CBD office market gaining strength

The latest research from Colliers International shows that the CBD office market continues to perform well for landlords. 

Its Second Half 2017 report says prime effective rents climbed by their strongest rate since 2011, underpinned by strong rental growth over the year.

“Premium grade assets experienced the highest net face growth rates, growing 18 per cent over the year. A and B grade net face rents also grew annually at 10 per cent and 8 per cent respectively,” the report found.

“Melbourne occupiers’ appetite for prime CBD space appears to remain high, with reducing levels of prime stock available, placing further pressure on tenants seeking over 5000sqm. Looking forward, we expect average net face rents for prime and secondary assets to rise by 13 per cent and 8 per cent respectively in the 12 months to June 2018.”

“Over the first half of 2017, Melbourne experienced the strongest net absorption across the nation of 128,389sqm with net supply of 109,640sqm over the same period.”

“Over the next 12 months, there is over 5800sqm of refurbished space and over 54,000sqm of backfill space due to be added to the market. The majority of this backfill space is 20,000sqm at 2 Lonsdale St, which has already been leased.”

“Vacancy as at July 2017 is 6.5 per cent in line with the long-term average of 6.6 per cent, having fallen from 7.1 per cent at the same time in 2016.”

“With an immediate shortage of supply a concern for the CBD leading up to the next supply cycle in 2018-2019, the prevailing high demand, low supply environment provides room for the vacancy rate to fall below 4.5 per cent in the second half of 2019. We expect vacancy levels to move towards 7.0 per cent by mid-2020, as more buildings complete.”

Daniel Wolman, director of Colliers International Melbourne City Sales, said: “There’s competition for quality office assets which are in extremely limited supply. Purchasers are scrambling for available stock while tenants seeking space in the traditional CBD grid won’t see any new space until the second half of 2019.”

“With an immediate shortage of supply and prevailing high demand, Melbourne’s outlook is extremely prosperous.”

Colliers national research director Anneke Thompson said office supply for the next 12 months was even more ominous.

“We’re forecasting the Melbourne CBD to reduce by circa 5000 sqm, based on the supply that we know will enter the market and forecast withdrawals,” she said.

“This is at a time when Deloittes Access Economics expects an additional 6121 workers in the Melbourne CBD.

“Based on a conservative estimate of 11 sqm per office employee, this is about 65,000 square metres of demand in Melbourne. It’s only natural that face rental growth will increase,” she said.

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