Strong quarterly demand in the metro markets

• The Melbourne CBD recorded negative net absorption of about -18,600 sqm. Weak leasing demand was driven by tenant activity within the sub-1,000 sqm cohort of the market. CBD headline vacancy increased to 15.4%, the highest CBD vacancy figure since 1998. 
• The Melbourne Fringe submarket recorded moderate leasing demand of about 7,500 sqm over 4Q22, while the S.E.S recorded a solid quarterly result of about 16,800 sqm. Demand was largely driven by relocation activity from untracked markets as well as expansion activity. Headline vacancy tightened to 14.4% in the Fringe and 11.9% in the S.E.S.

Supply pipeline remains strong in the CBD and Fringe submarkets

• One project completion was recorded in the CBD, with the refurbishment of 637 Flinders Street delivering 25,112 sqm back into the CBD market. The asset had no pre-commitments secured as at practical completion. There were no completions in the Fringe market, as the S.E.S delivered one project at 160 Whitehorse Road (2,000 sqm). 
• JLL is tracking 10 projects currently under construction (249,450 sqm) in the CBD, with a further 17 (208,100 sqm) in the Fringe and three (46,800 sqm) in the S.E.S. Lendlease’s 69,500-sqm development at Melbourne Quarter in the CBD remains the largest project under construction throughout Melbourne’s office market.

Effective rents remain steady as incentives increase in the CBD

• CBD prime net effective rents (PNER) marginally fell -0.3% over 4Q22, although remaining broadly unchanged over the past year at AUD 354 per sqm per annum (0.1% y-o-y). Fringe PNER remained robust (0.2% q-o-q) at AUD 323 per sqm per annum, with a strong annual growth result of 4.0%. PNER in the S.E.S remained steady over the quarter (-0.2% q-o-q) at AUD 266 per sqm per annum (-0.5% y-o-y).
• Prime CBD yields softened 50 bps over the quarter on the lower end to range between 4.25%-5.75%. Prime Fringe yields softened 12.5 bps on the upper end to range between 4.88%-5.50% as S.E.S prime yields softened 25 bps on the lower end to range between 5.00%-6.00%. 

Outlook: Vacancy across Melbourne’s submarkets to increase in 2023

• Global economic uncertainty heading into 2023 is likely to dampen leasing activity as businesses take a cautious approach to leasing decisions. The headline vacancy rates across all three of Melbourne’s office submarkets are likely to trend upwards, driven by a substantial development pipeline (particularly in the CBD and Fringe).
• Prime net effective rental growth is projected to record an uplift in 2023. This is being driven by a stabilisation in incentives which are projected to remain elevated over the short term as a result of the higher vacancy rate. Prime yields are forecast to continue softening, as investor markets remain challenged by an elevated cost of debt and economic pressures.