Melbourne records positive office net absorption for third consecutive quarter

Melbourne CBD office saw net absorption of 12,700 sqm in 4Q21.

Melbourne’s office leasing activity is slowly recovering as the city opens up after months of lockdown. According to JLL data, Melbourne CBD recorded positive net absorption (12,700 sqm) for a third consecutive quarter. 

“This demand result was driven by strong levels of small tenant activity (<1,000 sqm), a handful of large relocations and a significant pre-commitment. CBD vacancy remained stable over 4Q21 at 15.0%, the highest levels since 1999.”

Here’s more from JLL:

Both metro markets also recorded positive net absorption results over 4Q21. Fringe (28,200 sqm) and SES (14,200 sqm) net absorption was largely a result of positive pre-commitment levels in new completions, as well as strong deal activity from both the large (>1,000 sqm) and small (<1,000 sqm) tenants. Fringe vacancy held relatively steady at 15.5%, whilst SES vacancy dropped to 11.1%.

Supply pipeline remains strong in the CBD and Fringe markets

One project reached practical completion in the CBD over the quarter, delivering 24,000 sqm of new stock to the market. This completion was ISPT’s Victoria University Tower (364-378 Little Lonsdale Street), which was fully pre-committed to the university. There are currently five new projects (153,700 sqm) and three refurbishments (75,700 sqm) under construction expected to complete by 2024.

The Fringe market recorded three completions over the quarter, delivering 33,900 sqm of new stock (56% pre-committed). These were all situated within the Northern Fringe precinct at 54 Wellington Street, 611 Elizabeth Street, and 71 Gipps Street. One SES project (9,100 sqm) also reached completion at 260 Burwood Road, Hawthorn (77% pre-committed).

Face rents hold steady as incentives continue to increase

CBD prime net effective rents (PNER) declined for a seventh consecutive quarter, as face rents remained steady, and incentives increased to 38.2%. PNER fell by 0.7% to average AUD 353 per sqm per annum (-7.3% y-o-y). PNER increased in the Fringe (0.3%) and SES (1.7%) on the back of stabilising incentives, with both markets now reflecting positive annual growth of 2.2% and 1.3%, respectively.

Prime and secondary yields remained stable in the CBD over the quarter at a range of 4.38%-5.13% and 4.25%-5.50%, respectively. The Fringe and SES prime yield ranges both compressed 12.5 bps at the upper end of the range to sit at 4.63%-5.25% and 4.63%-5.75%, respectively. This yield compression was on the back of strong transactional evidence in the metro markets and general market sentiment.

Outlook: Leasing activity expected to continue recovering

Leasing activity is expected to continue to recover into the new year, however the current surge in case numbers may result in further stalled deal decisions and challenging occupier demand over the short term. CBD vacancy is forecast to begin moderating over 2022, however, it is likely to remain elevated for some time as large volumes of backfill and sublease space are absorbed.

Effective rents are projected to begin recovering over 2022, as face rental growth returns, and incentives begin to moderate. Prime yields are forecast to hold steady over the short term, well below long-term averages, as investor demand remains robust with a confidence in high quality assets with strong income security.

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