Melbourne's Office Rents to Rise Sharply

Vacancy rates will continue to fall over 2019 as Melbourne’s office market peaks.

According to research released by Herron Todd White, the nation's largest independent property valuation and advisory group, limited new prime office supply will see vacancy continuing to tighten over the next two years, before rising again in 2020.

The high net absorption rate of prime Melbourne CBD office stock would also continue to place Melbourne CBD below Sydney at the lowest vacancy rate of all Australia’s CBDs.

“There is limited new prime office supply due for completion over the next two years before the large deluge of supply forecast for 2020 is due to come online, and that is going to continue to drive up rental levels,” Herron Todd White director of office valuation Jason Stevens said.

Melbourne, benefiting from a boost in Victorian population growth, recording net absorption of +79,800sq m in the third quarter, the city's strongest quarter in more than a decade.

The office vacancy rate for Melbourne CBD currently sits at four per cent, the lowest it has been in 30 years.

Related: National Office Vacancy Rates Tighten Due to Demand in Sydney, Melbourne

Demand in the pre-lease market is now spilling into the fringe office market where vacancy has hit 6.8 per cent.

More than 50 office projects, comprising 615,000sq m, have had plans approved, submitted or proposed in the fringe precincts.

Commercial development sites across suburbs like Cremorne and Richmond have continued to drive strong capital growth with local agents now reporting net rents are in excess of $500 per square metre for new office space.

“Those factors – high leasing demand, strong underlying land values, and robust population growth - seem likely to continue to drive a very active investment and development market which is changing the shape of our inner suburbs,’’ Stevens said.

Another factor at play in the Melbourne market is the rise of co-working hubs, with players such as Hub Australia and US giant WeWork expanding rapidly.

The large wave of supply expected in the next few years has raised concerns about the capacity of the market and its ability to absorb that space.

Gross supply will increase by 170,000sq m in 2019 and by 290,000sq m in 2020. Net absorption, meanwhile, is forecast to be about 320,000sq m for the same period.