APPD Market Report Article
MelbourneNovember 29, 2022
Andrew Ballantyne, Head of Research, Australia
Strong quarterly demand from the small tenant cohort
- The Melbourne CBD recorded positive net absorption of about 20,200 sqm. This was driven by strong activity within the small tenant cohort. Headline vacancy improved to 14.6%.
- Melbourne’s Fringe submarket recorded a strong quarterly result of about 30,700 sqm, partially offset by the weaker SES result of about -17,600 sqm. Vacancy subsequently tightened in the Fringe to 14.8%, and increased for the second consecutive quarter to 12.9% in the SES.
Supply pipeline remains strong in the CBD and Fringe markets
- No projects reached practical completion in the CBD and SES over the quarter. The Fringe recorded three developments reaching completion, delivering 17,008 sqm of new stock into the market.
- The largest Fringe development delivered 9,448 sqm at 20-30 Mollison Street, Abbotsford (52.9% pre-committed) across nine levels, with Fred IT as the anchor tenant. The recently completed development at 236 Coppin Street in Richmond delivered 5,660 sqm across seven storeys and completed with no pre-commitments.
Face rents and incentives increase over the quarter
- CBD prime net effective rents (PNER) edged lower over 3Q22 to AUD 355 per sqm per annum (-0.3% y-o-y) as a result of prime net face rents and incentives increasing. PNER decreased in the Fringe to AUD 322 per sqm per annum (-0.5% q-o-q), yet recorded a strong y-o-y result of 4.0%. PNER remained stable in the SES at 267 per sqm per annum (1.4% y-o-y).
- Prime CBD yields softened 12.5 bps on the lower end to now sit at a range of 4.25%-5.25%. Prime Fringe yields softened 12.5 bps on the upper end and 25 bps on the lower end to now sit a range of 4.75%-5.50%, as SES prime yields softened 25 bps on the upper end to 5.00%-5.75%, supported by transactional evidence and general market sentiment in all three markets.
Outlook: CBD demand expected to moderate in 4Q22
- Melbourne’s office market is expected to plateau in terms of leasing transactions over the next 12 months, as lease expiries remain the main driver of tenant activity. Headline vacancy is expected to increase in the CBD and Fringe market in the short term, as a result of new supply entering the market and economic uncertainty.
- Prime net face rents are expected to accelerate in 2023, while incentives are anticipated to stabilise over the remainder of 2022 and 2023. Prime yields are forecast to continue softening, having already reached its cyclical low in 1H22.