Melbourne Office Market – It’s official – It’s a landlords market
Overall office vacancy as at July 216 in Melbourne stood at 7%. The next release of the Property Council of Australia’s office six month vacancy rates due out in January 2017 is expected to show an overall vacancy of 6.1%. According to one of Melbourne’s preeminent office agents once vacancy falls below 7% then we can officially say the market has turned in favour of the landlord.
One agent we spoke to predicted vacancy would fall to 4% by the end of next year and see leasing incentives halve.
With no major new development coming on tap until 2019/2020 conditions are expected to get tight. New building include Cbus’s 447 Collins Street partly pre-committed to Mallesens ready Q4 2019, Mirvacs 664 Collins Street (above Southern Cross station) part pre-committed to Pitcher Partners Q2 2018 and 477 Collins Street available Q2 2020 35% pre-committed to Deloitte.
Tenants will require greater flexibility and those tenants that move will not be wishing to do so again for a long time and therefore the importance of contraction and expansion provisions and break clauses in leases will play a bigger consideration when coming to select new premises.
Face rents will increase and market incentives will reduce particularly within general trading stock. Backfill space is reducing as seen with 161 Collins Street and Casselden Place leasing well.
Greater demand will be seen for project type space from government agencies and for rail projects.
Most agents have reported that 2016 was a very good year from a fee income perspective. 2017 is likely to be different as stock tightens and reducing incentives make the cost of relocating more expensive for tenants.
Over The Hump
Despite Brexit, a Trump victory and an inauspicious start by the Turnbull government, the Melbourne CBD office market has defied the doomsday commentators and is well and prospering. This has been helped by the Victorian economy outpacing the rest of the country over the past 12 months with employment growing by 3.2% compared to 2.4% in New South Wales. As such both the Melbourne and Sydney office markets have seen healthy activity in the last year. Clearly if you are a landlord in Perth or Brisbane you will be praying climate change is a myth and there will be a resurgence in the fossil fuel and engineering sectors as office vacancy in these centres have peaked at record levels.
From a feet on the ground perspective, in the sourcing of office space for a diverse range of both corporate and not for profit organisations Goodwin Property Advisory has seen in Melbourne a notable reduction in the supply side, less choice and a slight reduction in the level of leasing incentives being offered. Colliers International recently reported that “Tenants looking for quality assets will find their options very limited over the next three years…” as the average vacancy rate for the Melbourne CBD is expected to contract to 5.6%.
Rents in Premium, A grade and B grade offices in Melbourne have increased by 8.7%, 6.3% and 8.1% respectively in the last 12 months. Rental growth is predicted to continue over the next five years as a result of limited supply and leasing incentives will fall to the 25-28% range.
The Melbourne office market, according to Knight Frank Office Market Overview September 2016, is expected to see continued strong demand particularly from accommodation and food services, technology, finance and government sectors. Between 2016 and 2020, gross supply added to the market will average 2.3% of total stock per annum, well below the historical annual gross supply average of 3.5%. Of the space that is under construction, 56% is already pre -committed. The next supply cycle is anticipated to begin in late-2019.
With impending rental inflation and lack of supply Goodwin Property Advisory has seen a large number of organisations bring forward their premises deliberations and locking in to new leases at current rental levels and taking advantage of present day leasing incentives.