Vacancy Falls And Rents Rise For Melbourne Offices

Melbourne’s CBD office market is headed for a further fall in vacancy.

The fall, according to Savills, comes on the back of an improvement in the Victorian economy and a surge in business confidence that has seen tenants expand their space requirements.

Savills Victorian Office Leasing Director Mark Rasmussen said the market, which started the year with a vacancy rate of close to eight per cent, would enter the new year with a vacancy rate closer to five per cent.

"There have been several factors at work including a pretty positive economy and the fact that the four pillars of the Melbourne office market – Telstra, State and Federal governments, NAB and ANZ – who make up approximately 20 per cent of the market - expanded at the same time for the first time in several years," he said.

"Tenants now also have expectations that their business will grow and so when renewing their leases they are taking additional space."
Activity Based Working slowed net absorption
Mr Rasmussen said since the GFC, businesses had taken a conservative approach including the adoption of Activity Based Working (ABW) principles, which meant reducing space requirements and slowing net absorption.

"But ABW has now worked its way through the market and those businesses are now expanding again and that is driving down vacancy levels."During 2017/18 Melbourne will follow Sydney with the vacancy rate continuing to fall on the back of solid demand and lack of supply.

There are currently several major tenants in the Melbourne market with requirements of more than 20,000 square metres each including Dentsu Aegis, NAB, NBN and Energy Australia.

"It won’t be until 2019/2020 before we see the next tranche of new supply coming onto the market and that means in the meantime the market can only continue to tighten,’’ Mr Rasmussen said.

Face rents to rise 10%
Mr Rasmussen said incentives, which had averaged around 30 per cent over the last decade, would fall to the low to mid 20s over 2017/2018. At the same time rents would rise four to five per cent per annum which, taken together with the fall in incentives, would mean an effective face rent rise of around 10 per cent per annum.
Explosion of co-working and serviced office tenancies
Mr Rasmussen said the office market had experienced several new trends some of which had made significant and potentially lasting changes to the market"We have seen the re-emergence of project teams involved in infrastructure projects in the CBD and fringe markets on projects such as the Metro Tunnel taking up office space, and we have seen increasing tenant driven demand for landlords to offer business service centres, project space, wellness centres, EOT facilities, concierge services and childcare," he said.

"But perhaps the most important change has been the explosion of co-working and serviced office tenancies.

"We now have 90 per cent of premium and A grade buildings offering co-working and serviced office space. Two years ago that was 20 per cent."