Melbourne sees largest increase in CBD office stock in three decades

Five more new projects are currently under construction.

The Melbourne CBD recorded negative net absorption for the fifth consecutive quarter (-56,200 sqm) according to JLL, after the largest negative annual result on record (-188,800 sqm) over 2020. Subdued demand was largely on the back of an increase in new sublease space and large tenant contractions. CBD vacancy continued to increase to sit at 14.3% at end-1Q21, marking the largest vacancy since 1Q99.

Both metro markets recorded positive net absorption over 1Q21. JLL says fringe absorption (35,400 sqm) was a combined result of recent completions, reabsorbed sublease space and additions to the stock list. The SES result (66,500 sqm) was largely on the back of the addition of Caribbean Business Park, which added 48,200 sqm of occupied stock. Fringe vacancy rose to 15.3% and SES vacancy fell to 11.4%.

Here’s more from JLL:

The CBD and Fringe office supply pipelines remain strong

No projects reached practical completion in the CBD over the quarter, after 2020 saw the largest increase in new CBD stock since 1991. Five new projects and two building refurbishments are currently under construction, which are due to deliver 260,300 sqm of new stock by mid-2023. There is an additional 554,900 sqm with plans approved and 123,000 sqm with plans submitted.

The Fringe market recorded six completions during 1Q21, delivering a total 40,840 sqm of new space to the market. The largest completion was 60-88 Cremorne Street, Cremorne (19,000 sqm), fully pre-committed by SEEK. The Fringe supply pipeline remains strong with 14 projects under construction, expected to deliver 194,600 sqm of new stock by 2023. The SES recorded no completions over the quarter.

Incentives continue to rise but face rents have shown resilience

Prime net effective rents (PNER) decreased for the fourth consecutive quarter in the CBD, as incentives continued to rise (33.8%). CBD effective rents fell 0.6% and reflect a -8.7% y-o-y change. PNER increased slightly in both metro markets, a result of changes made to the rental basket. However effective rents continued to reflect annual decreases of -10.4% in the Fringe and -9.1% in the SES.

Prime yields continued to hold steady in all three Melbourne markets over the quarter. The CBD prime yield range remains at 4.38% – 5.38%, with yields holding firm for core assets with strong lease covenants. The Fringe and SES prime yield ranges also remained at 4.88% – 5.63% and 5.00% – 5.75%, respectively.

Outlook: Market activity expected to recover throughout 2021

Occupier demand is expected to remain subdued over the short term, as tenants continue to assess future office space requirements and optimise plans for possible space rationalisation and/or dedensification. Leasing activity is expected to increase throughout the year; however, vacancy is forecast to peak in 2021 as further new supply and sublease space comes online.

Effective rents are forecast to decrease over 2021, as face rents correct slightly and incentives continue to increase. There remains pent-up demand in Melbourne for core office assets with secure income streams, despite the lack of available assets on the market. Yields are expected to expand at the lower end of the prime range and for secondary assets in poorer locations with high vacancy risk.

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