APPD Market Report Article

Melbourne

December 1, 2021

-6.2%

AUD 518.7

Rents
Falling

Positive net absorption recorded for the CBD and Fringe markets

  • The Melbourne CBD recorded positive net absorption (24,100 sqm) for the second consecutive quarter, despite the ongoing lockdown and restrictions to commercial inspections. This result was largely led by pre-commitment activity in new completions and the withdrawal of NAB’s backfill space from the market for refurbishment, at 500 Bourke Street. Vacancy increased over 3Q21 to sit at 15.0%.
  • Both metro markets also recorded positive net absorption over 3Q21. Fringe absorption (30,100 sqm) was largely a result positive pre-commitment levels in the new completions as well as activity in the small tenant market (<1,000 sqm). The SES recorded minimal positive demand (470 sqm), as the market began to slow. Fringe vacancy slightly increased to 15.5% and SES vacancy held steady at 11.5%.

Three projects complete in the CBD over the quarter

  • Three projects reached practical completion in the CBD over the quarter delivering 140,000 sqm of stock to the market (63% pre-committed). These projects were 405 Bourke Street, 1000 La Trobe Street and whole building refurbishment of 100 Queen Street. There are now six new projects (177,700 sqm) and two refurbishments (70,000 sqm) currently under construction expected to complete by 2024.
  • The Fringe market also recorded three completions over the quarter, delivering 31,000 sqm of stock (85% pre-committed). These projects were all situated in Cremorne at, 510 Church Street, 57-61 Balmain Street, and 1-11 Gordon Street. The Fringe supply pipeline continues to remain active with 19 projects under construction (213,520 sqm) that are expected to complete by 2023.

Face rents continue to hold steady as incentives increased

  • CBD prime net effective rents (PNER) decreased for a sixth consecutive quarter, on the back of face rents continuing to hold steady and incentives increasing (37.8%). CBD PNER fell 3.6% to now average AUD 356 per sqm (-8.4% y-o-y). PNER increased in the Fringe market (2.0%) and held steady in the SES, however both continued to reflect negative annual falls of -3.1% and -2.8%, respectively.
  • Prime yields remained stable in the CBD over the quarter at a range of 4.38%-5.13%. Secondary CBD yield range compressed 25 bps at the upper end to sit at 4.25%-5.50%, on the back of strong transactional evidence. The Fringe prime yield range also recorded compression of 37.5 bps at the lower end to sit at 4.75%-5.25%, whilst limited transactions in the SES held the prime range steady.

Outlook: Market activity expected to recover once lockdowns are lifted

  • Leasing activity is expected to continue to recover now that office inspections are once again allowed. However, some tenants may hold off on deal decisions until after the lockdown and into the new year, subduing demand over the short term. CBD vacancy is forecast to peak this year and remain elevated for some time, as large volumes of backfill and sub-lease space are absorbed.
  • Effective rents are predicted to continue declining over the remainder of 2021, as face rents hold firm and incentives increase. Prime yields are forecast to hold steady over the short term, as there remains a strong investor demand for assets with income security and strong covenants. Some poorer quality, secondary assets with higher vacancy risk may see some yield decompression.

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

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