Melbourne CBD office rents drop for the fifth consecutive quarter

Prime net effective rents fell 2.7% in the second quarter of 2021.

According to JLL, Melbourne CBD’s 2.7% drop in prime net effective rents (PNER) in Q2 represents a decline for a fifth consecutive quarter. Overall, PNER recorded a -7.5% YoY change. 

“This was a result of face rents holding steady and incentives continuing to increase (35.5%). PNER decreased in both the Fringe (-1.6%) and SES (1.0%) markets and continued to reflect annual decreases of -6.6% and -4.8%, respectively,” JLL said.

Here’s more from JLL:

Prime yields compressed in all three Melbourne markets over the quarter. The CBD prime yield range compressed 12.5 bps at the lower end of the range to sit at 4.38%-5.13%. Fringe and SES prime yield ranges compressed at the upper end to average 4.75%-5.63% and 4.75%-5.75%, respectively, on the back of strong transactional evidence.

All three Melbourne markets record positive net absorption

The Melbourne CBD recorded positive net absorption (6,600 sqm) for the first quarter since prior to the pandemic (4Q19). This recovering demand result was led by small occupier movement (<1,000 sqm) and the withdrawal and absorption of some sublease space. CBD vacancy marginally decreased for the first time since it reached a 30-year record low in 1Q20 (3.4%), to now sit at 14.1%.

Both metro markets also recorded positive quarterly net absorption. Fringe absorption (11,700 sqm) was largely a result of a recently refurbished St Kilda Road asset returning to the stock list. SES demand (7,900 sqm) was driven by both a recently completed asset and positive large occupier (>1,000 sqm) relocations. Fringe vacancy held steady at 15.3% and SES vacancy slightly rose to 11.5%.

Three new projects commence in the CBD over the quarter

No projects reached practical completion in the CBD over the quarter; however, three new office projects commenced construction including the final project in Lendlease’s Melbourne Quarter precinct. There are now eight new projects (283,200 sqm) and two whole building refurbishments (60,700 sqm) currently under construction. These projects are 47% pre-committed and expected to complete by 2024.

The Fringe market also recorded no completions over the quarter; however, the supply pipeline remains strong with 19 projects under construction (228,600 sqm) expected to complete by 2023. The SES market recorded one completion, at Salta’s 631 Springvale Road, Mulgrave (12,800 sqm), partially pre-committed by Carlisle Homes (8,000 sqm). There are also six projects under construction (51,000 sqm).

Outlook: Leasing activity expected to continue recovering

Tenants are expected to continue optimising space rationalisation and/or dedensification plans, which will likely subdue occupier demand over the short term. However, leasing activity is expected to continue recovering, led by the small tenant (<1,000 sqm) market. Vacancy is also forecast to push out slightly further, as new supply and sublease space comes to market.

As face rents remain resilient and incentives continue to increase, we expect to see effective rents decrease over 2021. Prime yields are expected to hold steady over the short term, as there remains a strong focus on income and vacancy security. Decompression is expected in the secondary market, mostly for poor quality assets, with high vacancy risk and in weak locations.

Note: Melbourne Office refers to Melbourne's CBD office market (all grades).