Shrinking Office Market Boosts Tenant Offerings On St Kilda Road

A wave of residential conversion activity in the St Kilda Road precinct over the past two years has revitalised the suburb’s office market, with secondary stock replaced by an injection of fresh retail amenity.

CBRE revealed in their latest viewpoint – The future of office in the St Kilda Road precinct – that over the past five years prime vacancy in St Kilda Road has trended downwards off a peak of 14.2% in 2011, with a prime vacancy of 6.0% currently below the CBD average of 6.5%.

The decline in vacancy, coupled with growing tenant demand, helped drive a 2.5% increase in rents over 2016 and drop in incentives to 22%.

CBRE Director of Office Advisory & Transaction Services Anthony Park said the absorption of secondary assets in St Kilda Road had helped bring new life to the precinct.

“The trend towards residential conversion on St Kilda Road has had a positive impact on the office market as these developments have brought fresh retail amenity and helped improve the overall offering for prospective occupiers,” Mr Park said.

“As secondary office buildings are withdrawn from the market, it has forced remaining building owners to improve their assets to ensure they are well placed to meet the demands of the modern occupier.

“These improvements combined with the tightening of the market have seen solid face rent growth and the pulling back of incentive levels – resulting in healthy effective rental growth.”

CBRE Associate Director of Occupier Advisory & Transaction Services Matt Pedrazzini said while St Kilda had traditionally provided companies with affordable head office premises, shrinking stock levels would increase competition for quality in the precinct.

“With a general lack of investment in the existing office stock and sites being rezoned to residential, owners need to inject more capital into their assets if they are going to retain/attract tenants that may be looking further afield,” Mr Pedrazzini said.

“With the increasing presence of residential in the precinct, there will be greater amenity to support the St Kilda Road workforce – further underpinning the move towards to quality.”

CBRE Senior Research Analyst Anne Flaherty said a flight to quality and increased affordability of space in the CBD had supported the rise in secondary vacancy.

“Over the past five years, the additional cost to rent secondary grade space in the CBD over St Kilda Road has trended downwards,” Ms Flaherty said.

“However, this has also provided greater opportunities for developers, with 90% of the total 85,400sqm withdrawn over the past decade considered to be secondary space.”

Over the next three years, eight office buildings with a combined 56,000sqm of space will be withdrawn from St Kilda Road for residential conversion.

Despite the precinct seeing further withdrawals over the coming years, it would remain a key commercial office hub.

“A growing labour force, combined with shrinking supply should help to support lower vacancy and rent growth in the St Kilda Road market over the next five years,” Ms Flaherty said.

 

Image credit: John Gollings

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