Large tenants drive demand as smaller tenants lag recovery

• The Melbourne CBD recorded negative net absorption over the quarter, totalling -8,500 sqm. Demand was predominantly driven by consolidation of some government sector tenants as well as small tenant consolidation activity. Headline vacancy increased to 19.8%.
• The Melbourne Fringe market recorded strong demand with net absorption totalling 24,500 sqm driven by small occupier demand. The S.E.S market recorded negative net absorption of -27,700 sqm, largely the result of contraction from the utilities sector and small tenants.

The Fringe recorded two projects reaching completion

• There were no project completions in the Melbourne CBD over the quarter. The Fringe recorded two completions, delivering a total of 31,700 sqm, with the completed refurbishment of 380 St Kilda Road reflecting 78% of this figure. The S.E.S market recorded no completions.
• JLL is currently tracking 10 projects under construction in the Melbourne CBD (205,663 sqm), with a further eight in the Fringe (87,500 sqm), and an additional two in the S.E.S (55,000 sqm). There is a blended precommitment rate of 27% across these projects.

CBD yields stabilise as the metro markets record further softening

• CBD prime net effective rents (PNER) fell -2.1% q-o-q to AUD 321 per sqm per annum (-6.4% y-o-y). Fringe PNER fell -1.74% q-o-q to AUD 283 per sqm per annum (-9.61% y-o-y), and the S.E.S. PNER fell 0.3% over the quarter to AUD 238 per sqm per annum (-6.79% y-o-y).
• Prime CBD yields stabilised, maintaining a range between 5.63%-6.25%. Fringe prime yields softened 25 bps on both ends to now range between 6.25%-8.00%. S.E.S prime yields softened 50 bps on the upper end and 25 bps on the lower end to reach a range of 7.00%-8.00%.

Outlook: Space rationalization slowing but is likely to continue

• CBD demand is anticipated to remain soft over the short term. Some organisations are anticipated to continue going through space rationalisation plans which will dampen demand. However, as return to office mandates increase, positive demand is anticipated by late 2025.
• With increasing clarity on the cash rate outlook, office yields are expected to stabilise, likely stimulating growth in local investor demand for Melbourne office assets in the near term.