APPD Market Report Article

Melbourne

May 26, 2024

Andrew Ballantyne, Head of Research, Australia

-1.9%

AUD 512

Rents
Stable

CBD demand rebounds with strong take-up from smaller occupiers

  • The Melbourne CBD recorded a positive quarter of net absorption, totalling 8,100 sqm. Demand was driven by the small tenant cohort (<1,000 sqm), with the exception of one large tenant, Flight Centre, that centralised from the Fringe into 720 Bourke Street (2,800 sqm). CBD headline vacancy slightly decreased to 18.0%.
  • The Melbourne Fringe market recorded softer demand over the quarter totalling -1,700 sqm, while the S.E.S. recorded a minor positive result of 1,000 sqm of net absorption for the quarter. Fringe headline vacancy increased 1.5 percentage points (ppts) to 17.0% which was driven by negative demand and a significant amount of project completions, as the S.E.S. slightly decreased 0.1 ppts to 12.1%.

The Fringe delivers eight project completions

  • There were no office completions in the Melbourne CBD over the quarter, on the back of a strong 2023 result which delivered 119,200 sqm across four projects. The Fringe recorded 32,800 sqm of completions across eight projects, which had a blended pre-commitment rate of 19.7%. There were no completions within the S.E.S. over Q1 2024.
  • We are currently tracking 11 under-construction office projects within the CBD which are expected to deliver 275,200 sqm to the market by early 2027. There is a further 121,600 sqm of Fringe stock projected to completed by 2026, and three projects in the S.E.S are expected to deliver 58,100 sqm by late-2024.

Effective rental growth dampened by rising incentives

  • CBD prime net effective rents (PNER) fell 1.3% over the quarter to now average AUD 330 per sqm per annum (-6.2% y-o-y). Fringe PNER fell 2.1% to now average AUD 302 per sqm per annum (-5.5% y-o-y), and the S.E.S. fell a further 3.6% over the quarter to AUD 239 per sqm per annum (-8.7% y-o-y).
  • Prime CBD yields softened 13 bps on the upper end and 100 bps on the lower end to now range between 5.13%–8.00%. Prime Fringe yields softened 13 bps on the upper and 25 bps on the lower to now range between 5.88%–7.50%. S.E.S. prime yields softened 25 bps on the lower end to now range between 6.25%–7.50%.

Outlook: Office yield decompression cycle projected to end in 2024

  • The demand outlook for the Melbourne CBD is expected to remain positive but subdued over the near term, as there remains the risk of continued larger corporate consolidation. However, an uptick in tenant expansion by smaller organisations and centralisation is likely to support demand over 2024 and into 2025.
  • From a capital markets perspective, greater clarity on the cash rate outlook (no further projected rate rises) could ultimately allow investors to better assess the attractiveness of re-entering the commercial office sector.

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

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