Melbourne prime office yields rise to 7.25pc, secondary shy of 9pc

THE Melbourne office market looks to be on track for its lowest annual level of sales in 20 years, as the sector continues to lag behind the industrial and retail markets.

According to Urban Property’s Victorian Property & Economic Outlook Q4 2024, investment activity is still soft across the office market, with around $900 million in sales transacted in the year so far.

Based on these figures, Melbourne is headed for a two-decade low in office sales, reflecting the standoffish investor landscape and the current sentiment in the CBD office leasing market.

The vast majority of sales were located in the CBD, at 76%. While all other office sales were located in the metropolitan market, after six offices sold above $10 million.

For the quarter, average prime metropolitan office yields were stable at 7.25% with secondary yields averaging 8.75%. There are 95,000sqm of new office projects currently under construction in the metropolitan office market, by Urban Property’s figures, with 41% already committed.

As at July 2024, the Melbourne metropolitan office market vacancy rate tightened to 12.7%, which was still almost double the long-term average.

“Looking ahead, Urban Property Australia forecasts that prime rents have stabilised for the short term with tenant demand subdued,” read the report.

“In contrast, secondary office rents are projected to decline even more as occupiers seek to capitalise on better quality space which is highlighted from the recent trend of tenant moves.”

In the market, the Australian Unity Office Fund is seeking buyers for its last remaining asset, an office building in the St Kilda Road precinct, which has been independently valued at $62 million.

With a recent MSCI Capital Trends Report showing the gap between buyer and seller expectations is widening in Melbourne’s office market.

Industrial

Transactional activity was up in Melbourne’s industrial market, with over $1 billion in sales over the quarter, with $2.5 billion in sales in the year to date, which is already up on the 10-year annual average.

Over the quarter, sales were propped up by large portfolio transactions and offshore investment.

Average prime industrial yields are at 5.95%, with average secondary yields reaching 6.75% over the 12 months to September 2024.

With industrial land values across key industrial markets average $825/sqm, or around $1,750/sqm in the City Fringe market.

While prime industrial rents are up 4% on average over the 12 months to September 2024, with secondary rents having up 3%.

Frasers Property Industrial recently collected a suite of major city industrial leases totalling more than 80,000sqm, including four leasing deals amounting to nearly 64,000sqm in GLA in Melbourne.

While Salta secured warehousing and logistics organisation Trunk Logistics Group for a new custom-built 16,000sqm warehouse facility at its Nexus Dandenong South industrial estate in Melbourne’s south-east.

New industrial supply is forecast to reach 975,000sqm in 2024, with levels expected to exceed the long-term average for the sixth year in a row. With 60% of all new supply located in Melbourne’s Western region.

Urban Property Australia estimates that the industrial vacancy rate is at 2.0%, as at September 2024.

“Looking ahead, foreign investment levels may soften in Victoria due to the recently imposed absentee owner surcharge and land tax which may lead investors exploring other states. While sales activity has increased, Melbourne industrial yields continued to soften.”

Recent industrial transactions saw Nufarm has sell a shovel-ready 5.3-hectare western Melbourne industrial site for $32 million to a local developer. While in one of Melbourne’s key industrial spots, Dandenong South the 28,000sqm former Cadbury factory hit the market.

Retail

The retail property market has recorded over $1.3 billion in transaction over 2024 so far and is expected to reach the highest annual total recorded since 2021. With levels boosted by five sales above $75 million.

Yields have softened again over the quarter, though at a more moderate rate than recent quarters, with yields expanding by between 10 and 25 basis points.

While according to Fitzroys’ latest Walk the Strip report, shopping strip vacancies in Melbourne came in at 6.3% in 2024, just above 2023’s long-term low of 6.2%.

“Now that more normalised spending patterns have emerged, looking forward, Urban Property Australia expect to see a broader range of tenants seeking exposure in the retail strips market.”

In August, HMC Capital picked up Brandon Park Shopping Centre in Melbourne’s south-east for $107 million from Chris Langford’s Newmark Capital who acquired by Newmark Capital in 2017 for $135 million, before abandoning revitalisation plans in April.

While ISPT is selling its 50% interest in the $276 million Cranbourne Park Shopping Centre in Melbourne’s south-east corridor.

Nationally, following years of repricing and challenging fundamentals, the retail property sector is finally seeing a return of demand on a relative value basis with yield expansion milder than other core commercial property markets.