Melbourne Spotlight + Trends Affecting Melbourne Commercial Market

August 15, 2018 | Commercial Real Estate

Sunset on Melbourne CBD

The past year has seen some significant movements in the Melbourne office market, and these trends are likely to continue for the next two-to-three years.

Rental rates

Average rental rates for A-Grade spaces in the Melbourne CBD have increased by more than 6% over the past 12 months off the back of tight vacancy rates.  

Expect to pay around $580/sqm – just over half the cost of comparable space in the Sydney CBD, and only slightly more expensive than what you’d pay in Perth and Brisbane.

Premium Melbourne CBD office space averages $690/ sqm net, while B-grade rents sit at around $470/ sqm net.

Office premises in the Western Core and the Docklands precincts in the CBD have enjoyed the most leasing activity over the last twelve months, accounting for more than 60% of total transactions in the market.

St Kilda has also seen a steep rise in A-Grade office rents in the last year, rising by just over 15% to $450/ sqm net. Comparable suburban rates further out are about $400/ sqm net. St Kilda is victim of a dramatic lack of vacancies moreover, several commercial buildings are being redeveloped into residential complexes which drive rents up.

Image of Melbourne graffiti scene

Vacancy rates

Vacancy rates for prime office space in the Melbourne CBD are at their lowest levels since the early 2000s at 3.6%. That is almost half the vacancy rate of 12 months ago and significantly lower than the national average of just over 9%.

Vacancy rates in St Kilda are at 7.4%, down from over 10% this time last year.

These low vacancy rates are likely to put further upward pressure on rental prices in the short-to-medium-term.

Stock

There are a significant number of new office development projects underway in Melbourne’s CBD to cater for the strong demand. And a number of tenants have pre-committed to buildings.

Approximately 450,000 square metres of office space will be injected into the CBD over the next three years.

Market Trends

A shrinking market

Over the last couple of years, increasing rents and tightening vacancy rates have been primarily fuelled by commercial stock withdrawals (approximately 25,000 sqm).

Though the next surge of office supply is scheduled to come on the market this year (approximately 107,242 sqm across four developments, all pre-committed), new supply will remain relatively constrained over the next two years. In fact, the vacancy rate will likely remain at historically low levels given that levels of new stock in 2018 and 2019 will sit at approximately 2.3% and 1.9% of the total stock respectively.

Strong demand

Demand for Melbourne stock continues to trend upwards due record population growth, healthy employment growth and the fact that tenants are being forced out of other Melbourne markets (such as St Kilda Road) due to lack of supply.

White collar employment growth is forecast to increase by 2.9% every year until 2020. So, expect rents to continue to rise and vacancy to fall even further.

Images of young people working together
The rise in co-working spaces

Like most countries around the world, the demand for co-working spaces is increasing in Australia, and Melbourne is one of the cities leading the way!

Coworking spaces allow independent people and businesses to network and share office space. They’re great for small companies, start-ups and independent contractors because they are cost-effective and allow members the opportunity to negotiate short-term, flexible leases. Even larger organisations are jumping on the coworking bandwagon as a means of staying flexible and on top of the competition concerning innovative products and ideas.

Since 2016, the number of co-working spaces in Melbourne has increased by 63%. And moving forward, there’s at least 20,000 sqm needed by co-working facilities.

A reduction in incentives

Strong demand for Melbourne office space over the past year has also seen a reduction in the level of incentives being offered to tenants, especially in the CBD. Prime incentive levels are expected to drop further to around 24% over the next year. B-Grade incentives, on the other hand, are predicted to remain stable, hovering between 25% to 30%.

Tenant Representation Melbourne

Tenant CS is a commercial tenant advisory service that offers tenant representation services in Melbourne. We can also cater for businesses across Australia, with a particular focus in Sydney, Perth, Adelaide, Brisbane, and Canberra.

We represent you, the tenant, 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!

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The Author

Timothy Battut joined Tenant CS Australia in 2018 in order to support the tenant representation Sydney team. Prior to this, he worked as part of the Tenant CS Singapore branch as a Research Analyst intern.

Timothy has a Bachelor Double Degree in International Business from Groupe ESC Clermont (France) and can speak three languages (English, French and Spanish).

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