This article is from the Australian Property Journal archive
OFFICE tenants continue to seek space beyond the expensive Melbourne CBD market, putting further downwards pressure on the metropolitan vacancy rate, boosting rents and prompting the biggest supply boost seen across the city fringe.
Knight Frank’s latest Melbourne Suburban Overview found metro vacancy rate fell from 5.2% to 4.4% over the 12 months to January, further below the historical average of 5.9%.
Positive net absorption of 56,657 sqm was recorded in 2018.
Knight Frank associate director of research, Finn Trembath, said a strong local economy, which saw GDP growth of 3.5% last year, and growth in office-based jobs is generating strong demand.
“This growth has also driven Melbourne CBD’s vacancy level down to its lowest level in 10 years. This drop in vacancy is placing upward pressure on rents, which in turn is causing tenants to turn their attention to the metropolitan office market in search for more affordable accommodation.”
Prime grade vacancy fell from 5.6% o 5.1%, having sat at 8.4% in January of 2017, while secondary grade vacancies have tightened from 5.6% over two years to 3.7%.
Knight Frank director, head of metropolitan leasing, James Treloar said the city fringe region is poised to become the next office development hotspot as developers tap into the heavy demand in Richmond, Cremorne and South Melbourne.
“More than 150,000 sqm of new supply is expected to be delivered across the city fringe region over the next two years. This is the biggest boost to supply the region has ever seen and the number is likely to grow.”
However, Knight Franks expects that with demand in the CBD strong, much of the new supply will be absorbed.
One of the biggest projects in the pipeline, the DA approved 27,653 sqm development by Cremorne Properties at 60-68 Cremorne Street, has a 70% pre-commitment from online jobs search giant Seek.
Since 2014 there has been a dearth of new office supply in the city fringe, with prolonged low levels of net absorption. Only 7,208 sqm of office space has been absorbed in the region over the past four years.
New supply added to the metropolitan office market in 2018 totalled 27,693 sqm, down 8% from 2017.
The north & west region accounted for 64% of last year’s new supply, including the completed of 1-3 Janefield Drive, Bundoora and Target’s new head office at 2 Kendall Street in the western growth suburb of Williams Landing.
Close to 55,000 sqm of new supply is expected to be added to the metropolitan office market in 2019.
Speculative space is set to make up a large two-thirds of new supply in 2019, as confident developers move projects forward without firm tenant commitments amid tightening vacancies and rising rents.
Treloar said that the metropolitan office market recorded strong prime rental growth across all regions as tenants compete for dwindling available space, on the back of another year of declining vacancy.
Prime net face rents grew at their strongest rate in 11 years, surging by 7% in the 12 months to January to an average of $381 per sqm. Incentives were unchanged, with most deals being incentives between 15% and 23%.
Reflecting its drop in vacancy, the south east region witnessed the strongest prime rental growth at 9.4%, followed by the inner east (8.9%) and city fringe (8.4%) regions also saw notable prime rental growth.
“The lift in rents in these regions was driven by tenants’ readiness to pay more for locations that hold particular appeal to employees.” Treloar said.
Rents grew, albeit at a slower rate, in the north & west (by 4.5%) and outer east (3.2%).
Secondary rents across the market lifted by 5.4% to $284 per sqm over 12 months to January.
Investment demand for metro office assets remained strong, with 2018 transaction volumes totalling $767.9 million.
Yield compression has begun to ease. Yields firmed by 13 basis points in the 12 months to January to an average of 5.88%.
Australian Property Journal
