Melbourne CBD office vacancy hits 15% in Q2

This is almost as high as the record levels in 1999.

A JLL report said the Melbourne CBD recorded negative net absorption of -10,700 sqm for a second consecutive quarter. Leasing momentum was staggered throughout the quarter, resulting in subdued demand which was largely on the back of continuing tenant contractions and consolidations. 

Headline CBD vacancy remains stable at 15.0%, and was close to one of the highest levels recorded since 1999, the report added.

Here’s more from JLL:

Both metro markets recorded positive net absorption over 2Q22. Fringe net absorption (10,900 sqm) was a combined result of positive expansion and relocation activity. The positive SES result (1,800 sqm) was largely supported by the relocation and expansion from VicRoads (13,000 sqm). Vacancy remained stable at 15.9% in the Fringe and increased 0.8% in the SES to sit at 11.7%.

Supply pipeline remains active in CBD and Fringe markets

No projects reached practical completion in the CBD over the quarter. The Fringe recorded three developments reaching completion, delivering 13,100 sqm of new stock into the market, largely in the Northern Fringe precinct. The SES recorded three completed developments which delivered 25,187 sqm over the quarter.

The largest Fringe development delivered 6,900 sqm at Langridge Lanes (84% pre-committed) across 8 levels, with CreativeCubes as the anchor tenant. The recently completed EastCo development at 110 Maroondah Highway delivered 13,000 sqm into the SES market, and is fully occupied by VicRoads across the 10-storey office tower.

Face rents increase as incentives remain steady

CBD prime net effective rents (PNER) remained stable at AUD 356 per sqm per annum (0.1% y-o-y), as face rents increased by 0.3% to AUD 638 per sqm per annum (2.0% y-o-y), with incentives holding steady at 38.6%. PNER increased in the Fringe to AUD 324 per sqm per annum (6.6% y-o-y) while PNER decreased in the SES (-1.1% q-o-q) to now sit at AUD 266 per sqm per annum (1.2% y-o-y).

Prime CBD yields remained steady, as secondary yields narrowed 25 bps on the upper end to now range between 4.50%-5.50%. The Fringe and SES prime yield ranges narrowed 12.5 bps at the upper end to sit at 4.63%-5.25% and 4.75%-5.75%, respectively, on the back of strong transactional evidence in the metro markets.

Outlook: CBD demand is expected to improve in 2H22

The volume of leasing transactions is expected to increase in the second half of 2022, as tenants typically aim to have internal fit outs in new workspaces completed by the new year, likely resulting in stronger leasing activity in 2H22. Vacancy remains elevated, although it is expected to trend downwards over the short-to-medium term as the workforce gradually returns to the office.

Prime net face and effective rents are expected to increase throughout 2022, as incentives begin to moderate. Prime yields are forecast to remain steady in the short term and will continue to be reliant on transactional evidence.

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