Vacancy rates

Melbourne's CBD vacancy rate has increased y-o-y from 11.9% to 15% as tenants move up the quality curve.

This is reflected in the vacancy movements of Premium and B-grade assets, with Premium decreasing and B-Grade increasing  in the same timeframe.

New stock injections also impacted the total vacancy rate. However, Melbourne's 2023 development pipeline is smaller compared to previous years.

Like Sydney, many agent reports predict that a reduction in new supply, coupled with higher demand, will see the market slowly recover. However, we can't see that happening until 2026 at the earliest.

Here's why:

• Hybrid working - Melbourne-based companies have embraced hybrid work models (even more so than in Sydney). The city's average office occupancy rate at the end of February was 47%. This indicates that there's excess space in the market that businesses will look to offload on expiry or sooner via sublease.  
• Spec fit-outs - More and more landlords have undertaken speculative fit-outs and building upgrades to make the flight to quality more attractive. However, many of these spaces remain empty, failing to attract tenants. For this reason, we expect the spec suite market to become even more competitive through 2023-24, with 10-20% incentives being offered on top to help move vacancies. ‍
• Upcoming relocations - Many larger tenants will be looking to downsize and relocate in the next 12-24 months, which could leave several large holes in buildings. More Melbourne-based businesses are opting for shorter leases and less space. So, finding long-term tenants to fill these vacancies will be challenging.
• Market activity - Market activity has slowed down. In 2021, for example, the Financial Services industry made up circa 51% of all CBD leasing deals. However, this figure dropped to 34% by the end of 2022 as major companies reduced their headcount and moved to permanent hybrid working arrangements.
• Falling property values - Analysts predict a 15-20% fall in property values. REST Super, for example, tried to sell its Melbourne Docklands office building for circa $490 million. However, the sale was abandoned when bids started coming in at 15% below the book value. A widespread drop in property values will pressure landlords to reduce face rents, which, like Sydney, are being artificially propped up by high incentives.

Rents and incentives

While face rents have remained stable, they're still being capped by higher incentives, which have risen across all grades. Premium incentives now sit at 40%, and A and B-Grade at 42%. This has led to a quarter-on-quarter decrease in net effective rents for Premium and A-grade assets.

Subleasing

Melbourne CBD’s sublease availability is being reported at 112,821 sqm, 2.2% of total stock. We're finding that many larger companies are still looking to sublease their excess space. The deals being offered will attract companies looking for larger floor plates and high-quality modern fit-outs on relatively low rents and long lease tails.

High subleasing availability is expected to remain throughout 2023-24.

Tenant Representation Melbourne

Tenant CS is a commercial tenant advisory service that offers tenant representation services in Melbourne. We also cater for businesses across Australia, with a particular focus in Sydney, Perth, Adelaide, Brisbane, and Canberra.We represent you, the tenant, exclusively. And our in-depth knowledge of the Australian leasing market gives our clients the competitive advantage when it comes to finding a space or negotiating a commercial lease.If you’re on the hunt for tenant advisory services in Melbourne, get in touch with our team today!