, totalling approximately 64,000 square metres, Cushman and Wakefield research found. More than half of these leases were for spaces smaller than 500 square metres, signifying the growth of smaller tech companies and startups.

The biggest of the 40 leases was to the 17,000-square-metre Sydney Startup Hub above Wynyard train station, which the NSW Government will lease out at subsidised rates to tech startups.

The investment could go a long way for the city’s innovation sector, with the number of tech employees in Melbourne’s CBD trumping its NSW rival by about 3000.

Cushman and Wakefield’s Chas Keogh, joint head of office leasing in Victoria, said larger tenants who occupied offices outside of the city centre were taking a “renewed interest in the CBD”.

“They are gravitating from fringe areas like Richmond, Hawthorn and St Kilda Road back to the CBD for unsurpassed access to a wider talent pool and better amenities,” Mr Keogh said.

His colleague Tim Courtnall, head of office leasing in NSW, said although Melbourne had seen strong market growth and has more affordable premium office rents, companies had not been moving their head offices from Sydney to Melbourne.

“Interestingly, despite the strong rental growth in Sydney’s CBD, both national and global firms are focused on securing prime-grade office space in superior locations to be competitive in targeting talent,” he said, adding that Sydney remains the preferred location for global financial and tier-one technology firms.

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