Space squeeze in Melbourne as supply dries up

“The tidal wave of demand for CBD office space in Melbourne is leading to a real scenario of lack of suitable sites for the office developments of the future,” Knight Frank’s Hamish Sutherland said.

About 40,000 square metres of new stock is due to enter the market this year. Net absorption was close to 110,000 square metres in the past six months.

“Melbourne’s future commercial office supply is a top concern for the Property Council,” Victorian executive director Sally Capp said.

“We are commissioning research into the drivers of the approaching shortfall and the policy changes necessary to provide a steady supply of high-quality commercial office space into the future.”

A number of major requirements are still in the market, such as NAB, which is looking for 50,000 square metres and Japanese advertising and media relations firm Dentsu, which wants 20,000 square metres.

Singaporean co-working hub The Working Capitol is looking for a Melbourne home and so is US giant WeWork. As well, Monash, RMIT and Melbourne universities are all in the market.

“We have seen an increase in demand for co-working spaces as tenants seek more flexible working relationships,” JLL’s Stuart Colquhoun said.

With the squeeze on space, incentives, which have averaged about 30 per cent over the past decade, are expected fall to the low to mid 20 per cent range over the next two years, according to Savills’ Mark Rasmussen.

That contraction combined with a 4 per cent to 5 per cent increase in rents per year will deliver effective face rent rise of about 10 per cent a year, he said.

Colliers International’s Tony Landrigan and Andrew Beasley said more than half the space leased in 2016 was for large businesses with more than 3000 square metres.

“Inquiry levels are still strong and resulting in a more positive environment for the landlords than what has been experienced in the past few years,” they said.